Tapver told ERR that the key indicators in the Ministry of Finance's latest macroeconomic forecast are fairly similar to LHV's forecast, updated in mid-summer, which projects economic growth of 2.2 percent and inflation of 3.3 percent this year, followed by 2.6 percent and 2.5 percent, respectively, next year, assuming the external environment stabilizes.

"I am currently updating our summer forecast and various risk scenarios. Overall, however, I still expect growth in consumption and investment to accelerate. Investment will initially be driven primarily by government investment in defense and infrastructure. An important distinction needs to be made here, however, because a large share of defense equipment is purchased from abroad, meaning a relatively small proportion of that money actually enters the Estonian economy," Tapver said.

She noted that defense spending is primarily an investment in security rather than an economic stimulus comparable to conventional investment. Private-sector investment has yet to gain clear momentum, but gradual growth could also be seen there next year.

Improved consumption should support state budget revenues through value-added tax and excise duties.

"However, it is difficult to assess the scale of that impact. Around 85,000 people have not yet begun applying their tax-free allowance on an ongoing basis and their future behavior will affect how much of the additional income goes into consumption and, from there, into tax revenues," the analyst said.

The Ministry of Finance forecasts that consumer spending will grow more slowly than incomes in 2026. Given that higher earners also gained more in euro terms from the income tax change, Tapver said some of the additional income could go into savings or toward paying off existing obligations rather than consumption.

"Therefore, we cannot assume that higher net incomes will immediately translate into a comparable increase in consumption and tax revenues," she said. "This brings us to the main pressure point in the state budget. On the one hand, defense spending and other more permanent expenditures are increasing; on the other, growth in budget revenues is being constrained by the income tax change and declining revenue from the sale of CO2 emissions allowances."

While improved consumption will support revenues from consumption taxes, Tapver said this may not be enough to offset rising expenditures.

"At present, it appears that the budget deficit will persist, meaning that both the debt burden and interest costs will continue to rise. If interest rates remain higher going forward, servicing new debt will also become more expensive," the LHV analyst said.

Overall, continued improvement in the economy can therefore be expected, but so can structural pressure on the state budget. Tapver noted that if spending and the debt burden grow faster than revenues, intervention will eventually be necessary, either by increasing revenues through new or higher taxes or by cutting spending.

Tapver pointed out that several important spending decisions for the coming years have yet to be made, meaning the budget's actual trajectory could differ significantly from current forecasts.

"The positive side is that the economic recovery, improving consumption and expected growth in private-sector investment are creating a more favorable environment for the budget than before. If economic growth becomes more broad-based, the tax revenue base will also improve. In the longer term, however, we should be able to use better years to rebuild a sufficient fiscal buffer before the next economic downturn," Tapver said.

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