Forecasts for tax revenues are based on optimistic assumptions April 19, 2016

The spring 2016 forecast of the Ministry of Finance finds that GDP growth in Estonia in the short term will be lower than was earlier forecast. The implication of this reduced forecast for the state finances is that both the nominal and structural positions of the general government will be worse.

The spring forecast expects that nominal GDP growth will stabilise in the medium term at 6% and real growth at 3%. Although this forecast is similar to others, the Fiscal Council finds that it is based on quite optimistic assumptions. The forecast expects external demand and prices to rise faster, but in previous years this has been overestimated. Reaching such a path of growth assumes that productivity growth being slower than wage growth, which has been a key feature in recent years, will not have harmed the competitiveness of the Estonian exporting sector.

The Fiscal Council opinion is that the forecast for tax revenues should assume that there could be shortfalls in collection. This is because the recovery in external demand that the forecast assumes may not lead immediately to increased tax revenues. Furthermore, tax revenues in 2015 were boosted by above-average dividend payouts in the private sector, and it is foreseen that these will continue despite the increase in investment activity that is also assumed.

For this reason the government should consider that tax revenues may grow more slowly when it is planning increased spending and the general government fiscal position. Given this, the Fiscal Council recommends that the government set the target of a small surplus in the structural fiscal position each year for the whole of the forecast horizon.

The regular meeting of the Fiscal Council where the spring 2016 forecast of the Ministry of Finance was discussed was held on 15 April in Tartu. The Fiscal Council's opinion on the forecast and a more thorough explanatory report can be found here: Opinion Spring Forecast 2016.pdf

Additional information:
Raul Eamets
Chairman of Fiscal Council
Tel: 514 0082

Background Information

Under the State Budget Act, the Fiscal Council must assess the national macroeconomic and fiscal forecasts. The state budget strategy and the targets for the structural fiscal position for the next four years are based on the spring forecast of the Ministry of Finance.