The Bank of Estonia believes that, akin to Finland and Sweden, political parties in Estonia could reach an agreement to move toward reducing fiscal deficit and public sector debt. The agreement could express the parties' shared understanding that the state of public finances is critical and that it would be responsible to begin reducing the budget deficit in the near future.

According to the Ministry of Finance's latest forecast, the gap between state revenues and expenditures will widen this year to 4.3 percent of gross domestic product and the large deficit is expected to persist in the coming years.

Government debt needed to finance the deficit would grow from €10 billion last year to €21 billion by 2030. At that point, the government sector's debt burden would amount to 39 percent of GDP.

While the government sector spent €28 million on interest payments as recently as 2022, the projected cost for this year is exactly 10 times higher and is expected to reach €647 million by 2030.

To cover the latter interest cost, for example, value-added tax would need to be raised by around 3 percentage points to 27 percent or fuel excise duties would need to be doubled.

Bank of Estonia Governor Madis Müller spoke to ERR about the need for an agreement between political parties in an interview given at the end of March.

"I think that much is clear. Different political parties may have different views on how to achieve it: some would focus more on spending cuts, which are certainly painful and always affect specific people whose incomes would decline as a result, while other parties might place more emphasis on additional tax increases. But it seems to me that the objective could be the same — somehow reducing the budget deficit and avoiding a situation where our debt burden keeps growing and interest costs keep rising," Müller said.

According to Lauri Läänemets, chairman of the opposition Social Democratic Party, reaching such an agreement is essential and the Social Democrats have already informed other parties that they are seeking that consensus.

Läänemets added that parties could reach an agreement even before next year's elections, though the concrete steps would be discussed during coalition formation talks.

"Rather, the subject of the negotiations would be which measures to take, at what pace and what exactly the target is that we are moving toward," Läänemets said.

"And when coalitions are formed, those coalitions will negotiate among themselves whether the measures involve increasing revenues or reducing expenditures. Different coalitions will probably end up taking different approaches," the Social Democratic leader added.

Finance Minister Jürgen Ligi of the Reform Party said the idea of a cross-party agreement is not new, but experience has shown that such agreements do not work.

"I do not trust parties in agreements like this. They do not stick to them and their current interest is simply to show their willingness, not to actually fulfill them," the minister said.

"As finance minister, I do not need the opposition's help, which has not been there so far. What I need is for us to move toward balance in the state budget strategy faster than we have managed until now, and that is what I intend to present to the government this year already. But I simply do not believe in signing agreements without responsibility, to be honest," Ligi said.

Opposition Isamaa chairman Urmas Reinsalu said the Bank of Estonia had delivered a devastating assessment of the government's fiscal policy with its proposal, essentially calling on political parties to reach an agreement to change it.

"For that, the Bank of Estonia deserves recognition. At the same time, the Bank of Estonia noted that this should essentially be dealt with after the elections, since this year's budget has already been adopted," he added. "Action must be taken already this year, without delay."

"First, the government must abandon the idea of adopting another positive supplementary budget this year and instead present parliament with a negative supplementary budget that reduces governance costs. There is no escaping this. Otherwise, we will simply push the decision into next year," Reinsalu explained.

"Second, the real situation is worse than the government's plans indicate," Reinsalu added. "To get an honest overview of the fiscal situation, the current budget strategy should be stripped of bluff. Third, the government must present a new budget strategy that is fiscally more sustainable than the current one. According to information available to me, the government is in fact doing the opposite — planning additional expenditures."

Reinsalu also noted that he had reviewed the contents of Finland's corresponding agreement. In his view, the Bank of Estonia could present its own framework for a fiscal policy agreement, which would make it possible to assess it in light of the current government's actual steps.

"It is the Bank of Estonia's duty to advise the government on economic policy matters," Reinsalu added. "The Reform Party's tax hump project (returning to a €700 universal basic exemption – ed.) alone deepened the budget deficit in the coming years by around €2.5 billion. We are dealing with an unprecedented situation in which the state is borrowing billions on an ongoing basis to finance an election promise based on permanent expenditure. The current situation has become a textbook example of a 'after us, the flood' policy."

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