In preparing the state budget for 2025, the government made significant efforts to comply with the requirements of both European Union and national fiscal rules. For example, this included previously decided measures such as increasing the income tax rate from 2025 and introducing a motor vehicle tax, complemented by subsequent decisions to postpone the abolition of the tax wedge and to introduce a security tax.
The state budget for 2025 set out a nominal deficit of 3% of GDP and a structural deficit of 0.9% of GDP. These targets were also intended to ensure that government net expenditure followed the growth path agreed in the fiscal-structural plan for 2025‒2028.
By the spring of 2026, it became evident that nominal budget deficit amounted to 825 million euros last year, or 2% of GDP. Compared to the state budget for 2025, both tax and non-tax revenues performed better than expected. Based on the Ministry of Finance’s assessment of the economic cycle in 2025 and the impact of one-off budgetary measures, the structural budget deficit was 0.2% of GDP.
According to the Fiscal Council, this means that the government has achieved its budgetary objectives set for 2025 and that the structural budget position complies with the requirements of national fiscal rules. Based on the Ministry of Finance’s calculations of net expenditure growth for 2024 and 2025, the Estonian government has so far also remained on the net expenditure path agreed under the European Union’s fiscal rules.
However, in mid-2025, major changes took place in the European Union’s economic governance framework, when the European Commission informed Member States of the possibility to apply for the escape clause in 2025–2028. The escape clause is primarily intended to allow for increased defence expenditure and, in doing so, permits a temporary deviation from both the 3% of GDP deficit limit and the previously agreed net expenditure path.
The Estonian government intends to make maximum use of the flexibility provided by the escape clause in the coming years, suspending the requirements of national fiscal rules for this period. As a result, according to the Ministry of Finance’s spring forecast, both the nominal and structural budget deficit will average 4.5% of GDP in 2026–2028.
Even if such a deficit is temporarily permitted under the fiscal rules, it has a significant impact on Estonia’s public finances and fiscal discipline. This is already the second application of the escape clause in the fiscal rules during the current decade (2020–2023, 2025–2028). In essence, this represents a break in the government’s efforts to put Estonia’s public finances in order, in which substantial progress had been made in recent years.
The purpose of the escape clause is to allow countries to rapidly increase defence expenditure even when public finances are already in a difficult position. As the Estonian government began increasing defence expenditure early and is therefore reaching its numerical target (at least 5% of GDP) already from 2026, maintaining a persistent budget deficit of two billion euros over the following three to four years is not justified.
According to the Fiscal Council, revenue and expenditure measures for improving the budget position should be planned sooner rather than later in order to ensure permanent funding for the higher level of defence expenditure, to slow debt growth, and to avoid excessive fiscal adjustment in 2029, when the core requirements of the fiscal rules reapply. Even if in some years the target level of defence expenditure is not met due to postponed procurements, the Fiscal Council does not recommend increasing other government expenditure through supplementary budgets.