The Estonian economy has recovered better than expected from the Covid-19 pandemic, and the summer forecast 2021 of the Ministry of Finance expects the economy to grow by 9.5% this year and 4% next year.

In spring the Fiscal Council considered that the economic environment may prove better than forecast by the Ministry of Finance, but this time it considers it possible that the growth in 2021-2022 will be slower than forecast.

This is mainly because the expectations for a rapid recovery in the economy due to vaccination in Estonia and the rest of the world may not be realised, and the improvement in the supply chains of production inputs and consumer goods may take longer than expected.

For this reason the Fiscal Council recommends that the preparation of the state budget for 2022 should also take account of the risk scenario in the economic forecast of the Ministry of Finance, which foresees a sharper slowdown in economic growth next year.

Nevertheless the outlook for the economy and the state finances has improved, and the government should set more demanding budget targets than those that were in the state budget strategy in the spring. The Fiscal Council considers that it is no longer justified to apply the escape clause of the fiscal rules from next year given the Estonian circumstances.

The summer forecast of the Ministry of Finance expects the general government fiscal position to be in nominal and structural balance by 2025, but the forecast has not yet considered all of the decisions taken in the state budget strategy in the spring, such as the income tax exemption for the average pension. Taking this into account increases expenditure growth and weakens the fiscal balance. Cost pressures also come from the expectations of wage rises in the public sector and higher inflation.

It is forecast that fiscal policy will remain supportive for the economy, as the nominal fiscal deficit of the general government will total around 1 billion euros in the next four years, and a record amount of fiscal transfers will be available. The Fiscal Council considers that the Estonian economy does not need any additional fiscal support beyond this by increasing the deficit any further.

Stimulating the economy further at a point where it is already operating at its capacity, or even temporarily beyond it, could in the short term reduce the purchasing power of consumers and in the long term hurt the competitiveness of Estonian companies.

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