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Estonia to slow sharply in ‘08, budget hit

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Estonia’s Finance Ministry sharply lowered on Thursday its forecast for economic growth this year, edged up its prediction for inflation and said a budget shortfall would force spending cuts.

Estonia, where high inflation has delayed hopes of entering the euro zone, is leading the economic slowdown in the Baltic region, where analysts have tended more to focus on overheating problems after years of boom. The Estonian Finance Ministry forecast GDP growth falling to 3.7% this year, down from a previous forecast for 2008 of 5.2% growth and well below 2007’s 7.1% expansion. “Because of this quickly changing environment, the budget surplus we have planned no longer fully covers the deterioration of the budget position,” Finance Minister Ivari Padar said in a statement. The lower growth would lead to a budget revenue shortfall of up to 3.1 billion kroons ($309.6 million), cutting total revenues this year to 88.8 billion kroons, the ministry said. The government had planned a government sector budget surplus this year of 1.3% of GDP, or 3.6 billion kroons.

Under Estonian law, the country is not allowed to have a budget deficit, it must be balanced or in surplus. The government is expected to discuss later on Thursday how where to cut spending in response to the revenue shortfall. The ministry forecast inflation in 2008 at 9.0%, up from 8.6. Padar said good news from the slowdown was that the current account deficit would fall and price pressures ease. The ministry saw growth edging back up to 6.4% in 2009 and inflation going down to 5.3%. (Reuters)

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