The Fiscal Council finds the government should start to reduce the budget deficit from 2024 September 27, 2022

The government has decided in its budget strategy for 2023‒2026 to increase the budget deficit for the next four years by 2.9 billion euros compared to what was expected in the summer forecast of the Ministry of Finance.

The government is aiming to keep running the structural budget deficit at the same level as in 2022, which the Ministry of Finance forecast at 2.6% of GDP. This means it has abandoned the target of reducing the structural deficit that was still considered a priority in the stability programme in spring. The deficit is being justified because of increased spending on defence and family support, and the need to compensate for the rise in electricity prices.

The budget strategy contains new spending that is permanent in nature, but no new permanent sources of revenue. The Fiscal Council understands that the additional extraordinary spending is necessary this year and next because of the war in Ukraine and high inflation. The fiscal rules have remained suspended across all of Europe for the same reasons. The Fiscal Council considers it important though that public finances be managed responsibly even when fiscal rules are temporarily suspended and there are severe cost pressures. This means that new revenue sources need to be found for the medium term that are not based only on borrowing.

It is forecast that the general government nominal budget deficit will be around half a billion euros larger in 2023 than it is this year. Such a fiscal stance will not support the monetary policy fight against inflation. Neither do the targets set in the state budget strategy 2024‒2026 meet the requirements of the State Budget Act, under which the structural budget deficit must be reduced by at least 0.5 percentage point each year under normal economic circumstances. The forecast expects that the outlook for the Estonian economy will have improved sufficiently by that time.

The Ministry of Finance accompanied the state budget strategy with a new macroeconomic forecast scenario that takes account of the changed economic circumstances and the coalition agreement. The Fiscal Council considers that an appropriate update to the forecast was needed, and may be needed again in future, because the government decisions and measures that were added to the summer forecast had an extraordinarily large budgetary impact. The Fiscal Council endorses the new macro scenario of the Ministry of Finance, and considers it an important input for further discussions about the state budget and the budget strategy.

The Fiscal Council does not find the current practice of setting long-term targets for public finances twice a year, in the spring stability programme and the autumn budget strategy, to be appropriate, given that these plans are not binding on one another. The culture of political decision-making in Estonia ought to be of a standard where four-year plans for fiscal policy are not being rewritten every six months. The Council consequently finds that the earlier system, where the stability programme was agreed together with the state budget strategy for the next four years, worked better.

The Fiscal Council's opinion and a more thorough explanatory report on the budgetary targets set for 2023-2026 can be found here.

The Fiscal Council's opinion and a more thorough explanatory report on the additional macro forecast scenario can be found here.

Additional information:
Raul Eamets
Chairman of Fiscal Council
Tel: +372 514 0082