The Ministry of Finance presented its summer outlook on Thursday, including downgraded growth estimates both for the current as well as next year. Minister of Finance Sven Sester (IRL) explained that compared to spring, the economic environment had become less favorable.
“The weaker environment slows down investment, which immediately affects economic growth,” Sester said. He added as the Estonian economy was small and open, it heavily depended on the fate of its neighbors.
According to the outlook, incomes have continued to grow, which has helped along domestic consumption. “People’s living standard and income has grown three times as fast as the economy,” Sester pointed out. “Next year we expect wage growth of 5.5%, the same applies for the following years.”
Decreasing wage pressure and a shrinking number of employable people meant that companies found themselves forced to keep raising salaries, Sester said. Also, while Estonia had previously gone through a few years of deflation, it was now looking at 0.2% inflation.
Tax revenue was improving, which is why the budget was unexpectedly in a better position than previously projected. The government’s policy would be to continue to pursue a balanced budget, Sester said.
The minister expects having to add additional spending to next year’s budget because Estonia will have to take over the presidency of the EU council sooner than expected. The amount Sester expects having to spend on this is €25m. Increased presence of allied military forces would also affect spending, Sester added.
Estonia’s debt burden stood at about 10% of GDP, which Sester said he didn’t expect to change over the next four or five years. With this number, Estonia remains the EU’s number one least indebted country, as the EU average debt level is 85%.
Fiscal policy analyst, Madis Aben, said that though people had begun to save more, most of their income was still spent on paying off loans.
Investment by companies was clearly lower than in pre-crisis times. Companies were spending their money mainly to cover labor costs. The private sector, on the whole, was saving money, Aben summarized.
After a three-year continued decrease in consumer prices, now a small increase had been seen, the reason for which was the rising oil price as well as the continued increase in salaries.
Real and nominal growth of salaries had been adjusted upwards, though Aben made it clear that this came at the expense of other positions, and that it couldn’t continue indefinitely.
The ministry’s fiscal policy director, Sven Kirsipuu, stressed that the budget stood at a surplus, but that the social insurance funds reported deficits.
Investment activities of municipalities was noticeably lower than expected.
The tax revenue surplus reached €27m at the end of August, with labor taxes as well as excise duties bringing in more than forecast.
A decrease in government sector investment affected tax revenues in the amount of €40m. Government sector investment is expected to drop by 20% this year, but grow again by 25% in 2017.
A nominal budget deficit was expected for this year as well as the next two years, Kirsipuu said. This was to stimulate economic growth, and experience showed that local government would contribute to it substantially.
Editor: Editor: Dario Cavegn