In the stability program still pending government approval, there is a plan to present next year's budget deficit as 3 percent of GDP, which is the limit set by the Stability and Growth Pact.

In reality, the Ministry of Finance is using data from its spring economic forecast, where it hopes to reduce an otherwise projected deficit of 5.3 percent with measures that have not been adopted and from which many politicians have already backed away.

In addition to tax increases that are already in process and approved, the Ministry of Finance has created a table of possible new measures that could reduce the budget deficit – currently estimated at €2.22 billion without counting investments – to a more manageable one billion euros.

Considered additional measures that should bring the budget deficit down to around 3 percent include (in millions of euros):

As the table indicates, the most impactful measures proposed for next year are a broad-based national security tax worth €430 million, car tax worth €200 million, social tax exemptions reform worth €114 million and projected cuts of €120 million.

Finance Minister Mart Võrklaev has repeatedly said that the unspecified €430 million security tax will not land next year. The motor vehicle tax is in Riigikogu proceedings, and while there are some issues to iron out, the tax may be laid down from next year.

The social tax exemptions reform is also unlikely to happen in 2025. The euphemistic phrasing hides a plan to move social tax for unemployed persons and those with reduced work ability, currently paid from the state budget, to the Unemployment Insurance Fund's balance, which would also hike the unemployment insurance premium.

Cutting €120 million from public expenses also remains rather unlikely. The government failed to achieve meaningful austerity last summer, and there is little to indicate this year's so-called zero budget initiative will prove more successful.

In other words, the government's plans and the stability program to be presented to Brussels include at least €600 million worth of measures the government has no intention of executing in 2025.

Raoul Lättemäe, head of the Ministry of Finance's fiscal policy department, stated that the ministry follows legal requirements and official inputs when drafting and submitting documents. While officials do not dictate to politicians what exactly should be done in the stability program, they effectively communicate how much would need to be done to improve the budget position.

Lättemäe's message is that given the need for significant improvement in the fiscal situation, it is the role of politicians to find alternatives if they choose not to pursue the measures agreed upon in the national budget strategy.

Submitting a budget plan to the European Commission and the Council of the European Union that includes political choices not actually planned does not immediately cause any concerns in itself.

According to Raoul Lättemäe, the Commission does not pay too much attention to this document and tends to focus more on its own economic forecasts, which are expected to be published in mid-May. The Commission's own forecast might align with the Ministry of Finance's forecast, which estimated a deficit of 5.3 percent of GDP for 2025. This suggests that the European bodies are more concerned with broader economic trends and factual economic data than with preliminary government submissions that may not fully materialize.

Austerity

The ministry official said that the wealthier Estonian society becomes, the harder it is to cut public spending. "We're out of low-hanging fruit," he remarked.

Lättemäe noted that expecting to keep the recent level of public services, not to mention improvement, by going down the path of sweeping budget cuts is unrealistic.

He also said that there is no mystical army of officials just twiddling their thumbs, doing nothing, and that teachers, doctors, rescuers, police officers and military personnel make up a large part of the public sector and also cannot be cut back to any significant degree.

Taxes

While Estonia's income tax rate will rise by 1 percentage point from next year (to 22 percent), abolishing the country's gradual income tax reduction scheme, or the so-called tax hump, is estimated to cost €556.5 million.

Lättemäe said that Estonia has high consumption taxes, medium labor taxes and low property taxes.

That is why Estonia could emulate other countries by hiking property taxes, while the Ministry of Finance official stopped short of proposing it outright, as tax decisions are up to politicians.

In a situation where assets are unevenly distributed in society, relevant taxes would have a much higher equalization effect than other types of taxes.

Lättemäe suggested that people do not fully realize that income inequality and asset inequality are not the same thing. He said that while incomes differ maybe three to four times for 90-95 percent of the population, the difference in the value of the property people own can be much greater.

Budget and the economy

Provided the government will fail to reconsider, lay down new taxes or notably cut public spending this summer, the question of what will become of next year's budget is raised. The State Budget Act does not allow the passing of annual budgets where the deficit is greater than 5 percent of GDP.

Raoul Lättemäe said that while it is theoretically possible to change the law, long-term plans of how to come out of the deficit would still need to be presented.

He suggested that Estonia has not operated with a considerable deficit for prolonged periods of time, and that Estonia continuing to borrow to cover the deficit will sooner or later result in unfavorable loan conditions.

Uncertainty in public finances inevitably also affects the private sector and its willingness to invest in terms of tax hikes that may or may not happen, whether business models are sustainable over the long run etc.

The government is set to approve the stability program at its sitting Thursday.

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