Minister of Finance Jürgen Ligi (Reform) said Estonia's economy has been in better shape than public opinion might suggest. "The bleak despair has not matched the actual situation of people and businesses," he said.

"At the same time, confidence assessments have been disproportionately low, comparable to those during deep crises, even though employment has remained high, and wage and pension growth has been significant in real terms," the minister added.

Ligi said the biggest impacts on the economy have been the disruption of business relations due to war, rapid inflation, price increases, and a decline in export demand, not from tax hikes.

He pointed out that the economic downturn began before taxes were raised, and that the recovery started after those increases.

The budget situation will worsen next year, primarily due to a sharp rise in defense spending from weapons purchases, as well as the decision to forgo some planned tax increases, the forecast said.

Last autumn, the Ministry of Finance projected growth of 3.3 percent for 2025 and 3 percent for next year.

The Ministry now forecasts 5.2 percent inflation for 2025, which will slow to 3.3 percent next year as the impact of taxes decreases and food price increases stabilize.

Budget deficit to shrink this year, grow next year

The tax burden is expected to increase by 1.4 percentage points this year, including the introduction of a car tax and rises in personal income and value-added taxes.

The inclusion of the renewable energy fee in government revenue and tax burden calculations, per European Commission guidance, will also raise the tax burden every year. This year, it adds 0.2 percentage points.

Economic growth prospects in Estonia and global export markets have generally improved. However, geopolitical tensions and low expectations for private sector investment continue to weigh on the outlook.

Nevertheless, the forecast does not foresee a decline in the share of private investment. In 2025, government sector investments are expected to grow significantly due to the end of the European Union budget cycle.

This year's budget deficit is forecast to shrink to 1.5 percent of GDP, staying below the level set in the national budget strategy due to increased tax revenue. This will also result in a lower debt burden.

The deficit, covered by reserves accumulated last year, is expected to reduce debt to 22.6 percent of GDP.

Next year, however, the budget deficit is projected to increase. "We entered international crises with a deep budget deficit, which has made responding more difficult and, combined with a sharp rise in defense spending, forces painful cuts in all other areas," Ligi said.

The Ministry of Finance's economic forecast serves as the basis for government and Riigikogu fiscal policy decisions.

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