The Fiscal Council finds that the summer economic forecast 2020 of the Ministry of Finance is a suitable basis for preparing the state budget for next year and the budget strategy for next four years. The uncertainty that surrounds the economic forecast is larger than usual though.

The summer forecast finds that the impact of the coronavirus crisis on the Estonian economy in 2020 will be smaller than expected, but that the recovery from the crisis will be slower. The drop in the economy in 2020 is forecast at 5.5%, but the economy will start to grow again from next year.

Several economic indicators will recover more weakly though, as growth in wages and employment will not yet return next year and growth in private consumption will be less than that in the economy. This means lower tax receipts than was earlier forecast.

Government expenditure will increase by more than 11% this year, which is much more than usual, and public spending will continue to be a larger part of GDP even once the crisis measures have been withdrawn. This means the general government fiscal position will be in a large deficit in 2020-2024, which will lead to rapid growth in the debt burden.

The coronavirus crisis has led the European Union to suspend temporarily the requirement for the state budget to be in structural balance. Despite this, it is important for the stable development of the economy that the fiscal deficit should not be excessive over the long term and should not hurt the sustainability of the state finances.

The fiscal forecast puts the general government’s nominal deficit at 6.6% of GDP in 2020 and 6% of GDP in 2021. The cost to the budget of the fiscal measures related to the coronavirus that were passed in the supplementary budget is estimated at 3% of GDP in 2020 and 0.5% of GDP in 2021.

The Fiscal Council considers that the fiscal deficit in 2021 should only exceed 3% of GDP if it does so because of the weak economic cycle and the additional spending in response to the coronavirus crisis. The forecast indicators from the ministry do not justify the fiscal deficit exceeding the 3% limit in 2022 in the opinion of the Fiscal Council, and in 2023-2024 structural balance should be restored.

If excessive fiscal stimulus is delivered when the production capacity of the economy is already nearing its potential and the labour market has stabilised, it could cause unnecessary pressure on wages and the price level, and this could then harm the competitiveness of the Estonian business sector.

The Fiscal Council's opinion and a more thorough explanatory report can be found here.

Additional information:
Raul Eamets
Chairman of Fiscal Council
Tel: +372 514 0082
Email: raul.eamets@ut.ee