The Estonian economy returned to growth in 2025, but according to preliminary data not yet at the pace that forecasters had expected or that we were accustomed to before the crises. For 2026, forecasters expect economic growth to accelerate, mainly supported by domestic demand, as both public sector investment and private consumption are expected to increase significantly.
The Fiscal Council endorses the spring forecast 2026 of the Ministry of Finance. It is based on assumptions about possible developments in the global economy prevailing at the beginning of this spring and, on this basis, provides a sufficiently reliable picture of the outlook for the Estonian economy in the coming years. In addition, the Fiscal Council acknowledges the Ministry of Finance’s new approach to assessing the cyclical position of the Estonian economy.
According to the Ministry of Finance, the Estonian economy will grow by 2.3% this year. This is only 0.2 percentage points lower than in the previous forecast, but this spring the growth outlook is surrounded by greater uncertainty. Due to developments in the Middle East and upward pressure on energy prices, a negative risk scenario has been added to the spring forecast, which would entail faster price increases, slower economic growth, and a larger budget deficit for Estonia. In rapidly changing conditions, the government must also be prepared for the possibility that by the time of the autumn budget discussions, the outlook for Estonia’s economy and public finances will have deteriorated.
Based on the spring forecast 2026 of the Ministry of Finance, the outlook for the public finances of Estonia is already extremely challenging. The general government’s budget deficit over the next four years (2026–2029) averages 4.5% of GDP, both in nominal and structural terms, and the government debt ratio will start to increase rapidly.
According to the forecast, Estonia’s defence expenditure will increase to 5% of GDP from 2026, and government expenditure in total will account for a larger share of the economy than before. At the same time, the share of government revenue will decrease sharply due to the abolition of the tax wedge. In addition, the increase in the income tax rate to 24%, previously announced as part of the security tax, did not enter into force from 2026. Consequently, government expenditure will rise to a higher level without corresponding revenue coverage.
The escape clause in the European Union’s fiscal rules intended to allow for increased defence expenditure permits a budget deficit of this magnitude only until 2028 (inclusive). Thereafter, the core requirements of both the European Union’s and national fiscal rules will reapply, which, without prior improvement in the fiscal position, would require the implementation of large-scale revenue and expenditure measures.
The Fiscal Council expects that in the state budget strategy to be prepared already this autumn, the government will propose concrete solutions, when setting the budgetary objectives for the next four years, regarding which revenue and expenditure measures will be used to reduce the budget deficit. Some fiscal adjustment may prove necessary already in 2027, when the deficit is forecast to reach 4.9% of GDP.
Without improving the fiscal position, government debt is estimated by the Ministry of Finance to reach 39% of GDP by 2030. While in 2022 less than 30 million euros were spent on interest payments on government debt, by 2030 this will already amount to approximately 650 million euros. A higher debt burden reduces the fiscal buffer available to the government to respond to crises and increases exposure to volatility in financial markets. Once it has grown large, a high debt burden is difficult to reduce later.