The Estonian public finances have proven to be in better shape in 2024 and 2025 than was forecast. The budgetary position has improved partly because the government took deliberate measures to put the state finances in better order. However, the budget deficit will widen sharply again from 2026.

According to the State Budget Strategy 2026‒2029 the outlook for the state finances is worse than it was in the summer forecast of the Ministry of Finance. Additional spending obligations were taken on during the budget negotiations, while one of the main sources of additional revenues, the planned rise in income tax in 2026, was abandoned.

Estimates by the Ministry of Finance now put the nominal budget deficit for the general government at 4.5% of GDP in the next two years. This means that general government spending will exceed revenues by around two billion euros a year. In addition to defence spending rising to above 5% of GDP, expenditure on social security and healthcare will also exceed their previous long-term averages.

The government has been able to plan such a large deficit because the European Union escape clause has been applied for defence spending, and the national fiscal rules have been suspended. The Fiscal Council would have preferred to see the national fiscal rules loosened temporarily, not suspended.

The State Budget Strategy sets the Estonian public finances on a course that would leave the government debt at 34.5% of GDP by 2029, with interest expenses at over 450 million euros. The strategy does not however explain how budgetary position will begin to be improved when the fiscal rules start to apply again. Restoring fiscal discipline will by that point require great fiscal effort.

No matter which expenditure item has caused it, a larger government debt will generally mean larger interest expenses, higher borrowing costs for both the public and private sectors, increased exposure to volatility in financial markets, and smaller fiscal buffers for facing any crisis in the future.