Russia’s military invasion of Ukraine has made the economic environment very uncertain and forecasting extraordinarily difficult, which is also reflected in the outlook for the Estonian state finances.

For the third year in a row, the programme of revenues and expenditures planned in the state budget has had to be extended with a supplementary budget in the middle of the year. The two years of the pandemic were followed immediately by a rapid and volatile rise in energy prices and the war in Ukraine, which has all demanded unavoidable additional spending by the government.

The experience of the past two years has shown though that the Estonian economy is able to adapt quickly to changed circumstances, and the general government budget deficit has proven smaller than latest forecasts had expected.

The spring economic forecast published recently by the Ministry of Finance is the basis for a stability programme that usually sets the fiscal targets for the government for the next four years. It is understandably not possible to make such a long-term forecast this time, with a war not far away. The spring forecast gives a sufficiently reliable picture of developments in the near term.

Although the Estonian economy comfortably exceeded its pre-pandemic levels last year, the spring forecast expects that growth in the Estonian economy at constant prices will stall in 2022-2023. The Fiscal Council considers this expectation for growth to be reasonable under the current circumstances, though doubt is cast on it by the uncertainty around commodities prices on global markets, supply-side restrictions, and general hesitancy about investment.

The outlook for the Estonian state finances is sharply worse than it was in autumn because of both increased expenses and reduced revenues. The spring fiscal forecast does not yet give a full picture, as it does not include the supplementary budget for 2022 and only partially covers the possible impact of the refugees from the war.

The expectations of a balanced budget have been repeatedly postponed in recent years of crisis. It is not yet clear today when and in what form the fiscal rules of the European Union will start to apply again. The Fiscal Council considers that fiscal policy must be planned responsibly even when fiscal rules are temporarily suspended and there are severe cost pressures.

It is important in this that temporary additional expenditures should be fully justified and permanent additional expenditure should be covered by permanent additional revenues. Otherwise there is a danger of a permanent shift in the structure of general government revenues and expenditures and of that combining with high inflation to make the Estonian economy less competitive.

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

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