Ministry forecast: Rising costs to put pressure on reaching fiscal balance

Ministry of Finance.
Ministry of Finance. Source: Siim Lõvi /ERR

The Ministry of Finance has completed its summer economic and financial forecast, ahead of the 2024 state budget process commencing. The ministry says that the forecast shows that the fiscal position will improve next year, adding that it is however clear that costs must be further reduced.

Minister of Finance Mart Võrklaev (Reform) said that there is no point waiting for the fiscal balance to recover spontaneously.

"As we strive towards fiscal balance, we must continue to make the necessary political decisions," Võrklaev said.

"Economic growth alone will not improve the severe deficit – it will not reduce the state's increasing fixed costs," the minister went on, via a press release.

The changed security situation has led to a 1 percent increase in defense costs, now accounting for 3 percent of GDP.

The state's cost base is also strongly influenced by increased social costs and the calmed energy market, which reduces revenues from the sale of CO2 emission allowances, the finance ministry says.

"The government is facing the difficult task of balancing public revenue and expenditure in the coming years," Minister Võrklaev added.

According to a ministry forecast, the persistently high deficit would increase the debt burden from this year's 19 percent of GDP, to 30 percent of GDP as of 2027.

This would likely lead to an increase in the interest costs to 1 percent of GDP by 2027.

As with the spring forecast, the latest outlook confirms the difficult challenges of bringing public finances on a sustainable path, the finance ministry says.

The forecast shows that economic conditions have deteriorated over the past year-and-a-half across Europe. However, Estonia and its neighboring states are clearly worse off compared to the average of other European states, the ministry says.

The government package and the implemented tax changes have improved the state of public finances slightly, but the constantly increasing costs continue to worsen the fiscal position, however.

Economic recovery has thus been postponed to 2024, but rapid inflation and a better-than-expected labor market have improved this year's fiscal position nonetheless.

Based on various indicators, the Estonian economy has withstood the latest crises well, the ministry adds, citing rapid nominal growth despite the negative real terms, and slowing inflation, thought he second half of this year will still remaining challenging to the labor market, the ministry says.

Gradual economic growth is expected from 2024 onward. 

The summer economic and financial forecast forms the basis for the preparation of the next year's national budget and fiscal strategy, while the Ministry of Finance in turn bases its forecasts on decisions from the Riigikogu and methodologies from the European Commission.

The state budget process starts next month, with a view to getting the 2024 state budget enshrined into law before the end of this year.


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Editor: Andrew Whyte

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