Estonia’s central bank urges government to cut budget deficit

Estonia’s central bank president Ülo Kaasik has warned that a persistent budget deficit could create tens of millions of euros in additional annual interest costs, ERR reports. He said the deficit must be reduced and advised homeowners to consider fixing their energy prices before the heating season.

According to the central bank’s latest economic forecast, Estonia’s state budget deficit will remain at 4.5 to 4.8 percent in the coming years without additional measures. Kaasik said this would require the state to borrow more than 2.2 billion euros each year to cover its spending.

“The state will have to start paying interest on this borrowing, which will become a permanent annual expense for the budget. We are talking about an increase in fixed costs of around 70 to 80 million euros each year,” Kaasik said.

Estonia’s central bank has urged the government to begin reducing the deficit and follow domestic budget rules requiring it to be cut by at least 0.5 percentage points annually.

The government has set a goal of reducing next year’s deficit from 4.8 percent to 4 percent. Kaasik said the measures needed to reach that target were a matter of political choice.

“There is an option to reduce spending or raise taxes, and the central bank does not want to take a position on that,” he said.

Geopolitics could drive energy prices

Discussing the possibility of higher prices and changes in interest rates, Kaasik said current market expectations and futures contracts pointed to lower energy price pressures. However, he said the actual outcome would depend largely on the external environment.

“We all know that it depends on geopolitics and what happens around the Persian Gulf. If the situation there is resolved, it may be easier to breathe. If it is not resolved, prices could of course rise,” Kaasik said.

Before the upcoming heating season, Kaasik advised homeowners to fix their energy prices where possible.

“For all homeowners who are worried about winter heating bills, consider fixing your price if possible. It reduces the risk,” he said.