The Fiscal Council endorses the summer forecast 2025 of the Ministry of Finance that will serve as the basis for the state budget discussions this autumn. The forecast makes clear that the budget deficit being smaller than expected in 2025 does not indicate any permanent improvement in the state finances.

The summer forecast of the Ministry of Finance puts the general government’s budget deficit at 4% of GDP in 2026 and 3.8% of GDP in 2027. The deficit is larger than in the previous forecast because of the sharp rise in spending on defence, while the forecast for revenues from the security tax has been reduced.

The budget deficit is allowed to exceed its usual ceiling of 3% of GDP in the coming years because the government is applying the escape clause of the European Union’s fiscal rules so that it can increase spending on defence. It is also planning to loosen the domestic fiscal rules.

The Fiscal Council must stress that the larger the budget deficit grows while the escape clause applies, the larger will be the need to improve the fiscal position afterwards.

If Estonia can hit its current defence spending target of 5% of GDP, while still keeping the deficit below 4.5% of GDP as the summer forecast of the Ministry of Finance indicates it can, then it is not justified to widen the deficit further with other budgetary decisions.

A larger deficit would cause faster growth in debt and in interest expenses and would reduce the fiscal buffer that can be used in the face of any future crises. The summer forecast predicts that Estonia’s government debt will approach 30% of GDP as early as 2028.