Data released by Statistics Estonia put the deficit at over 3 percent on Monday.

"According to the last forecast we made last summer, our expectation for the deficit in 2023 was 3.3 percent of GDP, or 3.4 percent of GDP, which is as expected," said Kadri Klaos, head of the Public Finance Service at the Ministry of Finance.

The policies adopted with last year's budget exceeded €2 billion.

"Social benefits were increased, pensions were raised exceptionally, teachers' salaries and those of internal security personnel were increased in advance, there was an overall 5 percent increase in public sector wages, funding for higher education was increased, and there was a switch to Estonian-language teaching. The packages that were adopted at the end of 2022 were very large, and this increased the budget deficit by a very significant amount," Klaos said.

However, revenues did not rise in tandem. "No new decisions on revenues were made in the 2023 budget," Klaos said.

The two-year recession also led to €150 million less tax revenue than forecast last year. Due to the economic slowdown, this year's budget could also see a shortfall in tax revenue, she said.

Head of the Economic Policy and Forecasting Division at the Bank of Estonia Rasmus Kattai said the state's expenses have grown too quickly in recent years.

"Last year, too, expenditure grew almost three times faster than the economy's volume in euro terms. So spending has been growing fast. Of course, this includes defense spending, but also social spending, which the state pays out," said Kattai.  

The increase in spending has become permanent which is why the deficit will reach 3 percent this year, he said.

"And next year it will increase even more, with the personal income tax reform coming into force. And then, in 2026, there are more serious choices facing the government on the revenue and expenditure side of the equation to get closer to a balanced budget," Kattai said.

An annual deficit means an increase in the debt burden, and interest payments on debt alone could rise to one percent of GDP in a few years, Kattai said.

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