Finance Ministry reduces budget deficit forecast by €400 million

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Stacks of euro bills.
Stacks of euro bills. Source: Siim Lõvi/ERR

While this spring, Estonia's Ministry of Finance forecast a budget deficit growth this year of 4.3 percent of GDP, i.e. to €1.7 billion, the deficit thereafter narrowed under the impact of robust tax receipts in the first half of 2023, leading to a revised deficit forecast of €1.3 billion, or 3.3 percent of GDP.

The ministry is forecasting a recession of 2 percent this year, but 2.7 percent economic growth next year. This spring, it had forecast the Estonian economy would contract 1.5 percent this year before seeing 3 percent growth next year.

Inflation, meanwhile, is expected to slow to 9.6 percent this year, 4.6 percent next year and 2.5 percent in 2025.

The ministry noted that additional tax measures such as the VAT rate increase to 22 percent will inhibit the stronger deceleration of inflation next year.

This forecast will be used by the Estonian government as the basis for drawing up the 2024 state budget bill.

The ministry highlighted that the economic circumstances of the country's northern neighbors have remained below the EU average, which has inhibited Estonia's exports as well. The Estonian economy as a whole, however, has nonetheless coped well with these difficult conditions, it added.

The state of the labor market remains strong despite the downturn, and the ministry expects to see last year's increase in the number of people employed continue this year as well.

The unemployment rate is nonetheless forecast to rise slightly, but due primarily to the inclusion of war refugees in statistics.

According to Raoul Lättemäe, director of the ministry's Fiscal Policy Department, the labor market is cooling and the number of jobs is starting to fall somewhat, however the ministry does not foresee a sharp increase in unemployment.

Both unemployment and employment have increased slightly, and compared with its spring forecast, unemployment expectations have been adjusted downward.

"Rather, it's still a matter of the economy having to start adapting to higher prices," Lättemäe commented.

The Ministry of Finance forecasts average real wage growth of 1.5 percent this year and 1.9 percent next year. This figure is expected by the ministry to jump to 2.7 percent in 2025, reaching €2,053 per month.

According to Kadri Klaos, director of the ministry's Public Finance Service, the state budget deficit forecast will begin to worsen again starting in 2025.

"Also to be included in the forecast from '25 will be cost measures agreed upon in the coalition agreement," Klaos said, noting that first and foremost to increase the overall volume of costs will be the percent GDP of defense spending.

The official noted that social benefit expenditures and financial costs increase faster than the GDP, adding that interest expenses are growing quickly as well. This means that Estonia's state budget deficit will once again exceed 4 percent GDP in 2025, and that current tax increases will not lend themselves to a positive budgetary impact.

"There has been a sharp increase in decisions made on fixed costs," she added.

The Estonian ministry expects to see a 3.3 percent deficit this year, which it forecasts will shrink to 2.9 percent next year before increasing again to 4.1 and 4.2 percent, respectively, in 2025 and 2026.

According to Minister of Finance Mart Võrklaev (Reform), this forecast does not yet take the car tax or environmental charges into account, which will change things.

Estonia's government debt burden is growing rapidly thanks to a persistently large deficit, which by 2027 will lead to a sharp increase in interest expenses to 1 percent of GDP.

The ministry forecasts the government sector debt to increase to 19.4 percent GDP by this year, 19.4 percent by next and up to 30.4 percent GDP by 2027.


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Editor: Aili Vahtla

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