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Estonian government's 2023 budget - dealing with the crisis.

Updated: Jan 9, 2023

The Estonian government has acknowledged the Russian invasion of Ukraine and made Defence its first budget priority. Wishing to limit any Russian interference in Estonia, the government has made learning the Estonian language - at the expense of Russian - its second priority. At the same time, the Estonian population expects support in the face of the energy difficulties expected this winter, all in the context of marked inflation (+19.5% expected on average annually for 2022). As a result, the 2023 budget presented by the Estonian government foresees a significant increase in spending (+18%, EUR 17bn) and a temporary abandonment of the objectives of a balanced budget. Finally, we must consider holding parliamentary elections in March 2023, encouraging the parties to be more generous.

The slight deterioration in public finances.

The 2022 budget was designed to reduce Estonia's structural and nominal deficits over the long term. Indeed, the 2020 and 2021 budgets increased the debt with many new expenditures. The war in Ukraine, the energy crisis and inflation finally forced the government to abandon its balanced budget targets temporarily. The government's structural deficit is expected to remain at 2.6% of GDP between 2023 and 2026. The nominal deficit is expected to be 3.9% in 2023 and to decline gradually to 3% by 2025. These figures should be taken with caution: no additional investment is currently planned in the defence sector after 2026. It is unlikely that this situation will continue, which should lead to a deterioration of public finances.

The State forecasts EUR 16 billion in revenue in 2023, 16% more than in 2022. This is mainly driven by high inflation rather than by introducing a new tax. Conversely, expenditure is expected to rise to EUR 17 billion, 18% more than in 2022. The debt burden will increase by 0.1 percentage points in 2023, reaching 19.8% of GDP. After a strong recovery due to the end of the Covid crisis, Estonian growth has slowed this year, from 8.1% nominal growth in 2021 to 1% in 2022 and 1% expected in 2023.

The government's concern about this slight deterioration in public finances is worth noting. The Minister of Finance, Annely Akkermann, regularly reminds us of the need to be rigorous in public spending and to aim for a return to a balanced budget as soon as possible.

Three priorities: defence, Estonian language and energy security

The Russian aggression in Ukraine marked a turning point in Estonia's defence policy: defence spending will increase by 43% and will exceed the one billion euro threshold for the first time, reaching 2.9% of GDP. By 2024, this expenditure should amount to 3% of GDP. In total, nearly EUR 2.5 billion will be invested in defence between 2023 and 2025. The main expenditures will be allocated to the establishment of a medium-range anti-aircraft defence capability, the modernization of military infrastructure and the modernization of equipment.

Another consequence of the war in Ukraine is that Estonian language education has become a national priority. In this area, the state will contribute EUR 41 million: EUR 15 million to finance projects already underway and EUR 26.1 million to launch new programs. More generally, there is a significant emphasis on education. The budget allocated to higher education will increase by 15% in 2023, from EUR 175 million to EUR 201.5 million. This 15% increase is planned to be recurrent over 2023-2026 and is specifically targeted at recruiting specialist teachers in priority areas for the State. More than EUR 106 million is planned for teachers' salaries growth over 2023.

High inflation, attributed here to Russia's energy blackmail, has led to the introduction of a household assistance plan. This will be maintained until the end of March 2023. This support plan amounts to almost EUR 100 million for the period January-March.

In order to strengthen energy security in the long term, numerous investments are planned: nearly EUR 66.8 million for developing and monitoring offshore wind zones and EUR 49 million for strengthening the electricity distribution network. EUR 100m has also been added by the state to the loan guarantee for companies to survive the crisis and encourage investment.

Supporting household purchasing power

The Estonian Ministry of Finance expects inflation to stabilize at 19.5% in 2022 and then fall to 6.4% in 2023. As a result, several significant investments are planned to support household purchasing power. First, the government will implement wage increases for the public sector, starting in 2023:

increase in the minimum wage for teachers by +23.4%, from EUR 1 412 to EUR 1 749 ;

minimum wage increase of 20% for police and rescue workers;

15% average wage increase for nurses, doctors and cultural workers.

These professions are considered essential to the proper functioning of society, and it is, therefore, essential to maintain their economic attractiveness in an economy that will see the average salary increase rapidly (+6.7% in 2022, +8% in 2023). In the longer term, the government wants the average salary level to approach that of the Nordic countries. Estonia is currently far from this with an average salary of EUR 1,693 (compared with almost EUR 3,000 in Finland, for example).

At the same time, the government plans to increase pensions by 19%, bringing the average pension to €704 per month. This is still low, as Estonian pensioners are considered the least protected in the European Union.



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