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Reducing the budget deficit is warranted April 21, 2023

The government wrote its budget strategy for 2023‒2026 last autumn, in which it did not plan a budget deficit of less than 3% of GDP in any of the coming years. The estimate by the Ministry of Finance this spring for the outlook for the public finances is even worse, as the budget deficit in the spring forecast is not less than 4% of GDP in any year.

The fiscal forecast has deteriorated partly because the assessment by the Ministry of Finance of the outlook for the Estonian macro-economy has changed. The spring forecast of the Ministry of Finance expects slower economic growth and higher unemployment than was earlier forecast. This means lower revenues for the general government and higher spending.

Assessment of the spring forecast must consider that it takes no account of the new government coalition agreement or the plans to reduce the budget deficit, and those plans could have a substantial impact on the performance of the Estonian economy. The Fiscal Council finds that the goal of reducing the budget deficit is appropriate to slow the growth in Estonia’s debt burden and price level. Furthermore, the fiscal rules of the European Union and Estonia will start to apply again from next year.

The Fiscal Council was critical in its evaluation of the economic forecast of the Ministry of Finance last autumn because the forecast did not take account of the policy measures announced beforehand by the government, but this spring the coalition agreement was only published after the spring forecast had been written. The forecast does however contain an additional scenario for spending growth, and the Fiscal Council considers this a good addition for describing long-term cost pressures.

Overall, the Fiscal Council finds that, given the chosen assumptions, the spring economic forecast of the Ministry of Finance gives a sufficiently reliable description of the outlook for the Estonian economy in the years ahead. For this reason the Fiscal Council has endorsed the spring forecast 2023 of the Ministry of Finance. It must still be emphasised that there remains a great deal of economic and geopolitical uncertainty. The Estonian economy may grow more slowly than forecast if commodities prices rise for example, or if there are interruptions to supply chains. Equally, wages may rise more quickly than forecast.

The Fiscal Council agrees with the opinion of the Ministry of Finance that the spring forecast may have painted too negative a picture of the cyclical position of the Estonian economy. An improvement in the economic cycle would not however reduce the need to improve the budgetary position.

The Fiscal Council finds that the spring forecast by the Ministry of Finance gives an appropriate basis for writing the stability programme. The government should describe the measures proposed for reducing the budget deficit and their estimated fiscal impact in the stability programme that is being prepared for release at the end of April. The Fiscal Council recommends that the government set the target for 2024 that the general government budget deficit not exceed 3% of GDP.

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

Additional information:
Andrus Alber
Vice-chairman of Fiscal Council
Tel: +372 526 1707
Email: info@eelarvenoukogu.ee