The Ministry of Social Affairs recently introduced a bill to cap the basic exemption on pensions at €776, following an initial version from a month ago.

What changed in the meantime is the bill's effects analysis as it depends on the ministry's calculations. While the tax change was forecast to save Estonia €22 million next year and €46 million in 2026 in the first version, this drops to €17 million and €36 million respectively in the new one.

The first version was based on the finance ministry's summer economic forecast, while the recent iteration draws from the spring economic forecast to be published on April 4.

Margus Tuvikene, an analyst for the ministry's fiscal policy department, told ERR that the ministry has dialed back its pension growth forecast.

The analyst gave the example of the average old-age pension for 2025, which was forecast as €829 a month in the summer forecast but will be €819 in the spring.

Salary growth to slow

Pension advance forecasts were dialed back also for consecutive years.

In calculating the pension index, the state takes into account the change in the consumer price index by 20 percent and the change in social tax receipts by 80 percent. Meaning, that if prices and wages increase less, pensions will rise more slowly.

This also highlights the difference between the summer and spring economic forecasts.

"In the spring forecast, we adjusted the labor market indicators downward, which also affected the social tax and pension index throughout the forecast period," explained Tuvikene.

According to the summer economic forecast, the average salary this year was expected to grow by 6.6 percent and by 5.3 percent next year. However, the latest forecast allows for a 6 percent wage increase this year and 5.1 percent next year.

"The economic downturn at the end of last year was deeper than we expected in the summer forecast, and the economic recovery was delayed. That's why the labor market indicators were adjusted downward," Tuvikene said.

2024 will still see a recession for the whole year

Labor market indicators are not calculated in a vacuum. They are connected to the overall economic performance as well as to governmental inputs.

"For example, the fiscal strategy (RES) included several measures that raised wages. This again has a positive effect on labor market indicators compared to the summer forecast," said Tuvikene.

This suggests that the average wage and employment are dragged down by the second half of the equation, namely general economic performance.

Margus Tuvikene made no secret that the fresh forecast is more negative than the summer's and similar to the recent forecast by the Bank of Estonia. Exact figures will be available on Thursday, when the ministry introduces the new forecast to the public, as confirmed by Tuvikene.

"We are expecting, similarly to the Bank of Estonia, that recovery will begin from the second half of this year, but this year's growth will not yet reach positive territory," Tuvikene said.

Last summer, the Ministry of Finance forecasted that the economy would rebound significantly earlier. For this year, a 2.7 percent economic growth was predicted, and 3 percent growth for the next year.

Reality started to manifest itself quite quickly. Last year, instead of the expected 2 percent, the economy fell by 3 percent, and the Bank of Estonia, which publishes forecasts at shorter intervals than the Ministry of Finance, reflected this in its assessments.

For this year, the Bank of Estonia forecasts a further 0.6 percent economic downturn, which will be replaced by a 3.2 percent economic growth next year.

Tax receipt to miss targets

The figures that the Ministry of Finance will publish on April 4 are crucial inputs for the government. Based on these, politicians will see whether this year's budget will balance and whether it makes sense to write additional requests into next year's budget. To put it simply, the answer to both questions could be negative.

"Tax revenue will come in lower than projected in the summer forecast," said Tuvikene. "This directly depends on the macroeconomic forecast, meaning taxes usually do not move in the opposite direction."

How much lower the Ministry of Finance predicts tax revenue to be for this year will be seen on Thursday morning, according to Tuvikene.

Tuvikene also indicated that Estonia is unlikely to fit within the 3 percent budget deficit limit allowed by the State Budget Act and European Union rules this year.

According to the government's current plans, this year's nominal budget deficit should not exceed 2.9 percent. Next year, it is expected to decrease to 1.9 percent and to 1.5 percent the following year.

Tuvikene: Next year just around the corner

Tuvikene mentioned that in addition to the standard economic forecast, which only considers the impacts of already enacted laws, they also prepared a forecast taking into account the current state budget strategy.

"If we implement all the measures in the state budget strategy, then the position will start moving towards balance. It will still be in deficit during the forecast period but definitely below negative three," Tuvikene said.

In saying this, Tuvikene emphasized the word "if." "Otherwise, our debt burden will grow out of control, and we'll start paying significant interest costs. There are several big things in the RES that are still not legislated. The biggest one is the broad-based national defense tax, for example. Next year is already upon us," Tuvikene mentioned.

The media has been writing about the significant gap expected in the 2025 budget since autumn. Abandoning a new tax altogether would inflate the gap by €430 million compared to the budget strategy. Canceling the unemployment insurance premium reform would add another €114 million, and scrapping the renewable energy charge reform would add €60 million.

Smaller deficits are coming from various places. For instance, it's uncertain whether the increase in environmental charges will bring an expected additional €70 million to the state treasury and whether raising fines will yield the anticipated €15 million. According to a recently published draft, the Ministry of the Interior is projecting only about an additional €3 million from fines.

Officials have also doubted whether the months-long zero-based budget project will indeed save around €200 million. All this means that poorer-than-expected tax collection will increase the already significant gap.

Tuvikene said that from the perspective of the state budget, efforts should still be made.

"It would be the most positive scenario at this point if all these RES measures could be implemented," Tuvikene stated.

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