The Fiscal Council endorses the spring forecast 2025 of the Ministry of Finance, but finds that there are important negative risks around the outlook for growth in the Estonian economy that come primarily from the impact of trade tariffs on the global economy.

The Ministry of Finance finds that public finances have improved in 2024 and in forecasts for 2025 and ahead. The expected improvement in the fiscal position will come on the revenue side of the budget, as both tax and non-tax revenues have been increased in the spring forecast.

According to the spring forecast, the nominal budget deficit will be smaller in the coming years and so the buffer to the limit of 3% of GDP will be larger. The structural budget deficit will however grow larger than is permitted by the national fiscal rules.

This forecast does not consider the most probable developments in fiscal policy as it does not yet take the government’s plan to raise spending on defence above 5% of GDP into account, or the other fiscal policy decisions that the new government is still discussing, including possible changes to the security tax.

The medium-term fiscal targets set last autumn can be changed this spring because of the escape clause in the European Union’s fiscal rules. This allows an annual nominal deficit of up to 4.5% of GDP in 2025-2028 for the purposes of increasing spending on defence.

Although this escape clause allows the Estonian budget deficit to be increased temporarily without breaking the fiscal rules, doing so will lead to a higher level of government debt, increased interest costs, and to a more difficult transition when the clause ends. It should be remembered that Estonian fiscal discipline weakened substantially while the previous escape clause applied. The government debt being larger may start to impact the financing conditions for the private sector, and spending more of the budget on interest payments means that other important expenditure items may need to be cut.

Given the very uncertain outlook for the global and Estonian economies and the negative risks, the Fiscal Council finds that the fiscal buffers created by the improved fiscal forecast and the escape clause should be used above all to increase Estonia’s capacity for defence, and not to reverse the steps taken earlier to strengthen the fiscal position.