The uncertainty in the global economy and the security situation make it harder than usual to forecast the future performance of the Estonian economy. The recovery in growth in the Estonian economy has been delayed as foreign demand remains weak. Initial data show the recession in 2023 was deeper than expected, and the Ministry of Finance, like other forecasters, predicts that growth will only return to the economy in 2025.

The Fiscal Council endorses the spring economic forecast of the Ministry of Finance, which shows the Estonian public finances facing great difficulties. The Ministry of Finance considers that the budget deficit of the general government will reach as much as 5% of GDP, and public debt will continue to grow fast. Such fiscal policy course may hurt the stable development of the Estonian economy, and breaks the fiscal rules.

Estonian fiscal policy stance has been supportive since 2020, as state budgets have been planned with a large deficit. General government debt is now 5 billion euros larger than it was before the pandemic. The Fiscal Council considers that the cyclical position of the Estonian economy may be stronger than assumed by the Ministry of Finance, and so fiscal consolidation should not be postponed any longer.

Estonia may already face an excessive deficit procedure (EDP) from the European Union this spring, because the deficit in 2023 was larger than 3% of GDP. The spring forecast projects that the deficit will exceed 3% of GDP again this year. Opening the EDP may lead to reputational damage for the Estonian economic environment, as the country has long been known for its sound public finances. The Fiscal Council considers it important that the budget deficit be reduced starting from this year.

The spring forecast does not take account of the revenue and expenditure measures that have not yet come into effect and that the government announced in autumn 2023. The Ministry of Finance estimates that if they are taken into account, the budget deficit in 2025 will not exceed 3% of GDP, and will continue to decline in later years. There unfortunately remains a lot of uncertainty about whether the measures in the budget strategy will actually come into effect. The Fiscal Council recommends that the government clarify how it will start to reduce the budget deficit, and which measures have by now been abandoned.

Overall the Fiscal Council considers that the spring forecast of the Ministry of Finance together with its various scenarios is a suitable base for building the government’s stability programme on, and for setting demanding fiscal targets for the next four years. The Fiscal Council recommends that when the targets are set, it should be remembered that the current budget deficit is of a permanent or structural nature. This means that achieving balance in the budget will require deliberate decisions about the state’s revenue and expenditure policies, and not just a return to growth in the economy.