Estonian Fiscal Council: state has no plan to cover defence spending without borrowing

Estonia's Fiscal Council, which assesses the state's public finances, has published its assessment of the government's budget strategy. The government has set a target of keeping next year's nominal state budget deficit below 4% of GDP — an improvement of roughly 220 million euros compared with the summer forecast. However, the Council says this improvement mostly reflects minor adjustments to state investments, foreign funds and accounting, rather than a lasting improvement in the structure of revenues and expenditures.

Unlike the Council's recommendations, under the budget strategy the general government deficit will remain at 4% of GDP in both 2028 and 2029. The Council notes that meeting these fiscal targets depends on the durability of several planned revenue and expenditure measures, which carry considerable initial uncertainty. Given the recent rise in interest rates, servicing state debt could also become more expensive.

The Council points out that, under the government's interpretation, the domestic budget rules will re-enter into force from 2029, but the corrective step may take into account later delivery of supplies contracted under the defence spending exemption provision for 2025-2028. The Council acknowledges that the budget targets set for 2027-2030 formally meet the requirements of the budget rules under a flexible interpretation, but recommends not postponing budget adjustment until temporarily relaxed rules allow it, and instead continuing adjustment right after 2027.

Rapidly rising debt

The Council warns that even if the government's targets are met, the state's debt burden and interest expenses will rise quickly in the coming years. By 2030 the debt burden will already reach 37.4% of GDP, and over the following four years nearly two billion euros will have to be allocated to interest payments on state debt. If budget adjustment continued only from 2030, state debt would only start to decline after it exceeds 40% of GDP.

The Council concludes that this autumn's four-year public finance forecast still does not include a plan for finding a permanent source within the state budget to cover the constantly increasing defence spending, one that would not rely on borrowed funds. A flexible interpretation of the budget rules has postponed the necessary adjustment, but the later it is carried out, the more costly it will be for both the state and taxpayers.