Revisiting Fiscal Multipliers for Estonia: Republic of Estonia

Selected Issues Papers, July 25, 2025

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Revisits fiscal multipliers for Estonia to highlight policy trade-offs and provide growth-friendly options for fiscal consolidation.
Pandemic triggered a sharp and partly permanent increase in government spending.
Emerging and persistent spending pressures noted:
- Demand for better quality and broader provision of public services.
- Climate-related and ageing-related spending pressures set to intensify over time.
- Geopolitical risks have triggered a sharp increase in defense spending.
Policy response during and after the 2022–2024 protracted recession:
- Two rounds of wide-ranging tax changes affecting PIT, CIT, VAT, and excises.
- Spending cuts based on comprehensive spending reviews were enacted.
Central question: Do these measures have significant short-term effects on growth? Granular estimates of fiscal multipliers by type of instrument—on both revenue and spending—are used to assess short-term output costs and inform instrument-specific fiscal consolidation advice.

General fiscal shock:
- First-year multiplier estimates tend to fall in a 0.85–1.4 range.
Aggregate spending:
- First-year multiplier estimates tend to fall in a 0.6–1.2 range.
Revenue:
- First-year multiplier estimate is about -0.2.
Granular multipliers:
- Suggest initially larger but less persistent output costs of spending cuts relative to tax increases.

Multiplier effects in Estonia are not negligible, implying that the choice of fiscal instruments matters for short-term output.
Spending cuts:
- Tend to generate larger initial output costs but these costs are less persistent according to granular estimates.
Tax increases:
- Imply smaller initial output costs relative to spending cuts but may have different persistence profiles.
Use of granular, instrument-specific multiplier estimates can:
- Shed light on potential short-term output costs of consolidation measures.
- Underpin policy advice on selecting specific instruments for fiscal consolidation that are more growth-friendly.

Subjects: Expenditure; Fiscal multipliers; Fiscal policy; Government consumption; National accounts; Public investment spending; Total expenditures.
Keywords: Europe; Fiscal multipliers; fiscal policy; Global; Government consumption; government revenues; government spending; I. shock identification; IMF's Bucket Approach; multiplier effects in Estonia; multiplier estimate; Public investment spending; spending pressure; taxes; Total expenditures.

Revisiting Fiscal Multipliers for Estonia: Republic of Estonia, by Carlos de Resende and Sadhna Naik, July 25, 2025.