Central bank warns increased budget deficit will strain economy ({{commentsTotal}})

The Bank of Estonia building
The Bank of Estonia building Source: (Tanel Valdna, Martin Dremljuga, Joel Kivi/ERR)

In its latest economic outlook, the Estonian central bank notes that the budget deficit will deepen further next year, which may lead to the need to raise taxes.

"The nominal budget deficit will stay low in the next few years, but a need to raise taxes or cut spending may arise due to structural deficit and the resulting need to consolidate," warns the Central Bank.

The outlook says that in spite of the weak state of the economy, the rapid growth of wages and household spending has increased tax revenue this year, which has in turn improved the state of the public finances; still, the budget will run a deficit this year.

"Next year, when tax changes take effect and pensions and child allowances increase, the deficit will increase further," said the bank.

A negative aspect noted by the Bank of Estonia is that the difference between public and private sector growth has increased, but the difference must decrease if wage pressure is to slacken off.

A positive factor, on the other hand, is that the resistance of the Estonian economy to risks has improved thanks to the lower loan burden in the private sector, fewer bad loans and larger savings.

Plus, the risks related to real estate price inflation has abated, as have risks related to the excessive increase in workforce expenses, reported the central bank.