The Ministry of Finance published its summer economic outlook Tuesday, which predicts the anticipated revival in external demand in the second half of this year will also be reflected in Estonia's export volumes recovering.

Still stronger growth is expected next year, and private consumption is set to rise in line with purchasing power increases, consumer confidence, and a fall in interest payments.

Introducing the forecast, Minister of Finance Jürgen Ligi (Reform) said that the economic backdrop is still one of war, adding that the economy has started to adapt to these effects.

He said: "The growth forecast refutes the charges that the government's policy is destroying the economy and hiking prices to the maximum."

"We have no alternative but to restrict state borrowing and replacing it with spending cuts and tax rises. Both economic growth recovery and budget rules require reducing budgetary stimuli," the minister went on.

In the real world, accepting that making the country more sustainable will burden the taxpayer, he added, plus there will be a setback in the growth of real incomes in the coming year, Ligi said.

The forecast stated that the Reform-SDE-Eesti 200 coalition agreement aims to improve the country's fiscal position via tax reforms and cuts in government sector operating expenses, which should, it is argued, lead to a reduction in the budget deficit on a year-by-year basis.

As a result, the debt burden is expected to remain below 25 percent of GDP

According to the forecast, real GDP growth next year will be 3.3 percent, while nominal growth will be 7.1 percent, and GDP at current prices is projected to reach €42 billion.

As for this year, the Ministry of Finance said it expects inflation to accelerate in autumn, driven by both external and domestic factors.

Energy prices will cease to fall, the economy will pick up, and some food commodities will become more expensive on the international markets.

The car tax entering force in January will further exacerbate inflation, albeit temporarily, the ministry added.

The forecast also noted that the coalition agreement's planned expenditure and revenue measures will influence Estonia's economic development outlook. Under the scenario based on the coalition agreement's funding sources, the economy is expected to grow by 2.1 percent next year and by 2.7 percent in 2026. Consumer price inflation is projected to accelerate by 0.8 percentage points next year and by one percentage point the year after due to increases in VAT and excise duties.

The consumer price index is expected to grow by five percent in 2025 and by 3.2 percent in 2026, according to the forecast.

The budget deficit is projected to remain at 3 percent this year, though without taking the coalition agreement into consideration, it is expected to deepen to 4.4 percent of GDP next year, mainly thanks to changes in income tax, a fall in property income, and a worsening financial position at the Health Insurance Fund (Haigekassa).

The Ministry of Finance warned that a persistently large budget deficit will increase the debt burden at a faster rate than the average growth of the last five years, making debt servicing more expensive.

The government sector's debt burden is projected to be 23.3 percent of GDP this year, increasing to 25.6 percent next year, and reaching 33.2 percent of GDP by 2028.

Aside from the coalition agreement, interest expenses are expected to rise to 1 percent of GDP by 2028.

The rising cost of debt servicing is to put additional pressure on the budget, potentially reducing investment capacity and hindering economic growth, the finance ministry reports. The budget deficit is expected to be financed through the issuing of long- and short-term bonds.

The forecast also reports the Reform-SDE-Eesti 200 coalition agreement aims to improve the country's fiscal position via tax reforms and cuts in government sector operating expenses, resulting in an annual reduction to the budget deficit.

Furthermore, the debt burden is expected to remain below 25 percent of GDP.

Economist: Base scenario should have taken into account impact of tax changes

Raul Eamets, chief economist at Bigbank, said that the planned tax changes are not taken into account in the base scenario (see below) of the Ministry of Finance's forecast, but if they are added to the calculation, economic growth would be 2.1 percent in the coming year, while presenting this number as a base scenario would give a much clearer message to all economic operators.

Eamets noted that lender SEB Pank forecasts 1.5 percent economic growth by 2025.

In the context of the state budget, this seemingly only 0.6 percentage-point difference equates to millions and millions of euros less tax revenue, i.e. a bigger budget hole than forecast, Eamets said.

"Furthermore, wage growth and price dynamics give rise to questions. If the labor market situation is good and we supposedly see a drop in unemployment, then there is clear pressure on wage growth," Eamets went on.

According to the ministry's forecast, price inflation will slow down in 2026, but wage inflation will continue at around the 4-5 percent mark.

Eamets noted this can lead to a wage-price spiral.

Ministry provided base scenario and coalition agreement measures scenario

The Ministry of Finance gave variations in its forecast: A base scenario and one with coalition agreement measures factored in.

These are still to be specified during the preparation of the next year's state budget.

The basic scenario finds the expected revival of foreign demand in the second half of this year will also be reflected in the recovery of Estonian export volumes, and stronger growth can be expected next year.

According to the forecast, the cost and revenue measures planned by the coalition agreement will affect the economic development outlook of Estonia.

According to the scenario covered by the coalition agreement, the economy will grow by 2.1 percent next year and 2.7 percent in 2026.

The rise in the consumer price index will accelerate by 0.8 percentage points next year and one percentage point the year after, due to the rise in VAT and excise duties.

The CPI will increase by five percent in 2025 and by 3.2 percent in 2026, according to the forecast.

The debt burden of the government sector is 23.3 percent of GDP this year, while it will rise to 25.6 percent next year, and by 2028 it will have reached 33.2 percent of GDP, the ministry reported.

Editor's note: This article was updated to include comments from Jürgen Ligi and Raul Eamets and more information on the base versus coalition agreement scenarios.

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