Today, the Riigikogu discussed the state of public finances as a matter of significant national importance, initiated by the State Budget Control Select Committee.

Minister of Finance Mart Võrklaev said that, for decades, Estonia had been known as a country with a low debt burden and sound public finances. “In earlier times, international organisations have often looked to Estonia and pointed us out as an example to other countries,” he said.

In Võrklaev’s words, the Government that had been in power in 2016 had put Estonia’s general government budget into deficit during rapid economic growth. One of the first major fiscal policy decisions had been to amend the basic Act on the state budget in order that it would be possible to draft the budget with a deficit. “As a result of the consequent COVID crisis, energy crisis and war, the deficit has aggravated rapidly and suddenly, amounting to minus 5.5% of GDP in 2020. As the budget was in deficit already before the crises, we fell deeper than we should have during the crisis and it will take years to climb out of this pit,” he explained.

Võrklaev said that the deficit that had emerged over recent years was of a permanent nature because both the expenses due to the crises and other added costs were mostly fixed costs. In addition, the Minister of Finance said that, because of Russia’s full-scale aggression in Ukraine that had started last February, Estonia had had to boost its defence spending to at least 3% of GDP. “Therefore, public costs have increased significantly but we have not increased our revenue at the same time,” the minister said.

Deputy Governor of the Bank of Estonia Ülo Kaasik said that the debate that had been raised was very important because it defined to a great degree in which direction the Estonian economy was moving and how that economy was managed. “First, today we should definitely make efforts to ensure the long-term sustainability of public finances because the budget deficit will become worryingly large and persistent in the next few years,” he began.

Second, Kaasik pointed out that the budgetary position should be improved as quickly as possible because that was necessary to ensure both the inner and outer balance of the economy. “A rapid price and salary growth is currently a threat to the competitiveness of our businesses, and the budget deficit may undoubtedly hinder this competitiveness even more,” the Deputy Governor thought.

Kaasik also said that if the budget balance was going to be restored with a longer delay and when the debt burden was greater, more extensive cuts would be needed to achieve it, and the impacts on the economy would probably also be more extensive. Third, he pointed out that it would probably be expedient to carry out a thorough review of general government expenditure and the tax system to find political agreements on how to ensure a sustained improvement in the state of public finances.

Deputy Governor of the Bank of Estonia said that today it was definitely necessary to make efforts to ensure the long-term sustainability of public finances because the budget deficit in the next few years was going to be worryingly large and persistent. “We should do this as quickly as possible and it would definitely be expedient to review both expenditure and revenue in different views and to try to reach a political agreement so that we would be able to ensure a better state of public finances in the long term,” Kaasik said in conclusion.

In his report, Chairman of the Fiscal Council Raul Eamets focused on two questions – what the current state of Estonia’s public finances was and how it had been formed, and what the fiscal policy should be like in the future. In Eamets’s words, it is necessary to go back in time two or three years in order to understand the current situation. “Fast-forward, I can already say that public expenditure has increased faster than public revenue and in order to offset this gap, it would be necessary to prop up the revenue side or to slow down the expenditure growth, or to do both at the same time,” he said.

Summing up last years, the Chairman of the Fiscal Council pointed out that the faster growth of expenses had begun in 2020 when, at the outbreak of the pandemic, the then Government had adopted a decision that the expenditure plans that had been made would not be amended but, on the contrary, the economy would be supported with the help of loan money. “In summary, in 2020, public expenditure increased not by 6% as had been initially planned, but by 13%, and the increase of public revenue remained practically zero,” Eamets noted.

The report of the Chairman of the Fiscal Council revealed that, in 2021, general government expenditure had increased by 6% from a very high reference base, and the rapid recovery of the economy in 2021 had brought about an increase in public revenue. “Tax revenue increased nearly 17% and the result was that budget deficit turned out to be much smaller than had been expected,” he said. At the same time, in Eamets’s words, the complicated situation with public finances had also been somewhat concealed by the reform of the second pillar pension, where the side effect had been that several hundreds of millions of euro worth of additional tax revenue had been accrued to the state. “It was one-off additional revenue which the state received at a complicated time, and we definitely cannot count on such revenues in such a volume in the years to come,” he added.

Concerning the year 2022, Eamets said that public expenditure had increased by 9–10%, but public revenue had increased even more rapidly. He recalled that, when the drafting of the state budget for 2022 had been started in autumn 2021, an economic growth of 4% and approximately the same increase in prices had been expected. In reality, however, a small economic downturn and a nearly 20%-per cent price rise had been seen. “Thanks to such a price rise, significantly more tax revenue was received than had been expected and tax revenues turned out to be higher by approximately 850 million euro than had been originally planned,” he gave an example. Eamets said that, again, similarly to 2021, an unexpected extra boost to public revenue had been seen, but we probably cannot count on similar volumes in a longer-term perspective.

In his report, the Chairman of the State Budget Control Select Committee Urmas Reinsalu discussed the impact of political choices on the state budget. He spoke of the general government balance of 2021 and 2022, which had been minus 2.4% and minus 0.9%, respectively. “These figures would have been positive, and we would have had a positive general government balance if no positive supplementary budgets had been made in spring 2021 as well as in spring 2022,” he said. In Reinsalu’s words, when the positive budgets had been made, then in 2021 it had been justified by the COVID crisis, and in 2022 it had been justified mainly by the energy crisis and in a smaller part, by the need to increase national defence spending.

Looking at the recent fixed costs in the perspective of the next four years, Reinsalu said that, in 2024–2026, the fixed costs for the state would increase by 4 billion euro. “As I said, costs have been occurred, four billion euro worth of decisions have been made, and this situation where we have a more than 4% deficit in the nominal balance is planned to be solved by a project where the minus will be increased by over 1% of GDP per year on an ongoing basis,” he said. Taken separately, this means regressive income tax exemption. “Cancel it, it is a luxury product,” Reinsalu advised.

During the debate, Lauri Laats from the Centre Party Group, Hendrik Johannes Terras from Estonia 200 Parliamentary Group, Aivar Kokk from Isamaa Parliamentary Group, Reili Rand from the Social Democratic Party Group, Maris Lauri from the Reform Party Group, Leo Kunnas from the Estonian Conservative People’s Party Group and Urmas Reinsalu from Isamaa Parliamentary Group took the floor. The Minister of Finance Mart Võrklaev also took part in the debate.

Verbatim record of the sitting (in Estonian)

Photos (Author: Erik Peinar, Chancellery of the Riigikogu)

The video recording of the sitting can be viewed on Riigikogu YouTube channel.
(Please note that the recording will be uploaded with a delay.)

Riigikogu Press Service
Eleen Lindmaa
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