A leading Estonian think tank has warned that the country’s declining birth rate, though expected to ease pressure on education and family policy budgets in the short term, will ultimately lead to a tax revenue shortfall of up to €1.3 billion.
Estonia’s shrinking birth rate may offer short-term savings in welfare and education, but it will cost the state up to €1.3 billion in lost tax revenue over the long term, according to a new report by the Foresight Centre, a think tank at the Estonian parliament.
In a brief published under the title “The impact of population ageing and low birth rate on long-term state revenue and expenditure”, the centre highlights that between 2022 and 2024, as many as 7,500 fewer children were born than previously projected. This resulted in savings of around €100 million in state benefits, and future spending on education is expected to fall accordingly.
However, the think tank warns that the demographic trend carries significant long-term risks.
“Unfortunately, lower birth rates also mean a decrease in tax revenue in the coming decades, and the ageing of the population will lead to an increase in public sector spending on long-term care and healthcare,” said Kaupo Koppel, an expert at the Foresight Centre.
He noted that for three consecutive years, Estonia’s birth rate has fallen below forecasts by both Eurostat and Statistics Estonia.
Long-term care costs may rise up to 15 times
Conservative estimates suggest that each child not born represents a loss of €100,000 to €190,000 in future tax revenue for Estonia. The Foresight Centre calculates that the current shortfall in births will reduce the country’s revenue base by at least €750 million to €1.3 billion over the next 40 to 60 years.
A recent European Commission forecast warns that population ageing will bring structural shifts in public sector spending. By 2050, Estonia’s long-term care costs could increase up to fifteenfold, while health-care expenditure is expected to rise steadily.
Pension spending is projected to remain stable in the coming decades but decline over the longer term, as ongoing reforms will gradually lower the future pension replacement rate.
Education and family policy spending to decrease considerably
While the role of individual pension accounts is expected to grow in shaping future pensions, their contribution does not affect public sector pension costs. In contrast, expenditure on education and family policy is set to decline significantly as birth rates fall and the younger population shrinks.
In a risk scenario, where demographic changes are compounded by an expansion in the scope or coverage of services, long-term care costs could surpass 6% of Estonia’s GDP by 2070 – outpacing the projected rise in pension expenditure.
“Lower birth rates will result in reduced family and education expenditure by up to half, but this will not offset the growing costs associated with an ageing population,” Koppel said.
The Foresight Centre, a think tank operating under the Estonian parliament, analyses socio-economic trends and builds long-term scenarios to anticipate future developments and disruptions.
