Recent statistics and economic forecasts finally bring long‑awaited news: Estonia's economic growth is positive again. After a prolonged slump and stagnation, any sign of recovery is welcome.

I am sincerely glad for the ingenuity of our entrepreneurs and the resilience of our people. Our companies have shown remarkable adaptability, found new export markets, and broken through the consequences of misguided economic policy. As humor with a sad undertone says, the patient is recovering despite the treatment. I firmly believe in Estonia's growth potential, but unfortunately I must admit that folding our hands and surrendering to satisfaction would be dangerous self‑deception right now.

Recovery is not yet a new level

A statistical revision showed that Estonia's economy was somewhat stronger in recent years than earlier GDP numbers indicated. This is good news, but it does not change the fact that the economy has not yet returned to the peak level of four years ago, and we must first restore the positions we have lost.

Swedbank forecasts Estonia's economic growth at two percent this year and 2.5 percent next year. SEB expects 2.5 percent this year and 2.7 percent next year. The Finance Ministry's fresh forecast sees 2.5 percent this year and 2.3 percent next year. These are certainly better indicators than in recent years. The economy is emerging from decline, but I still would not call this a new economic boom.

Let us look the facts in the eye. The current growth does not mean the economy has reached a new high level. Right now it is merely making up for the long decline and stagnation in between. We have almost climbed out of the pit of decline, but we have not yet reached over the edge toward a better future. Not to mention the four lost years and the missed opportunities we will never get back.

The main reason why I cannot join overly optimistic rejoicing lies in the uncertainty over how strongly current economic growth depends on the state's budget‑policy stimulants. According to all experts, Estonia's economy is moving toward balance, but the state's finances are not. And here we reach the most important problem.

An expensive and ineffective "stimulus"

According to the Finance Ministry's forecast, the general government deficit will be 4.4 percent of GDP this year and 4.5 percent next year. In 2028 and 2029, the deficit will remain at 4.4 and 4.3 percent respectively.

There is no doubt that a 4.4‑percent deficit represents a massive financial injection into the economy. The question, however, is how much the economy would have been able to grow without this loan‑dependent doping, and whether a stimulus given at the wrong time has any measurable long‑term positive effect — or whether its real cost to Estonia's future is too high.

Let us make a simple calculation. If a nearly two‑billion‑euro deficit (4.4 percent of GDP) manages to "buy" only about 0.7 billion euros of real economic expansion — that is, 2.5 percent economic growth — then from the state's point of view this is clearly a bad deal. And if Estonia's economy is currently growing with high probability not thanks to the government's actions but despite them, the overall picture becomes even more alarming.

A structural hole hidden behind defense spending

At the European Union level, there is an agreement that temporarily the deficit may reach up to 4.5 percent if it is justified by defense spending that has increased by at least 1.5 percent of GDP. This exemption applies until 2028. The Finance Ministry's own forecasts leave no room for illusions: Estonia's budget deficit will remain at the same extremely high level even years later, staying at 4.3 percent of GDP in 2029.

This is a fundamental confirmation that the coalition has no realistic or concrete plan for emerging from deep deficit. The entire current budget shortfall has become structural. It can no longer be blamed on unfavorable economic conditions or one‑off extraordinary events.

Also notable is the rhetorical manipulation regarding national defense. According to the ministry, Estonia's defense spending will rise from 4.2 percent of GDP in 2025 to 5.3 percent this year. This is a correct and necessary step; I fully support increasing defense spending. But let us note that defense spending rises by 1.1 percent of GDP. At the same time, the deficit grows more than twice as much — from 2.0 percent to 4.4 percent, that is, by 2.4 percent of GDP.

The sharp rise in defense spending is constantly talked about loudly, but the reasons for the rest of the deficit's expansion are kept quiet or the conversation is quickly diverted. The increase in defense spending is used as a political shield, but the budget deficit is growing twice as fast as our security buffer.

Growing debt burden and unfulfilled promises

Instead of honestly acknowledging the fact that with 2.5‑percent economic growth it is mathematically impossible to simply "grow out of" a 4.5‑percent deficit, we hear new populist promises again in the early election fever.

Recent experience does not allow us to lull ourselves. It is not worth believing the coalition's repeated assurances that taxes will not rise anymore and that the budget will reach balance through some mystical internal reserves. Budget arithmetic clearly shows these promises do not hold. They have unfortunately not kept their previous promises, and there is no reason to believe it will be different this time, since we have not heard an honest admission of past mistakes.

The most painful consequence of this irresponsible policy is the rapid growth of state debt and the costs associated with it. If the debt level is 24 percent of GDP this year, next year it will reach 30 percent, and by 2029 nearly 40 percent. Although this does not yet mean an immediate debt crisis, it is a fundamentally different and much more vulnerable situation than we have been used to.

Already this year, the state's interest costs are 239 million euros, and with the growing debt burden they will swell to 656 million euros by 2030. This is the loan‑servicing bill that prevents us from raising teachers' salaries or building new highways. This is money lost to the economy — money taken from the future to pay for current political manipulation.

Estonia needs an honest and responsible long‑term view that restores trust in our public finances and gives entrepreneurs confidence to invest. It is time to stop telling embellished or outright false stories and start making responsible decisions.

--

Follow ERR News on Facebook and X and never miss an update!