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Ministry of Finance forecasts Estonian economic growth of 4.3 per cent for 2017

14. September 2017 - 13:43

According to the summer forecast of the Ministry of Finance, the Estonian economy will grow by 4.3 per cent this year and by 3.3 per cent in 2018.

According to the summer forecast of the Ministry of Finance, the Estonian economy will grow by 4.3 per cent this year and by 3.3 per cent in 2018.

“The economy of Estonia and the rest of Europe is returning to normal conditions,” Minister of Finance Toomas Tõniste said. “The government will continue with a responsible fiscal policy. General government debt will decrease and the tax burden will remain at the current level in the coming years.”

From 2019-2021, the Estonian economy is predicted to grow by an average of 3 per cent annually. The main driver of economic growth for these years will be domestic demand supported by investments. Exports are to grow substantially along with foreign demand for Estonian goods and services, and the role of exports as a growth driver for the years to come will increase.

The average wage will increase from previous year’s 1,144 euros to 1,217 euros this year, and to 1,280 euros the next year, with real wage growth of 2.9 per cent this year and 2.5 per cent the next year. In the future, the moderately quick wage growth is to continue, which is in line with respective productivity developments.

In 2018, a new system of differentiated tax-free income will be introduced and the tax-free income of most wage earners is to increase to 500 euros. As a result, employees with and average incomes will receive up to 64 euros more monthly. This in turn will support the growth of private consumption and to reduce pressure on labour cost growth. Positive developments in the labor market continue and the demand for labor is high.

The number of employed people is high and it is projected to increase every year, reaching approximately 649,700 people in 2017 and 659,600 people in 2021. The labour market is significantly affected by the “work-ability” reform, which aims to help find jobs for many people on disability pensions who have not been involved in the labor market previously. The reform may turn out to be more successful than expected, as to date, more people with reduced capacity to work than expected were able to find work. Most of them continue to be registered as job seekers until they find jobs, which increases the statistical unemployment rate. The unemployment rate is expected to be 6.9 per cent this year and 8.3 per cent the next year.

The highest level of consumer price growth will be registered in the second half of this year, after which inflation is to slow down. The rise in prices is explained by increasing food and oil prices on the world market, rising prices for services and additional fiscal measures. This year, the consumer price index will rise by 3.4 per cent; the next year the price increase is expected to slow down to 2.7 per cent.

The tax burden in the coming years will remain at a stable level. Between 2018 and 2021, labor taxes will be reduced due to taxation changes, while consumption and capital taxes will be increased. Overall, the average tax burden during this period will be 34.3 per cent of gross domestic product (GDP).

Last year, general government debt declined to 9.4 per cent of GDP. This year, it is projected to decrease further, and in the next two years, due to improvement in the nominal fiscal position, the debt burden is expected to decrease, reaching 8.6 per cent of GDP by the end of 2019. According to the forecast, from 2020 on, debt will also decline nominally as a result of cash flow surplus and loan repayments, reaching 7 per cent of GDP by the end of the forecast period in 2021.

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