The spring economic and financial forecast prepared by the Ministry of Finance shows a cooling of the economy – although the budget policy of the crisis years had a stimulating effect on the economy, it brought a constant gap between income and expenditure, and purchasing power decreased. also declined, both due to factors caused by the sanctions, and because of the rapid rise in prices.
The continued large deficit is projected to push the debt burden up to 20 percent of GDP this year and could already reach 33 percent of GDP by 2027. Under the influence of this, interests can also rise sharply – up to 1 percent of GDP. Putting public finances on a sustainable path will be a major challenge. The nominal budget deficit will increase to 4.3 percent this year and remain at the same level in the coming years. The structural budget deficit will improve this year, but the trend will worsen in subsequent years, the ministry said.
Economic conditions have taken a turn for the worse across the European Union in 2022. Rising prices began to accelerate even before the war, and last year was exacerbated by the energy crisis and trade restrictions. However, the Estonian economy has weathered the difficult circumstances relatively well – employment has remained stable, wage growth has accelerated, and although the competitiveness of exporting companies has suffered, many enterprises have still been able to translate the increase in input prices into their selling prices. and maintain profitability.
“In the second half of this year, external demand will start to recover, energy prices will fall, and the economy will adapt to the changed circumstances,” said Raul Lättemäe, head of the fiscal policy department of the Ministry of Finance. latest forecast, adding that, from the state’s perspective, the most important message of the spring forecast is that a modest further economic recovery will not bring much relief to public finances in anticipation.
The forecast indicates that the public sector deficit will remain deep due to budgetary decisions made during the crisis years and a reduction in the tax burden. “Fiscal discipline alone will not lead to a balance, for this it is necessary to make difficult political decisions,” said Finance Minister Anneli Ackermann. According to the minister, a gradual trend towards a balanced budget is needed. Persistent budget deficits lead to higher debt and interest rates, which hamper the country’s ability to deal with future crises.
According to Ackermann, the economic environment does not require large-scale stimulus. “Currently, the state of the labor market is good, and the price of energy carriers remains at the same level. It’s time to work on the organization of public finances,” she stressed, noting that supply chains, export markets, competitive situation and price levels have changed, and when choosing the pace of movement towards a balanced budget, it must also be taken into account that the economic and political narrowing of the country’s position will not overly oppose economic adjustment.
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