Estonia is currently living beyond its means as expenses have been growing much faster than revenue. The Ministry of Finance's recent economic forecast suggests fiscal deficit will grow to 3.5 percent of GDP this year, putting it at €1.3 billion at a budget of €17 billion.

However, the deficit is forecast to grow to 5.3 percent or €2.2 billion next year.

The finance ministry said that executing every measure included in Estonia's recent state budget strategy could help reduce this year's deficit to 2.6 percent or €1.1 billion. The government has been looking for ways to implement some of the measures.

"We come a step closer every time. But it is also true that we have very different ideas about what can be done. We have some agreements in place. But all ministries need to make preparations, which is when we can give them new tasks. We'll monitor this progress monthly," Reform Party head, Prime Minister Kaja Kallas said.

In terms of taxes, next year will see the planned car tax enter into force as well as the abolition of Estonia's "tax hump" (or gradual income tax reduction scheme where Estonia will return to a universal basic exemption of €700 monthly – ed.), Kallas said.

Final decisions regarding the state budget strategy will be made in August by which time it will be too late to plan any new taxes for 2025, with cutting costs at ministries the only way to improve the fiscal position.

Kallas said that no new measures have been agreed on, mentioning untying expenses from the minimum salary or other indexes that cause sums to automatically grow as one possible avenue of cost-cutting. "But there are no painless, popular or positive solutions on the horizon," she remarked.

Reform's coalition partner Eesti 200 believes that all ministries should be ordered to cut back equally.

"Let us focus on all manner of foundations where a lot of money has been stashed and where operating costs need to come down. We need to look at what local governments are really doing. They are also growing as one part of the public sector. We need to dial back the entire system quite mercilessly and on level grounds," Eesti 200 chairman and Minister of Foreign Affairs Margus Tsahkna said.

One reason we're forced to engage in difficult austerity talks today is that the government failed to introduce €400 million worth of new taxes, which the state budget strategy called for last year, head of the third coalition partner, the Social Democratic Party, Lauri Läänemets said.

He said that while pruning public sector spending by 5-7 percent has been discussed, Estonia will not be able to conquer the deficit without raising taxes.

Decisions could be made regarding existing taxes, while this would require preparedness to hike the rates, the politician added.

Urmas Reinsalu, head of the opposition Isamaa party, which currently tops the polls in Estonia, said that the government's austerity plans come catastrophically late.

"What members of the government are saying about seeing where the land lies in August, following monthly meetings, is out of touch with the reality of the situation. Action needs to be taken in real time in such a difficult fiscal and economic situation," Reinsalu said, adding that the government should have taken action in the 2023 budget or at the very beginning of 2024 when the Bank of Estonia's discouraging forecast landed.

He also suggested canceling the Reform Party's election promise of returning to a universal basic exemption, which the Ministry of Finance forecasts will cost €556 million next year.

Urmas Varblane, economist and supervisory board chairman for the Bank of Estonia, said that the government is struggling to put together an austerity plan because it has no clear goal.

"The situation today is very different from 2009 when austerity clearly served the purpose of getting Estonia into the Eurozone. We had a clear goal then and it worked to mobilize the government's partners."

Varblane also believes that austerity alone cannot sufficiently improve Estonia's fiscal situation.

"Three things should be done simultaneously. We should cut costs, which we virtually haven't been able to do so far, and introduce a whole series of tax changes along the lines of what the finance ministry has suggested. But there is also a third and thoroughly underreported side to this – activating or livening up the economy," Varblane said.

Should austerity prove unfeasible, Estonia will have to borrow wherein the country's public sector loan burden would double in four years' time. We'll be making annual interest payments of half a billion euros alone, Bank of Estonia economist Rasmus Kattai said.

"Every worker will need to pay the state €600 annually just to cover interest costs which were near or at zero only a few years ago," Kattai said based on the Ministry of Finance's deficit forecast.

The analyst said that this would also send a poor signal to investors and negatively impact companies' loan conditions, which might render job creation more difficult. "The country being on top of its finances is one criteria when credit ratings are determined," he said.

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