It is uncertain whether the fiscal targets set by the government will be achieved April 30, 2024

The Fiscal Council finds that the fiscal targets set in the stability programme for 2025‒2028 are in line with the national fiscal rules. The Fiscal Council applauds the goal of the government that started work a year ago of putting the state finances in order. Part of the government’s plan was carried out in summer 2023 and part of it, which was presented in the state budget strategy in autumn 2023, still lies ahead. How the future outlook for the Estonian state finances appears depends though on that part of the plan.

The Fiscal Council finds that it is not currently certain that the fiscal targets will be achieved. The planned improvement to the budget is built on measures with a very large fiscal impact that have not yet been legislated or that have not even started the process yet. It will not be possible to pass some of the measures by the start of 2025 given the usual standards and timetables, but almost all of them need to be in place if the fiscal targets are to be met, and those targets have already been set as low as the rules allow.

Both national and the European Union fiscal rules have started to apply again from 2024, and medium-term fiscal targets need again to be based on their requirements. The fiscal rules were suspended for four years when the pandemic erupted, and the Estonian public debt has increased by 5 billion euros during that time, as the spending by the government substantially exceeded its revenues. The resulting budget deficit is mainly permanent or structural in nature, which means that improving the fiscal position will require the government to take deliberate revenue and expenditure policy decisions, and not just wait for a recovery in economic growth and consequently better tax receipts.

Estonia may face an excessive deficit procedure (EDP) from the European Union, because the budget deficit in 2023 was larger than 3% of GDP. Data from Statistics Estonia show that the general government budget was 3.4% of GDP, or around 1.3 billion euros. The spring forecast of the Ministry of Finance projects that the deficit will again exceed 3% of GDP in 2024. The Fiscal Council consequently considers it important that the budget deficit be reduced this year. The spring forecast finds that the shortfall from the 3% target will be around 170 million euros, which is 1% of the total spending of the general government in 2024.

The government has set the target in the stability programme of keeping the general government structural budget deficit to 1% of GDP in 2025‒2028. This also means that the nominal budget deficit will no longer exceed 3% of GDP from next year. Achieving these targets needs a large amount of improvement to the budget, as the fiscal position for 2025 needs to be improved by around a billion euros from what was in the spring forecast. The stability programme considers that the total package of fiscal measures presented in the autumn should continue to be sufficient, and those measures coming into force in 2025 should ensure that the fiscal rules are followed over the longer term.

The supportive fiscal stance during the pandemic and the additional cost pressures afterwards have put the Estonian public finances in a difficult position. Opening the EDP may cause reputational damage to the economic environment, as Estonia has been known for its sound public finances and fiscal discipline. If the budget deficit remains consistently larger than permitted though, long-term budget plans and fiscal targets would in that case need to be coordinated with the European Commission, and a fixed trajectory for spending would need to be followed. Therefore, fiscal consolidation cannot be postponed any longer.

The Fiscal Council also notes that the Estonian general government budget was last in surplus in 2019. The forecasts this spring do not see budget balance being restored even by 2028, which would mean that the budget will have been in deficit and debt will have been growing for a decade. The Fiscal Council consequently advises that fiscal targets that are more demanding than just the minimum requirements of the fiscal rules should be set in future as growth returns to the economy.