Despite slower economic growth, tax receipts remain good September 29, 2016

The summer 2016 forecast of the Ministry of Finance finds that GDP growth in Estonia in the short term will be lower than was earlier forecast, and that the economy will grow by 1.3% this year and 2.5% in 2017. Actual GDP and its potential level have been corrected downwards, and so has inflation. The Fiscal Council finds that this is in line with the changes that have occurred in the Estonian economic environment.

The Ministry of Finance considers that faster economic growth depends primarily on the external environment and it is assumed that at the end of the forecast period the imports of Estonia’s trading partners will grow markedly faster than their economies, and Estonian exporters will be able to benefit from this increased foreign demand. This is put at risk though by wages rising faster than productivity, as it would harm Estonian competitiveness were this to continue.

Despite the reduction in GDP growth forecast, growth remains strong in components of GDP on which tax revenues depend directly, like the payroll and private consumption. In consequence the forecast for tax revenues for 2017 is slightly higher than it was in the spring because of faster wage growth. When budgeting for the longer term, it cannot be expected that the growth in the main tax bases will continue to exceed GDP growth.

In planning fiscal policy it must be remembered that it is still hard to assess the position of the economic cycle. The contradictions between strong labour market indicators and weak economic growth may even have increased. In contrast to the forecast of the Ministry of Finance, the Fiscal Council finds from its calculations that it is possible that the budget is in structural deficit for this year and next.

With domestic demand strong, there is no justification for weakening the budget position. For this reason the Fiscal Council recommends that a state budget be passed that sets a target of a small structural surplus for 2017.

The experience of the Fiscal Council this year shows that the procedures used in assessing the summer forecast, and for taking account of these assessments, need to be improved. The measures in the State Budget Act do not ensure that the opinion of the Fiscal Council reaches the government before the draft budget for the next year has been passed. This autumn the government passed the draft state budget before the Fiscal Council presented its opinion on the economic forecast of the Ministry of Finance.

The Fiscal Council's opinion on the forecast and a more thorough explanatory report can be found here: Opinion Summer Forecast 2016.pdf

Additional information:
Raul Eamets
Chairman of Fiscal Council
Tel: 514 0082

Background Information

Under the State Budget Act, the Fiscal Council must give an assessment of the national macroeconomic and fiscal forecasts as well as observing that fiscal rules are followed. Although the spring and summer forecasts of the Ministry of Finance look forwards four years, they have different roles in setting fiscal policy. The spring forecast is the base for the state budget strategy, and the summer forecast is the main basis for preparing the draft of the state budget for the next year.