Selected Issues Papers

This Selected Issues Paper revisits fiscal multipliers for Estonia with a view to highlighting policy trade-offs and providing growth-friendly options for fiscal consolidation. The pandemic triggered a sharp and partly permanent increase in government spending. Demand for better quality and broader provision of public services has materialized, while climate and ageiong-related spending pressures are set to intensify over time and geopolitical risks have triggered a sharp increase in defense spending. Despite the 2022–2024 protracted recession, Estonian authorities have responded to these pressures with two rounds of wide-ranging tax changes affecting PIT, CIT, VAT, and excises, while spending cuts based on comprehensive spending reviews were enacted. Do these measures have significant short-term effects on growth? Granular estimates of fiscal multipliers by type of instrument—on both revenue and spending—can shed light on potential short-term output costs and underpin policy advice on specific instruments for fiscal consolidation. Our results indicate that multiplier effects in Estonia are not negligible. First-year multiplier estimates tend to fall in a 0.85–1.4 range for a general fiscal shock, 0.6–1.2 for aggregate spending, and about -0.2 for revenue. Granular multipliers suggest initially larger but less persistent output costs of spending cuts relative to tax increases.