The spread of the coronavirus and the restrictions introduced to prevent it will cause a recession in Estonia and elsewhere that the spring forecast 2020 of the Ministry of Finance estimates could reach 8% of GDP in Estonia.

The forecast of the Ministry of Finance expects that the economy will recover quite quickly, and will return to its pre-crisis levels in 2021. The Fiscal Council finds that the recovery from the crisis could take longer, as the production capacity of the economy and trade relations may be interrupted for longer.

The support measures contained in the additional budget will ease the drop in the economy, but they come at a cost that is initially estimated at over 1 billion euros in 2020. This will combine with the drop in tax revenues caused by the recession to leave the general government budget with a nominal deficit for 2020 of more than 10% of GDP. The Fiscal Council finds that an additional negative risk on the revenue side of the budget is weaker tax discipline and a consequent increase in tax arrears.

The government has decided to take loans to finance the deficit, as it does not have sufficient reserves to cover it. The Ministry of Finance considers that the debt burden of the Estonian general government could reach 22% of GDP after the crisis has passed.

The emergency situation means that a temporary deviation from the budget rules is permitted. To avoid the state taking on more liabilities than it can handle, the Fiscal Council finds that the stimulus package for the economy should be well targeted and focus on the measures with the largest short-term impact.

As the spring forecast of the Ministry of Finance only describes the developments for this year and next, and even then only in part, the Fiscal Council finds it important that by autumn at the latest the government submit a long-term outlook for the state finances together with the steps to be taken to return the budget to balance.

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