GDP growth is projected to gain momentum in 2017 and reach 2.9% in 2018, mainly driven by domestic demand. Private consumption will remain robust and public investment will pick up, sustained by EU funds. Despite a favourable business environment and good financing conditions, private investment will recover only slowly. Exports will strengthen backed by increasing external demand. However, maintaining price competitiveness will be challenging due to increasing labour costs.
Fiscal policy will ease slightly but remain tighter than the fiscal rule of a structural balanced budget. Remaining inefficiencies in insolvency procedures, barriers to SME lending and labour shortages all undermine capital spending and productivity growth, calling for reforming the legal system, promoting new forms of business financing and strengthening the supply of marketable skills further.
With the lowest public debt in the OECD and a general government surplus in 2016, Estonia’s fiscal position is very strong and prudent. The opportunity cost of this policy is high given the extremely favourable borrowing conditions and the need to fund growth-enhancing policies. Fiscal room should be used on measures to boost competitiveness and to make growth more inclusive, in particular by expanding active labour market policies and cutting labour taxes.
Economic Survey of Estonia (survey page)