The Fiscal Council endorses the summer forecast 2024 of the Ministry of Finance and considers it a suitable basis for the state budget and the budget strategy that are to be drafted this autumn.

The summer forecast of the Ministry of Finance does not yet contain a scenario that presents the most probable development of the Estonian economy and public finances for the years ahead. The baseline scenario of the forecast does not consider any tax changes or spending decisions that have not already been legislated. The additional scenario considers the measures from the summer’s coalition agreement that will increase revenues and cut spending (and their impact on key macroeconomic indicators), but does not yet consider planned increases in spending on national defence and security.

The Fiscal Council considers that the baseline scenario of the summer forecast describes the growth outlook of the Estonian economy with sufficient reliability. However, the Fiscal Council has a different estimate from the Ministry of Finance for the output gap, which is the difference between the actual and potential levels of the economy, and the source of the difference is how shocks to the Estonian economy and high inflation have impacted the output gap.

The output gap is an important element of the national fiscal rules for assessing how much of the budget deficit comes from the weak cyclical position of the economy. The Fiscal Council considers that the negative output gap may be smaller than that calculated by the Ministry of Finance, and so the structural deficit may be larger.

Estonia escaped the excessive deficit procedure of the European Union this spring, and the government made efforts in the supplementary budget for 2024 to do so again next spring. The supplementary budget can in consequence be seen to have been the correct decision, and it is shown by the summer forecast to have been necessary in order to keep the deficit within the permitted limits. Avoiding the excessive deficit procedure was important for keeping the costs of borrowing down and for not losing any ownership in setting the fiscal adjustment path.

Regrettably the baseline scenario shows Estonia’s budget deficit being too large once again from 2025 under both the European Union’s fiscal rules and the national ones. The Fiscal Council considers that the majority of the current budget deficit in Estonia is structural and so is permanent in nature and will not be reduced simply by a recovery in growth in the economy, and so it will require deliberate policy decisions to be taken about how to align the revenues and expenditures of the state better. This makes it important that the government continues to improve public finances this autumn by taking decisions that will permanently improve the budgetary position.

The Fiscal Council finds that the government does not have much spending room this autumn to cover new expenditures, including possible increases in spending on defence, if the measures described in the coalition agreement are not supplemented with additional revenues or cuts in expenditures. The Ministry of Finance estimates that the structural budget deficit will already reach close to 1% of GDP under current assumptions. Planning a structural deficit that is larger than 1% of GDP would be a breach of the national fiscal rules.

The Fiscal Council would not be in favour of the national fiscal rules that were reintroduced in 2024 being loosened even further. The current rules are as loose as it is possible for them to be. Slackening the rules further would mean that Estonia as a small and open economy would not have sufficient buffers under the reformed EU fiscal requirements, and the Estonian state finances may then be permanently derailed from their track of long-term sustainability.