According to the latest data, the Estonian economy has now grown for five consecutive quarters. While real GDP growth was 1.3% last year, it will accelerate to 2.5% this year according to the Ministry of Finance’s summer 2026 forecast. The acceleration in economic growth will be driven by private consumption and government investment. The abolition of the tax wedge in 2026 left consumers with approximately 700 million euros in additional disposable income. The summer forecast has also lowered the inflation forecast for this year and raised the wage growth forecast, which will further support the improvement in purchasing power. According to the Ministry of Finance, both government investment and defence expenditure will reach their highest levels in 2026.
The summer forecast assumes that the economy’s current growth momentum will continue. Although the situation in the Middle East may deteriorate again, the negative economic impact of developments there has so far been smaller than anticipated. Nevertheless, the Fiscal Council continues to see the possibility of a more rapid increase in energy prices as one of the main risks. Overall, the Fiscal Council endorsed the summer economic forecast and considers it a suitable basis for preparing the next state budget and budget strategy.
Although the economy is growing, the difficult outlook for public finances has not improved in the summer forecast. The fiscal policy choices made so far have put Estonia’s public finances on a path where the budget deficit remains at 4–4.5% of GDP over the forecast horizon. In 2026, however, the fulfilment of this forecast assumes that the planned (defence) investments can be carried out in the second half of the year. According to the summer forecast, the budget deficit will be lower than this in 2030 only if government expenditure growth is 0.5%, but this is difficult to assume under normal economic conditions.
The summer revisions to the tax revenue forecast are relatively small and do not stem from economic conditions. For example, a new long-term financing option (SAFE) has been found for defence expenditure, and procurements related to it are exempt from value added tax, which has reduced government tax revenues. By contrast, slightly higher revenues are expected from personal income tax.
Overall, the forecast for tax revenue growth is consistent with the expected nominal growth of the economy, which reaches 4.5–5% per year over the forecast horizon. As the summer forecast indicates that the Estonian economy will already be operating close to its potential in the coming years, improving the state of public finances cannot rely on even stronger economic growth and tax revenues. Even if the budget deficit turns out to be smaller than expected due to the postponement of defence expenditure, this will not improve the situation in the following years. Putting public finances in order requires new revenue and expenditure decisions.
The Fiscal Council supports the government’s proposal to plan for a budget deficit of 4% of GDP in 2027, which would mean a deficit that is 0.5% of GDP smaller than planned in the 2026 state budget. To achieve this objective, measures improving the budgetary position by approximately 240 million euros should be identified for next year during the budget discussions.
According to the Fiscal Council, annual adjustment of this size should also be used to reduce the budget deficit in subsequent years, and this should be reflected in the budgetary objectives set in the state budget strategy for 2027–2030. As such an adjustment would also be consistent with the requirements of Estonia’s State Budget Act, which have been temporarily suspended, the Fiscal Council recommends that the government should reinstate the national fiscal rules already from 2027.
If the budget trajectory in the summer forecast remains unchanged, government debt and interest expenditure will begin to increase rapidly. By 2030, according to the Ministry of Finance, the government debt burden could reach 38.5% of GDP, and according to the Fiscal Council, as much as 40% of GDP. A total of 2 billion euros would need to be allocated in the state budgets for interest expenditure over the next four years.