Finance ministry estimates 2.5 percent economic growth for 2021

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€200 bill. Source: Siim Lõvi/ERR

The Ministry of Finance estimates Estonia's economic growth for the ongoing year to stand at 2.5 percent and 4.6 percent for 2022, if the spread of COVID-19 is under control and vaccinations proceed to go forward as planned.

Minister of Finance Keit Pentus-Rosimannus (Reform) said the coronavirus economic crisis was shorter and more lenient than feared. "Coming out of an unprecedented budgetary hole requires long-term effort and an iron will," the minister said at a press conference on Monday.

Scarce budget opportunities should be used to make changes for a more efficient public sector, the minister added. "If we get vaccinated well and fast and the organization does not become an obstacle, the economy will grow by 2.5 percent this year and even 4.8 percent next year," Pentus-Rosimannus said.

The ministry's forecast is slightly more conservative than that of Bank of Estonia's, which predicted an increase of 2.7 percent for 2021 and 5 percent for 2022.

The forecast was drawn up with getting the virus under control and no more strict restrictions in mind. "We must certainly consider going forward that growth expectations are tied to getting the virus under control, vaccinations and easing restrictions," the minister noted.

Head of the finance ministry' fiscal policy department Raoul Lättemäe said the Baltic Sea region did better than Europe last year. "The economic recession in our are was circa two times better than the European average," he noted.

Due to improved external environment, the ministry also increased their forecast on the estimated exports of goods and services with a possible return to pre-crisis levels forecast for 2024.

Lättemäe said the labor market forecast has gotten better throughout the crisis but exiting a high level of unemployment will take time and the ministry does not see a return to pre-crisis levels until after 2025.

Lättemäe noted that in the sectors unaffected by unemployment, wage pressure persisted and average wages even increased. The ministry expects the average wage to climb to €1,504 by the end of 2021 and to €1,588 by 2023.

Difference for diesel fuel excise duty will end next year

Keit Pentus-Rosimannus said that as of the current plan, the diesel excise will return to its pre-crisis level. "The decision was actually made by the previous coalition and they wrote the due date into the law so it will end in the spring of 2022 as a crisis measure," the minister said.

"Discussions over next year's budget and the state budget strategy will begin this week, but the current decision in force made by the previous government, which is also stated in the law, says that the specificity, meant as a crisis measure, will end in the spring of 2022," she added.

Margus Täht, leading analyst of the state's finance performance, noted that the state expects €528 million in excise duties for 2022 and €470 million for the ongoing year. The forecast assumes that the diesel excise will climb back to its pre-crisis level in the coming year.

Easing restrictions should lead to significant growth in nearly all sectors

Economic recovery will remain hindered in the first half of 2021 by restrictions on activities and movement. Once the risk of infection abates, all areas except construction should exhibit growth once more, and pre-crisis economic levels will be attained by the end of the year.

Faster growth is expected to occur in construction and foreign tourism in 2022, and unemployment is likewise expected to start declining next year. While the level of unemployment is projected to reach 8 percent this year, it will decrease to 7.3 percent in 2022 and to 6.6 percent in 2023.

The nominal general government deficit will reach 6 percent of GDP this year due to an aggravating crisis, which is nonetheless an improvement by 0.7 percentage points compared with the state budget strategy drawn up last year.

Compared with the earlier prognosis, tax receipts will increase as a result of an improved economic environment and changes in the second pillar pension fund. Cost prognoses will be increased, however, by short-term crisis mitigation support measures set out in the supplementary budget.

Structural deficit will also be much smaller compared with that projected in the state budget strategy, only reaching 5.5 percent of GDP instead of the forecast 6.7 percent.

The deficit together with growth in the volume of external support means a considerable stimulus for the economy. According to the ministry, it will help reduce the negative effects of the crisis. More rapid economic recovery will occur from 2022, enabling for the state to start reducing budgetary stimulus.

The deep deficit will start declining rapidly with exit from the crisis next year; however, there will be both nominal and structural deficit in the budgetary position in 2022 as well as in the following years.

"The budgetary deficit will impose constraints on using tax money; however, Estonia will have the opportunity to invest a record high sum of EU funds towards new growth and for implementing importance changes. Scarce options in the state budget must also be used for carrying out reforms rendering the public sector more efficient," Pentus-Rosimannus said.

Minister: Need for a loan much smaller than projected

The minister said that the deficit will be smaller in the coming years than forecast; however, overcoming the deep gap in the budget nonetheless requires long-term effort. "The need for a loan is also much smaller than projected in the fall," Pentus-Rosimannus said.

Indebtedness will grow to 21.4 percent of GDP this year and will reach 28.8 percent of GDP by 2025. Growth in debt will be slower that previously forecast, however, as in September last year, the Ministry of Finance projected a debt level of 23.6 percent of GDP for 2021 and a level exceeding 30 percent for 2024.

Negative cash flow in the State Treasury will total €2.36 billion in 2021, according to the forecast, which is smaller by €200 million compared with the budget strategy. The sum includes both covering the deficit as well as refinancing of already issued treasury bills. One-third of the negative cash flow will be financed from reserves and two-thirds from bond issues and new loans.

The Ministry of Finance forecasts that the people leaving the second pillar pension fund will affect the Estonian economy first and foremost through the real estate market and to a lesser degree through private consumption. Some €1.2 billion worth of pension savings will be withdrawn from pension funds, according to the prognosis. Around €300 million of this money will be used for private consumption, and roughly an equal sum may be spent on the real estate market.

The Ministry of Finance is forecasting tax receipts totaling around €300 million from the sums to be paid out this fall, both directly through income tax as well as through VAT imposed on the payouts.

The ministry also forecasts that inflation will be 2 percent in 2021, 2.1 percent in 2022, 2 percent in 2023, and 1.9 percent in 2024 and in 2024.

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Editor: Kristjan Kallaste

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