JÜRI RATAS ⟩ Time to act: the downturn of our economy

Photo: Mihkel Maripuu

• There are no signs of improvement in Estonia's economic situation.
• We are not yet moving towards budgetary balance.
• With skillful fiscal policy, the government could achieve good results.

After the recent forecast by the Ministry of Finance, even the biggest optimists can no longer hope that Estonia's economic situation will improve on its own. The only solution is to roll up our sleeves and implement economic policies that will finally bring about a long-awaited change, Jüri Ratas, vice president of the Riigikogu (Isamaa), writes.

After a long period of stagnation, we have been nurturing a hope from quarter to quarter that from this summer onward, Estonia's economy would begin to recover. Unfortunately, this hope was doomed to fail! The Finance Ministry's latest forecast reveals that no economic growth is expected in 2024. Alongside the ministry's zero-growth assessment, the forecast from Eesti Pank is even more pessimistic: the recession will continue this year. Thus, it will be the third consecutive year without economic growth in Estonia. Although growth is promised next year, the volume of the economy will still be below the level of 2021.

Revenue growth not covering deficit

Despite our economy stalling, the state budget's current revenues have grown quite rapidly due to inflation. Thus, budget revenue grew by 12.9 percent in 2022, 8 percent last year, and a 9.1 percent increase is projected for this year (see Chart 1). However, a slowdown in revenue growth is anticipated next year, due to the Reform Party's most expensive election promise – elimination of the so-called tax hump. This promise alone will reduce budget revenue by 556.5 million euros.

Chart 1: Revenue development in the state budget from 2021 to 2028 (mln euros)

Source: Ministry of Finance

Unfortunately, the rapid growth in revenue has not led to a shift towards budgetary balance. On the contrary, the government sector's budget deficit increased by nearly one billion euros in 2023, reaching 3.4 percent of GDP. According to rules agreed upon in the European Union, the annual deficit should not exceed 3 percent. However, the forecast indicates not a decreasing trend, but an increasing one: this year, the budget deficit will rise to 1.4 billion euros, or 3.5 percent of GDP, and by next year, it is expected to reach 2.2 billion euros, or 5.3 percent of GDP. A deep deficit close to 5 percent is anticipated to persist throughout the forecast period.

While the increase in the budget deficit is often attributed to rising defense expenditures, this is not the complete truth, especially for next year. The forecast shows that in terms of GDP, defense spending will actually decrease in 2025, from this year's 3.4 percent of GDP to 3.1 percent (see Chart 2).

Chart 2: Government sector expenditures by administrative function (% of GDP)

Defense spending

Source: Ministry of Finance

The Finance Ministry's forecast also highlights that the growth in the government sector's debt burden is accelerating. The deficit will be covered through the issuance of long- and short-term bonds and loans. As a result of the increasing deficit, the government sector's debt burden will rise to 22.6 percent of GDP this year, 27.1 percent next year, and is projected to reach 35.9 percent of GDP by 2028 (see Chart 3).

Chart 3: Government sector debt from 2021 to 2028 (mln euros, % of GDP)

Total debt, mln euros

Total debt, % of GDP

Source: Ministry of Finance

It is not too late

Governments can achieve good results by stimulating a struggling economy with skillful budgetary policy or by reducing its external vulnerabilities. However, from our local example, we must sadly acknowledge that there is yet another coalition promise that will remain unfulfilled – we are not moving towards budgetary balance in the near future. What is worse than the failure to fulfill a promise is the significant decline in our ability to provide the economy with budgetary policy support when needed.

The problem is that not every increase or decrease in government expenses or revenues affects the economy equally. Fewer economic reforms and investments mean slower long-term sustainable growth; slower growth, in turn, means less expenditure on defense, education, transportation, healthcare, social programs, and so on.

Although our national debt is growing rapidly, it is still not excessively high. This gives us time and hope that with the right decisions, we can still steer our economy back on track. A sensibly reliable long-term budgetary position should be considered an asset that can be relied upon. While it is not necessary for the budget to be balanced every year, the budgetary position should, on average, remain close to balance—with temporary and well-thought-out fluctuations around this average. This is the policy to strive for.

In difficult times, both people and countries look for new opportunities, fresh strength, and hope. If those in power are in tune and empathetic with their fellow citizens, they are more likely to unite people behind a common goal. However, disappointment, distrust and fear undermine this effort greatly, as well as the paranoid reduction of ideas into categories "us versus them." Cynical politicians often try to exploit these divisions, using them for their election campaigns. But there is a different way – not by tearing down, but by fostering unity; not by imposing top-down, hastily made decisions, but by selecting the best ideas through inclusive dialogue.