REPUBUc OF EsT0NIA
MINIsTRY OF FINANcE
Mr Maarten Verwey
Your ref. 08.05.2024 No
European Commission
[email protected] Our ref. 17.05.2024 No 11-4.1/2318-2
Estonia Proceedings related to
-
fiscal surveillance: Letter on
relevant factors for 126(3) reports -
2024
Dear Mr Verwey,
1 am writing you in response to the letter on relevant factors in relation to upcoming
Commission report under Articie 126 (3) of the Treaty.
First, let me emphasise that Estonia continues to take the fiscal rules and commitments
seriously. The Government has underlined its commitment to keep the public finances in order
in its latest State Budget Strategy in 2023 and confinned the target of following our European
obligations and domestic fiscal rule of 1% GDP deficit in structural terms in the latest Stability
Programme 2024.
As you referenced in your letter, general govemment deficit in Estonia did breach the Treaty
reference value in 2023. This is the reflection of wide range of actions taken by Estonian
government in response to effects of the Russia’s unjust invasion ofUkraine and to the wider
security situation. According to the data of the Classification of the Functions of Government
(COFOG), spending on the defence increased by nearly 50%, from the level of 2,2% of GDP
in 2022 to 3,1% of GDP in 2023. In addition to that, the Kiel institute ranks Estonia as the
largest contributor in terms ofbilateral support to Ukraine j.
1 would like also to point to the fact, that the economic situation was exceptionally difficuit
for Estonia in 2023. Main trading partners of Estonia ali experienced different issues, resulting
in extremely weak external demand. Coupled with the historically low business and consumer
confidence, economy contracted by 3,0% in real terms compared to previous year, which had
a major impact on the revenues of the general government. However, taking ali this into
account, the deficit for 2023 turned stili out to be lower than was expected in the Draft
Budgetary Plan for 2023 (where it was forecasted to reach 3,8% of the GDP).
Adverse conditions in terms of the economy will also dominate the picture in 2024. Economy
will slowly stabilize, and the quarterly growth wili return later in the year, but the Spring
Forecast of the Ministry of Finance stiil sees zero real growth for the entire year. At the same
time, it is important to emphasise, that the Government continues to implement the budget
which the Commission assessed to be in line with the Council Recommendation in its opinion
of the Estonia’s Draft Budgetary Pian of 2024.
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https://www.ifw-kiel.de/topics/war-against-ukraine/ukraine-support-tracker/
Suur-Ameerika 1 / 10122 Tallinn / Estonia / +372 611 3558
[email protected]
www.rahandusministeerium.ee / Reg. code: 70000272
But as the underlying economic situation has turned out worse than was expected at the time
of the eompilation of the 2024 budget, the Spring Forecast of the Ministry of Finance points
to the breach of 3% of GDP deficit limit and the breach is also confirmed by the Spring 2024
Forecast of the Commission. The Government has therefore started a process of a
suppiementary budget with a clear target of reducing the deficit below 3% aiready this year
with range of spending cuts considered.
Looking forward, 1 would once more like to stress the challenge posed by the security situation
and the impact of that to the overail budgetary position. The Government has decided that,
given the overali adverse security situation in Europe, the minimum required annual defence
spending will be at the level of 3% of GDP, at least for the medium term. In 2024, the level
ofspending on defence is planned to increase to 3,4% ofGDP, stabilising in following years.
Furthermore, it is also important to note that the actual concept of defence investments
(measured in gross fixed capital formation) does not cover the whole need in terms of
additional security spending. It could be argued that a cost of needed ammunition could be
substantial as well, together with the actual training of the personeil to use the additional
equipment.
As to your request for data on the increase of government investment in defence, our
preliminary indications from government accounts are showing the increase of 0,45% ofGDP 0
in 2023 and 0,44% of GDP in 2024.
Finally, 1 would like to underline again that we do consider the breach of the deficit limit
temporary and the conditions exceptional in 2023 and 2024. In addition to that, the
Government intends to take corrective actions aiready in 2024 and decide on further specific
measures for 2025 in coming months.
Yours sincerely,
Märten Ross
Adviser to Ministry
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