co

The general government fiscal position needs to be improved September 26, 2019

The summer economic forecast of the Ministry of Finance finds that growth in the Estonian economy will slow to 2.2% in 2020. Expectations for economic growth are lower than they were in spring, as the external environment has proved weaker than expected. Even so, the Estonian economy will be running at above its estimated potential in the years ahead.

The Fiscal Council finds that the summer forecast of the Ministry of Finance is in line with the changes in the Estonian economy and the assumptions used for the forecast. The Fiscal Council considers though that there is a risk that geopolitical and foreign trade tensions may have more of an effect than assumed, and this could lead to economic growth being slower than forecast.

According to the summer forecast of the Ministry of Finance, the 2019 structural budget deficit will be 1.4% of GDP. This means the fiscal position has to be improved this year to comply with the fiscal rules. The Fiscal Council recommends that the steps to improve the fiscal position be planned with an excess, as revenues in 2019 could prove weaker than expected.

The general government fiscal position for the coming years will be weaker than it seemed in spring, and the structural deficit will remain throughout the whole forecast horizon. The structural deficit will remain despite the improved forecast for tax revenues and the measures proposed in the state budget strategy this spring that aim to improve the fiscal position.

The general government fiscal position was last in structural balance in 2016. This means that the structural deficit is forecast to remain throughout the peak of the economic cycle. The Fiscal Council finds that this is not a suitable fiscal policy given the state of the economy.

The Fiscal Council recommends that the government stick to the budget targets set in the state budget strategy in spring, meaning that the fiscal position should be substantially improved in the years ahead and structural balance should already be attained in 2021.

Finally, the Fiscal Council believes that frequent changes to the fiscal rules harm the credibility of Estonian fiscal policy. However, once the government has decided to change the rules, those changes need to be analysed carefully, and their introduction should not be left until the very last moment.

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