Together with preparing the supplementary budget for 2022, the government has set its targets for the budgetary position for the next four years. Although the state budget strategy will be prepared in the autumn, the targets set now are important for coordinating the fiscal policies of the member states of the European Union. Any long-term projection made this spring is understandably very uncertain, making it harder to set fiscal targets.

Estimates by the Ministry of Finance put the structural budget deficit for the general government at 3.8% of GDP for 2021. As the restrictions on the size of the structural deficit have temporarily been suspended, the Fiscal Council cannot assess the fiscal position for last year under the national fiscal rules. The nominal fiscal deficit at 2.4% of GDP did however fall within the requirements of the stability and growth pact.

In 2021 the funds from the European Union were again not used in full to the extent forecast. Although the past year was an extraordinary one, where a new budget period was launched together with the use of the recovery instrument, the Fiscal Council finds that this is a repeating pattern in the planning of Estonia’s state finances. To avoid forecast errors of this kind, the use of EU funds should be planned more conservatively, or the administrative capacity of the state for using the funds should be increased.

There have been new and unexpected challenges in the past half year that have stopped the government from improving the state finances as the pandemic subsides. The support measures introduced in the pandemic and the additional spending on healthcare have been superseded by the support measures for the energy crisis and the additional spending on defence and security. At the same time, economic growth is forecast to stall in 2022-2023.

The Ministry of Finance estimates that the state finances will deteriorate this year, and accounting for the 2022 supplementary budget puts the general government structural deficit at 4.5% of GDP, and the nominal deficit at 5.3% of GDP. The nominal deficit is forecast to remain above 3% of GDP in 2023-2024 as well.

The government set the target this spring of not letting the structural fiscal deficit exceed 3.5% of GDP in 2023. After that it wants to reduce the deficit by 0.5 percentage point each year until it achieves a structural budget deficit of 2% of GDP in 2026. Extending this plan onwards would see structural balance return by 2030. The general government debt is forecast to reach 11.6 billion euros by 2026, or almost 30% of GDP, meaning it will be double what it is today.

The government has set its targets on the assumption that the fiscal rules will start to apply again from 2023 in unchanged form. This makes the target of 3.5% for next year appropriate if the structural fiscal deficit in 2022 is not smaller than 4% of GDP, though if it is then the target for 2023 should be more demanding. The Fiscal Council finds that if these assumptions are met, the budgetary targets set under the stability programme are in line with the State Budget Act as it stands.

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 while permanent additional expenditure should be covered by permanent additional revenues. Otherwise there is a danger of the structure of government revenues and expenditures being shifted out of place 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