While this spring, Estonia’s Ministry of Finance forecast a budget deficit growth this year of 4.3 percent of GDP, i.e. to €1.7 billion, the deficit thereafter narrowed under the impact of robust tax receipts in the first half of 2023, leading to a revised deficit forecast of €1.3 billion, or 3.3 percent of GDP.
The ministry is forecasting a recession of 2 percent this year, but 2.7 percent economic growth next year. This spring, it had forecast the Estonian economy would contract 1.5 percent this year before seeing 3 percent growth next year.
Inflation, meanwhile, is expected to slow to 9.6 percent this year, 4.6 percent next year and 2.5 percent in 2025.
The ministry noted that additional tax measures such as the VAT rate increase to 22 percent will inhibit the stronger deceleration of inflation next year.
This forecast will be used by the Estonian government as the basis for drawing up the 2024 state budget bill.
The ministry highlighted that the economic circumstances of the country’s northern neighbors have remained below the EU average, which has inhibited Estonia’s exports as well. The Estonian economy as a whole, however, has nonetheless coped well with these difficult conditions, it added.
The state of the labor market remains strong despite the downturn, and the ministry expects to see last year’s increase in the number of people employed continue this year as well.
The unemployment rate is nonetheless forecast to rise slightly, but due primarily to the inclusion of war refugees in statistics.
The Ministry of Finance forecasts average real wage growth of 1.5 percent this year and 1.9 percent next year. This figure is expected by the ministry to jump to 2.7 percent in 2025, reaching €2,053 per month.
Estonia’s government debt burden is growing rapidly thanks to a persistently large deficit, which by 2027 will lead to a sharp increase in interest expenses to 1 percent of GDP.
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