While the state budget, which was drawn up based on the ministry's forecast, expected a general government budget deficit of 3 percent GDP last year, according to preliminary figures published by Statistics Estonia on Tuesday, the actual deficit for 2024 came to 1.7 percent.

"Despite such a challenging economic environment, both the labor market and wage growth remained faster than expected in the second half of last year," Lättemäe highlighted. "This provided somewhat higher tax receipts toward the end of the year."

This year's tax hikes also contributed to improved tax revenue, as some businesses made certain expenditures at the end of last year already. However, this means that a large share of the factors improving tax receipts were temporary, he noted.

According to the ministry official, cost-cutting at all levels of the government sector also played a role in reducing the deficit.

"When we talk about a better labor market situation, that is indeed a more persistent factor," he said. "But when we talk about the private sector attempting to adjust its behavior ahead of tax hikes in order to reduce the payment of taxes — paying out dividends at the end of last year, moving payroll payments forward as a lump sum, or, to some extent, boosting VAT receipts by purchasing cars ahead of the introduction of the car tax — all of that comes at the expense of the future. This is not a sustainable improvement in tax revenue that could be repeated next year."

Defense spending planning and fulfillment are difficult to forecast in the budget due to the timing of procurements. This was also pointed out by Bank of Estonian Governor Madis Müller.

As recently as February, the ministry was still estimating last year's deficit at 2 percent rather than 1.7 percent, as one specific set of defense expenditures was shifted from 2024 to 2023, Lättemäe explained.

"Some of these advance tax payments were recorded in 2025, which improves 2025," he said.

"As for statistical adjustments, particularly regarding defense spending, we know what the situation is, and what needs there are," Lättemäe continued. "The issue here is statistical recording — whether a particular procurement was successfully financed in one year or another does not actually affect how much defense spending was planned or whether there will be any [funds] left over. All necessary expenditures will be made, and this cannot be considered a permanent improvement in the deficit."

Most of last year's better-than-expected result was still a one-off factor, characteristic of living at the expense of the future, he added.

The Fiscal Policy Department director estimated that the deficit is likely to be smaller than forecast this year as well.

"In fact, the change in behavior ahead of the tax hikes affected both years," Lättemäe noted. "It actually boosted this year's revenues as well, meaning that we can also expect a smaller deficit this year than we forecast in the fall, and for similar reasons."

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