Speaking to ETV news show "Aktuaalne kaamera" (AK), Müller said the government needs to make tough decisions about increasing revenues and slashing expenses.

The economic situation seems to be improving, yet the state's financial status is getting worse. Why is that?

There are several reasons behind this. The things that will diminish state revenues next year consist of the tax changes planned for income tax legislation: Rolling out a tax-free income to all will spell a significant fall in personal income tax revenues to the state. This is one reason for the larger deficit next year.

More than that, this improvement in the economic situation will be quite gradual, and, hopefully, will derive from stronger exports. Export growth doesn't actually mean as much in terms of additional tax takes, however. Instead, we have had a very strong job market up to now means a strong tax take from income tax and social security contributions alike.

Based on this, we can surmise that we are already in a relatively good place in terms of tax revenues.

The [projected] deficit numbers of 3.5 percent and 5.3 percent are quite scary. What are your thoughts on these figures, as the head of the central bank?

They are quite concerning indeed. In a situation where the economy remains in a relatively fragile state, it is not realistic to balance the state's expenses and revenues either this year or next.

More concerning still is that the Ministry of Finance's forecast extending to 2028 shows no signs of improvement expected unless additional decisions are made to raise taxes or cut expenses significantly.

What will it mean for us if the state has to pay half a billion euros per year in interest?

If the state spends more than it takes in – even every eighth euro that the Estonian state spends in the coming years will actually be borrowed funds – while this means that more loans must be constantly taken out at a time when interest rates are much higher than they were a few years ago. Well, first and foremost this will mean higher expenses on interest payments.

If by 2028, interest payments reach about €500 million annually, we can think of this in terms of €700 per year, per working person. This is the cost of interest which could instead have gone on other things.

In terms of scale, this is about as much as we spend on maintaining higher education in its entirety; slightly less than on internal security, and more than the state spends on supporting sports and culture.

So these are substantial sums.

The borrowing burden is growing and the question is whether the state is creating a lasting value from that, or metaphorically speaking, we are using up all the funds we borrow.

From these expenditures are both current expenses and investments. The state must invest each and every year, but over the longer perspective, the state's income in terms of tax revenues and expenses should be balanced during normal times. Without that, the debt burden and interest payments tend to grow indefinitely, metaphorically speaking.

What should the government do, in the Bank of Estonia's view?

I would suggest considering over the horizon of the next couple of years the possibilities from both the expense [cutting] and revenue-boosting side, while not leaving this concern solely to the Ministry of Finance, but grasp that this is the problem facing all sectors.

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