The Ministry of Finance on Tuesday published its summer economic forecast, which will serve as the basis for drafting next year's state budget. According to the new forecast, uncertainty in the economy remains high, but businesses and households are nevertheless prepared to follow through on some of their investment and consumption plans. Foreign demand is recovering gradually and export opportunities are improving.

The ministry forecasts price growth of 5.4 percent this year. Inflation is expected to slow to 3.5 percent in 2026 as food and service price increases ease and the impact of tax measures diminishes.

"Next year's price growth will be significantly lower than this year's and real wages will rise," Finance Minister Jürgen Ligi (Reform) said.

This year, GDP growth is expected at 0.8 percent, accelerating to 2.5 percent next year.

The unemployment rate will remain elevated this year but is forecast to begin declining gradually from next year. The average gross salary is projected to grow by 5.7 percent this year, slowing to 4.4 percent by the end of the forecast period. The purchasing power of the average net salary is expected to return to its pre-crisis 2021 level by 2026.

Ligi highlighted export demand as the weakest indicator, noting that it has been hit particularly hard, as well as consumer confidence, which is reflected in spending volumes.

"We've all convinced ourselves that everything is getting worse and worse," the minister said, adding that in turbulent times people tend to hold back on spending. "We are mentally in the deepest crisis that, in reality, does not exist. /.../ It's like a national sport."

The tax burden is increasing this year due to higher income tax and value-added tax rates. Next year, however, the burden will ease with the introduction of a single tax-free income threshold and then remain stable.

According to Ligi, efforts to improve the fiscal situation have fared better than expected, which is reflected in a smaller budget deficit this year and gives more confidence for budget planning in the future.

Minister: Income tax hike might be canceled

This year, the budget deficit will shrink to 1 percent of GDP thanks to tax changes, but it is expected to rise to 4 percent next year due to rapidly increasing defense spending and income tax changes.

The ministry noted that without the additional defense expenditures, the deficit would remain within the limits permitted by fiscal rules. In the following years, the deficit is projected to decline step by step, reaching 2.8 percent of GDP by 2029.

Kadri Klaos, head of the state finances department at the Ministry of Finance, said the main reasons for the deepening nominal deficit next year are additional defense spending decisions and tax changes.

"The single most significant change compared with the previous forecast is the additional defense spending decisions, amounting to 1.5 percent of GDP. If you take that out of the picture and account for other changes, we would essentially be at the same level we expected in the spring," Klaos said.

Finance Minister Jürgen Ligi said there is reason to consider scrapping the planned income tax increase for next year.

"There are strong suspicions that this may indeed be decided," Ligi said.

According to Klaos, when looking at the overall impact of tax changes, the burden this year is high due to one-off factors, but it will drop to just under 36 percent next year and remain at that level.

"In the bigger picture, tax revenues will of course keep growing year by year, but this growth will slow in the coming years and the tax burden will also stabilize starting in 2027," Klaos added.

Defense spending will rise to 5.3 percent of GDP next year and remain above 5 percent throughout the forecast period.

Against the backdrop of these additional expenditures, Estonia's public debt will increase to 31.4 percent of GDP by the end of the forecast period, while interest costs will reach 0.8 percent of GDP, or €417 million.

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