Under the State Budget Act, the Fiscal Council must give an assessment in spring of the macroeconomic and fiscal forecasts of the Ministry of Finance, and of the structural budget position planned for the general government in the state budget strategy. This year there was a very short gap between the releases of these documents, and so the Fiscal Council has put both its opinions together in one publication.

• The spring forecast of the Ministry of Finance describes the outlook for economic growth and inflation in Estonia accurately enough.
• The Fiscal Council does not agree with the Ministry of Finance's estimate of the position of the economic cycle.
• In the estimate of the Fiscal Council the structural deficit next year will be bigger than is planned.
• In order to maintain the credibility of fiscal rules, they should not be changed so frequently.
  

The spring forecast of the Ministry of Finance describes the outlook for economic growth and inflation in Estonia accurately enough and is similar to several other forecasts. The Fiscal Council does not agree, however, with the Ministry of Finance’s estimate of the position of the economic cycle and its forecast for tax revenues. For this reason the Fiscal Council finds that the general government’s structural deficit next year will be bigger than is planned in the budget strategy.

The forecast of the Ministry of Finance considers that the Estonian economy is currently running at below its potential, and the output gap will close fully in 2020. As labour market indicators of fast wage growth and high employment indicate the good cyclical state of the economy, the estimate of the IMF and the Fiscal Council is that the negative output gap may be smaller this year, and it will already close fully in 2018. This makes it debatable whether additional measures to stimulate the economy are needed in the current economic cycle.

Keeping the general government structural deficit at the targeted level will need rapid growth in tax revenues. In the assessment of the Fiscal Council the forecast for tax revenues is too optimistic, as there are a large number of planned tax changes and it will be very complicated to introduce them, partly because of the disputes at the Supreme Court over the changes to the tax laws, and this will increase the potential for forecasting errors with tax revenues.

According to the state budget strategy for 2018−2021 the planned structural budget position for the general government will be in deficit over the next three years, by as much as 0.5% of GDP in 2018 and 2019. This breaches the State Budget Act as it currently stands.

The Fiscal Council is aware that the government plans to change the fiscal rules so that a structural budget deficit of up to 0.5% of GDP can be permitted against the earlier structural surplus that was built up. Even assuming that this change is made in the State Budget Act, the structural budget deficit as estimated by the Fiscal Council for 2018 will be larger than is permitted by law.

The planned changes to the State Budget Act have been prepared in a very short time and represent a fundamental shift in the direction of a looser fiscal policy. Given that the State Budget Act was last changed only three years ago, it is recommended that in future such frequent changes should be avoided so that the credibility of fiscal rules may be maintained.

The Fiscal Council's opinion and a more thorough explanatory report can be found here: Opinion_Spring_2017.pdf  

Additional information:
Raul Eamets
Chairman of Fiscal Council
Tel: 514 0082
Email: raul.eamets@ut.ee