General government debt level continued to increase

According to the adjusted data of Statistics Estonia, in 2013 the Estonian general government deficit was 0.5% and the gross debt level was 10.1% of the gross domestic product.

At the end of 2013, the total expenditures of the general government exceeded the revenues by 89 million euros, according to the Maastricht deficit criteria. According to adjusted data,

the central government deficit decreased from 138 million euros at the end of 2012 to 64 million euros by the end of 2013. The deficit of the local government sector increased almost three times over the year, amounting to 89 million euros. The budget of social security funds was in surplus by 64 million euros.

The consolidated debt of the general government (Maastricht debt) rose by 10.3%, reaching 1.9 billion euros by the end of 2013. The overall debt level of the local governments grew by 19.7% compared to 2012. Social security funds did not contribute to the general government debt as at the end of 2013.

The indicators of government finance statistics are compiled on the basis of the new methodology of the European System of National and Regional Accounts ESA 2010. Several changes have been made compared to the preliminary indicators published in spring: the preliminary estimations have been replaced by actual data from the reports and the entire accounting has been transferred to the ESA 2010 methodology.

The majority of the methodological changes did not affect the balance of the general government consolidated budget and the debt level. For example, the changes arising from the capitalisation of research and development and military expenditures were made by rearranging different transactions which cancelled each other out. The change in the classification rules of public sector entities had the most significant impact on government finance statistics, resulting in the redistribution of public enterprises, foundations and non-profit institutions between the corporations sector, non-profit institutions serving households sector and general government sector.

Due to the reclassification, there was an increase in the number of public units assigned to the general government sector as non-market producers. The effect on the consolidated budget balance was positive in most years while the general government debt level increased slightly. The biggest change in debt burden occurred in the local government sector, due to the aggregation of the majority of the non-market producers assigned to the general government sector.

Diagram: Surplus/deficit and debt level of the general government in Estonia

In Estonia the general government sector comprises three sub-sectors: 1) central government (state budgetary units and extra-budgetary funds, foundations, legal persons in public law);
2) local governments (city and rural municipality governments with their subsidiary units, foundations); 3) social security funds (Estonian Health Insurance Fund, Estonian Unemployment Insurance Fund).

Eurostat is going to publish the data on the debt and deficit levels of the Member States according to ESA 2010 on 21 October.

Source: Statistics Estonia

Governemnt pledges to seek new export markets

With the Agriculture Ministry saying the EU is unlikely to decide support for sectors hit by Russian sanctions before September, Estonian officials and producers focused today on what the national government can do. The focus will lie on finding new markets and working with banks to secure more favorable terms for dairy farm investors.

Agriculture Minister Ivari Padar and Foreign Trade Anne Sulling said after meetings with lobby groups today that the sanctions were a political conflict between the EU and Russia and a united front would have to be agreed on the EU ministerial level. A meeting is due to take place in Brussels on Wednesday.

But domestic efforts will also be at center stage for now, with ministries pledging to work with banks to institute grace periods for dary farm investors and possibly to roll out more export subsidies in the 2015 state budget, Padar and Sulling said.

Farmers and milk producers said going into the meeting that they expect decisive action, including more direct subsidies and government intervention on milk prices.

Read more from ERR News

Recession in the distorting mirror of the state budget

The sustainability of state financing is measured in Europe by the structural fiscal balance, which indicates what the budget balance would be if it were not affected by the cyclical position of the economy or one-off factors. When the economy is growing fast, a nominal surplus is needed for the budget to be at least in balance structurally, and the opposite also applies, so when the economy is temporarily operating below its long-term growth potential, the nominal fiscal position is worse than the structural position. Structural budget balance or a small surplus is necessary so that the public finances would remain good over the longer term and the general government debt would not grow. The Estonian government debt is the smallest in Europe and the surplus targeted in the budget strategy is more than the minimum required by the European Union. However, both the previous and the current governments have relaxed the fiscal targets. In the latest budget strategy for 2015-2018 set by the new government, the government target is a structural budget surplus of 0.2% of gross domestic product (GDP). A year ago the previous strategy aimed for a surplus of 1.0%.

The structural position planned in Estonia’s national budget strategy meets the criteria observed by the European Commission, but whether the targets that have been set are actually fulfilled is another question altogether. The main debate is around the assessment of the current and future cyclical position of the economy. Both the European Commission and the Estonian government measure the economic cycle using the GDP gap, which shows how far GDP is above or below its potential, or its long-term capacity for growth. Measuring the current GDP gap is an inexact science and estimates only prove their accuracy during the subsequent years as more statistical data become available. This means that discrepancies can ensue in estimates of the structural budget position and in opinions on government activity, and debate can arise.

Measuring the economic cycle and estimating the cyclical effects on the budget becomes even more complicated if the structure of the economy is changing at the same time, and this has been the case with the Estonian economy recently. Economic growth has slowed to close to zero and GDP actually shrank at the start of this year, but wages and household consumption increased rapidly at the same time because of the decline in the population, emigration and structural unemployment. Some three quarters of government revenues comes from taxes on labour and consumption, and the sharp drop in economic growth did not directly affect that, so revenues to the state budget have increased by substantially more than the general cyclical position of the economy would suggest.

It is also important to be quite careful in forecasting the structural budget revenues, as they largely dictate the level of expenditure that the government will be able to sustain over the longer term. The most recent forecast from Eesti Pank expects the cyclical effect on the fiscal position to turn positive next year already, though the economy as a whole will remain below its potential. This means that tax revenues are already close to balance and will pass that point next year. By this interpretation of the cycle the state should limit expenditure growth to the same degree and put some of the tax revenues into the reserves. If the estimates of the economic cycle that are based on a negative GDP gap are used as a guide now, the consequence could be that the budget later turns out to have remained in structural deficit and the fiscal targets set in law prove to be unattainable. In the long run this could create problems of fiscal sustainability as the reserves built up in the good times prove insufficient to finance the deficit through more difficult times. The government has three options in that case. The first is to increase the general government debt and leave some of the costs to future generations; the second is to cut spending; and the third is to raise income, which generally means increasing the tax burden.

Source: Bank of Estonia

Author: Ardo Hansson, Governor of Eesti Pank

Government plans to nominate ex-PM as candidate for European commissioner

At May 29, 2014 Cabinet meeting, members approved Prime Minister Taavi Rõivas’s plan to nominate Estonia’s most popular politician as a candidate for European commissioner.

Andrus Ansip, just elected to the European Parliment with the largest number of votes received during Sunday’s election, told ETV that he was geared toward dealing with finances, energy and regional affairs – the fields where Estonia gets most of its EU funding – if he was selected for the executive post.

Read more from ERR

Minister seeks to stop sale of Tallinn TV Tower

Estonian Minister of Economic Affairs Urve Palo says that the planned sale of Levira, network services provider and transmitter of TV and radio channels, should be reversed.

Eesti Päevaleht writes that Palo is referring to security considerations and emotional aspects because Levira also owns the Tallinn TV Tower, a symbol of Estonia regaining independence that the Soviet Army attempted to conquer in August 1991 as part of the coup d’etat.

Read more from BBN

 

State budget revenue shows healthy increase

The state collected 438 million euros in tax in April this year, 12 percent more than during the same month in 2013.
A 15 percent increase in VAT takings and a 7 percent increase in social tax drove the surge in revenue, the Finance Ministry said in a press release.

The first quarter has filled 30.9 percent of the budget, leading to the hope that the 2014 state budget will produce a surplus instead of the predicted deficit of 38 million.

This year’s budget was the first state budget to pass the 8-billion-euro mark. Last year’s budget was 5 percent smaller.

Source: ERR via Estonian Review

Tallinn water company makes too much profit

The Competition Authority said the capital’s water company, Tallinna Vesi, is already earning too much money and company’s decision to sue the authority for blocking price hikes is unjustified.

Tallinna Vesi has taken the authority to court, demanding 90 million euros for lost profits between 2011 and 2020, with that sum declining to 50 million if price hikes were to be allowed now, ETV reported on Monday.

Read more from ERR

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