The severe economic downturn and high output volatility, in the context of the currency board, underscore the importance of well-designed fiscal policies to help mitigate shocks. Since Estonia’s fiscal policy now exercises a pro-cyclical bias, the key challenge is to develop gradually its counter-cyclical role without jeopardising sustainability. The government could achieve this objective by modifying the rule of annually balanced budgets and balance the budget over the business cycle while letting the automatic stabilizers respond freely to short-term fluctuations. The deficit target accompanied by an expenditure rule incorporated in the medium term budgetary framework would facilitate sustainability and efficiency of public spending. To enhance credibility of the modified framework discretionary measures should be used for longer-term structural issues. The uncertainty of estimating the structural surplus could be addressed through a mechanism that claws back expenditure or debt overruns. An important consequence of such changes would be the development of a government bond market, which could also play a benchmark role for financial markets.