IMF Warns Estonia’s Public Debt Will Become Too Large if Budget Policy Stays on Course

Estonia’s public debt could become too large if the government keeps its budget on its current course, the International Monetary Fund said in its annual assessment of the economy. The OECD reached similar conclusions in June, warning that the country’s debt burden would rise significantly in the coming years and over the longer term.

Both institutions recommend beginning a gradual improvement in Estonia’s fiscal position next year. Raido Kraavik, an economist at Eesti Pank, said the IMF and OECD had not prescribed exactly how the budget should be repaired. They had, however, pointed to ways to restrain spending and increase tax revenue. The choice and responsibility would remain with politicians.

Kraavik said the measures needed a lasting effect on reducing the deficit, so that the rapid growth in the debt burden could be slowed. Continuing along the current path, he warned, would reduce Estonia’s ability to respond to future crises and rising costs.

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The IMF and OECD do not prescribe exactly which steps Estonia should take to improve its budget, but they point to several ways to limit spending and increase tax revenue. The specific choice and responsibility remain with politicians.

The IMF forecasts that Estonia’s budget deficit will reach 4.3% of GDP this year and 4.9% next year. It says current economic conditions do not justify a significant fiscal loosening. The fund does not question the need for higher defense spending, but says spending has also increased in other areas, boosting demand while higher energy prices are already driving inflation.

The IMF considers a neutral fiscal policy appropriate, or at least a much smaller loosening than at present. It recommends using stronger-than-expected tax revenue and savings from lower-than-planned spending to reduce the deficit and rebuild buffers. It also advises against broad energy subsidies, general price support, cuts to value-added tax and excise duties, and price caps. Any additional support, it says, should be temporary and targeted at vulnerable households and companies.

Estonia’s general government debt stood at 24.1% of GDP in 2025, according to the IMF, placing the country among the OECD members with the lowest debt burdens. The article ends as it begins to consider that position in light of the warnings about the current fiscal path.

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Continuing along the current path would reduce Estonia’s ability to respond to future crises and rising costs.