The summer economic forecast of the Ministry of Finance expects the Estonian economy to grow by 2.6% in constant prices and 5.5% in current prices in 2016 as external demand improves and inflation rises. The forecast assumes that foreign demand for Estonian goods and services will increase next year, but the Fiscal Council finds that the economy may grow more slowly than forecast because of the external environment.

The forecast for tax revenues in the state budget for next year is slightly higher than it was in the spring and the Fiscal Council finds that tax revenues, particularly VAT and corporate income tax revenues, may be overestimated. For this reason the forecast additional revenues should not be treated as a source of funds for increasing spending.

The summer forecast put the structural budget position of the general government in surplus throughout the forecast horizon and at 0.5% of GDP in 2016. However, it is very difficult to assess the position in the economic cycle and structural balance right now. This is because developments in the external environment are having a negative effect on the outlook for growth in Estonia, while at the same time the unemployment rate is lower than before and wages are growing too fast from the point of view of competitiveness. Strong tax revenues have been helped by private consumption and wage income growing faster than GDP.

The Estonian economy may already be operating at full potential or even beyond, meaning that the general government structural budget position may be overestimated. The Fiscal Council recommends that this be borne in mind and that the budgets for the coming years contain a small surplus.

The Fiscal Council held its regular meeting to discuss the summer economic forecast of the Ministry of Finance last Friday in Tartu. The Fiscal Council opinion and a more thorough explanatory report can be found here: Opinion Summer Forecast 2015.pdf

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

Background Information

Under the State Budget Act, the Fiscal Council must assess the national macroeconomic and fiscal forecasts. The summer economic forecast of the Ministry of Finance is the basis for the draft state budget for the following year. The law requires the state budget for each year to be prepared so that the budget for the general government is at least in structural balance.