The latest economic forecast from Eesti Pank finds that the economy will grow by 2.4% this year. The growth will come mainly from increased spending by private individuals and the general government. If the situation in the Middle East eases, growth could remain at the same rate in 2027-2028 as well. The central bank sees risks in the rapid growth of Estonia’s public debt, as it could place a burden on the development of the economy. An agreement between all the political parties to set limits on the state debt would help counter this.

The large fiscal stimulus will boost growth in the economy this year. Domestic demand will be increased by the changes to the personal income tax system that reduce the income tax burden for individuals. The change will mean the average net monthly wage increases in real terms, so accounting for inflation, this year at the fastest rate of the past 19 years. The economy will grow by 2.4% this year, largely through increased spending by private individuals and the general government. The war in the Middle East has however restrained the recovery in the economy, as it has caused greater uncertainty and problems with supplies, and also raised prices and interest rates on loans. The war has had a similar impact in foreign markets, restricting Estonia’s options for exports. If the situation in the Middle East is alleviated soon, growth will remain at around 2.5% in the next two years as well.

Growth continuing in the economy and in incomes will need productivity to increase. Increased spending by the public sector will boost the economy in the short term, but lasting growth in wealth can only be built on improved productivity. This needs companies to invest, modernise their activities, and move towards production that has higher value added. Financing conditions are at present fairly favourable, but uncertainty and a lack of confidence are hampering investment. The lack of certainty about the future is exacerbated because sooner or later Estonia will have to start to reduce the fiscal deficit that has by now become permanent. It is however risky for businesses to invest if they do not know when they make their business plans what tax rises or expenditure cuts the state is planning and when.

The fiscal deficit needs to be reduced to stop the public debt from growing and to avoid the loan liabilities weighing too heavily on economic development. Interest expenses increasing each year will limit the ability of the state to finance other expenditures and reduce the options for softening the blow to people and companies of any future crisis that might occur. Keeping the debt and the interest burden low is vital for Estonia’s economic security. Orderly state finances have a broader effect on the financing of the whole economy and the capacity of businesses to invest, and consequently on the future of growth in the economy. The state debt was around 2.5 billion euros in 2019 but had grown to 10 billion by 2025. The Ministry of Finance estimates that the state debt could reach 20 billion euros by 2030, and then keep on growing fast from there. Keeping the state finances on a sustainable track and ensuring a stable outlook for the economy would benefit from the political parties all signing a broad agreement to set an affordable baseline for the debt level and stick to it whichever coalition of parties are in government.

Inflation will largely depend on what happens in energy markets. Consumer price inflation rose to 3.7% in May, which partly reflected the rise in energy prices that followed the outbreak of war in the Middle East at the end of February. Inflation would have been quite moderate at around 2% in recent months without the effect of tax rises. Prices have risen this year for a smaller range of fuels than in the energy crisis of 2022, and it is mainly motor fuels have become more expensive. Prices for gas and electricity have reacted less, and so the overall impact of energy prices on inflation has remained small. There remains however a lot of uncertainty about where inflation may go next, as it depends on the resolution of the crisis in the Middle East and on the geopolitical situation more broadly. The baseline scenario of the Eesti Pank forecast expects inflation to be 3.4% this year and to remain at around 2.5% in the next two years.

Viljar Rääsk
Head of Communications
Eesti Pank
6680 745, 5275 055
[email protected]
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