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Budget deficits in the coming years should not exceed 3% of GDP April 29, 2021

The government has used the spring economic forecast 2021 of the Ministry of Finance as the basis for its state budget strategy for 2022-2025. It is the responsibility of the Fiscal Council to assess the fiscal targets set in the budget strategy, starting from the fiscal rules and the need to improve the fiscal position. The European Union introduced an escape clause for the fiscal rules in spring 2020, which still applies.

The government’s aim in its budget strategy is to reduce the fiscal deficit of the coming years to below what was forecast in the spring. Additional revenues and expenditure cuts are planned in order to achieve this, together with a reduction in public sector investment. The state budget strategy puts the general government’s nominal deficit at 3.8% of GDP in 2022 and 3.2% of GDP in 2023.

Under the fiscal rules of the European Union, the budget deficit may not exceed 3% of GDP under normal circumstances. As the spring forecast of the Ministry of Finance finds that the Estonian economy will have returned to its pre-crisis level from next year, the Fiscal Council finds that there is no longer any reason for the budget deficit to exceed the 3% limit from 2022.

In consequence the Fiscal Council recommends that when the state budget for 2022 is drafted in the autumn, the general government budget deficit should be reduced by at least 220-230 million euros from the current forecast. The budget deficit can be reduced by increasing revenues or reducing expenditures or both.

In its assessment of the spring forecast of the Ministry of Finance, the Fiscal Council found that growth in the economy in the years ahead could prove even faster than expected. This is because of the money paid out from the second pension pillar and the consequent increase in private consumption, and because of wages rising faster than forecast. This will mean that tax revenues may be higher than expected. If this positive growth scenario occurs, the Fiscal Council recommends that the additional tax revenues should be used not for additional expenditures, but for returning faster to fiscal balance.

Additional information:
Raul Eamets
Chairman of Fiscal Council
Tel: +372 514 0082
Email: raul.eamets@ut.ee