Estonia’s central bank, which forecast 1.5% growth this spring, now expects 0.6% for 2025, but has raised its 2026 outlook from 2.6% to 3.2%.
According to the central bank, next year’s economic growth is expected to stem from additional borrowing directed into the economy by the government. The economy’s own growth conditions are forecast to gradually improve until 2027, when the financial stimulus provided by the government will taper off.
The downward revision of growth is explained by the central bank as stemming from Statistics Estonia’s updated 2024 GDP data, meaning the growth baseline was adjusted. At the same time, the Bank of Estonia (Eesti Pank) stressed that its outlook for the economy’s recovery potential within this year has remained unchanged.
Government decisions to cancel next year’s income tax hike, raise wages in the public sector and eliminate the tax hump (Estonia’s basic exemption reduction scheme) will add to inflationary pressure in 2025, while external price pressure is expected to ease, Eesti Pank Vice President Ulo Kaasik says.
“This change next year is very, very big. If this year’s deficit is expected to remain around 1% or slightly higher, and the government has promised that next year it wants to push it to 4.5%, we are still talking about an additional EUR 1.3-1.4 billion in spending. A significant part of that will end up in households for consumption. It’s a major injection of money into the economy,” Kaasik said.
The central bank emphasized that it was not prudent to use the maximum deficit level permitted under the European Commission’s temporary escape clause in its entirety.
“Given the economy’s shift toward recovery and the persistently large state budget deficit, it is reasonable that any further deterioration of the fiscal position be limited to additional defense spending,” Eesti Pank said, noting that if defense expenditures remained elevated for a longer period, a permanent source of funding must be found from the state’s regular revenues.
“If the deficit is kept close to the maximum allowed level for the entire period that the escape clause applies – essentially until 2029 – the national debt would rise above 30% of GDP and interest payments would reach nearly 1% of GDP. Growing interest costs would take up an ever-larger share of tax revenues, leaving the government with very little room to respond to unexpected problems in Estonia,” the central bank stated.
The central bank forecasts inflation at 5.3% for this year, with price growth expected to slow to 3.1% next year.
Kaasik noted that inflation was being driven by different forces.
“On the demand side, a larger deficit increases demand and price pressures,” he said.
“On the other hand, there are opposite mechanisms at play. This year’s rapid inflation has been pushed up by government measures aimed at raising more revenue: we’re talking about the car tax, higher healthcare fees, the VAT increase. All of these feed into price growth relatively quickly, without companies themselves needing to think or decide much,” Kaasik explained.
He also pointed to the sharp rise in global food prices, which had further fueled inflation.
“In fact, wage growth in Estonia has also been quite fast, and it was only this year that it clearly began to slow. Relatively rapid wage growth has helped households cope with higher prices, but on the other hand, it has pressured companies’ costs, forcing them to raise prices,” Kaasik said.
Next year, these processes are expected to slow, with external price pressures easing, food prices stabilizing and global trade tensions pushing price pressures downward, Kaasik listed.
“But the truth is, domestic demand will likely get an extra boost and that will probably push price pressures somewhat upward,” he admitted.
According to the central bank’s forecast, rapid price growth should ease to around 2% in the second half of next year and reach 2.3% until 2027. (ERR)