The decline in the Estonian economy and the fiscal deficit in Estonia were both smaller than expected last year. Assuming there is no third wave of Covid-19 and consequent restrictions on economic activity, the spring economic forecast of the Ministry of Finance expects the economy to grow by 2.5% in 2021 and 4.8% in 2022.

The Fiscal Council finds that the economic environment in the years ahead may even be better than forecast. Growth in private consumption in the initial years of the forecast may be underestimated and there may be a bigger boost to growth than expected in the final years of the forecast from growth in investment driven by foreign support.

The government will use the spring economic forecast of the Ministry of Finance as the basis for its draft budget for 2022 and the state budget strategy for 2022-2025. The Fiscal Council considers the forecast of the Ministry to be a suitable basis for this.

The spring forecast expects the general government fiscal deficit to be 6% of GDP in 2021 and then to start narrowing, but considers it will not yet have reached balance by the end of the forecast horizon in 2025. The outlook for the state finances is still better than it was in the autumn. Not only has the impact on the economy of the Covid-19 pandemic been smaller than feared, but the fiscal position has also been improved by the pension reform, which is increasing revenues to the state budget.

The Fiscal Council finds it reasonable that the spring forecast no longer takes account of the spending cuts of around one billion euros that were presented when the state budget strategy was drawn up last autumn. Corrections to the fiscal position that are not accompanied by actual measures should be avoided in future.

As it is forecast that the Estonian economy will return in 2022 to its level of before the pandemic, the Fiscal Council recommends that the fiscal rules should start to apply again from next year. This means that the nominal deficit should not exceed 3% of GDP in 2022 and the structural deficit should start to be reduced year by year.

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