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

Estonia launches OpenData application for municipalities

The financial activities and overall financial situation of Estonia’s local governments can now be easily monitored via Riigiraha (State Finances). The goal of the service is to increase the transparency, accessibility and openness of local governments.

All accounting data retrieved from local governments from 2008-2013 is made public. Everyone has unlimited access to view, download, compare and analyse data using the business intelligence software platform. This is an important step towards making public sector finances transparent and understandable to all.

“New users should start by accessing the User Guide and then looking up the interactive report ‘Where does your money go‘ to get an overview of local government spending of revenue received from chosen tax payers,” explained Andrus Jõgi from the Local Government Financial Management Department of the Ministry of Finance.

The application was developed based on the success of and experience obtained during a 2012 pilot project known as ‘Riigipilv’. More than 200,000 enquiries were made during the project – 0.15 enquiries per citizen. The new application, at ‘riigiraha.fin.ee‘, has increased usability, more data and analysing tools, and is available in English.

Source: Estonian Ministry of Finance

Estonia’s government deficit among lowest in EU

The general government deficit of Estonia in 2013, measuring 2 percent of GDP, was lower than in any other EU member state save for Luxembourg and Germany, which boasted a surplus of 0.1 and 0 percent of GDP.

Read more from BBN

Euro area countries need to react flexibly to economic changes

Governor of Eesti Pank Ardo Hansson said on Saturday at the high-level Ambrosetti Financial Markets Workshop in Italy that the experience of the euro area shows that countries in a monetary union need to have a responsible economic policy and should be ready to react flexibly to economic changes.

Mr Hansson used his presentation to compare the advantages and disadvantages of a sharp adjustment for countries suffering an economic crisis.

He said that one advantage of a sharp adjustment is that the rapid reaction of economic policy makers means there is a shorter period of high uncertainty weighing on economic activity, especially on investment decisions. Another advantage is that a rapid adjustment frees up resources for new businesses and activities. Mr Hansson emphasised that a sharp adjustment can help avoid reform fatigue in a society and prevents debts from building up too far in both the public and private sectors.

At the same time, economic policy makers need to be careful that the speed of rapid changes does not create problems by forcing viable firms out of business. It is also important for governments to explain clearly to society why the changes are needed and what effect they will have. He showed a comparison of Estonia’s adjustment during the economic crisis with the reactions of four other euro area countries, namely Greece, Ireland, Spain and Portugal. The comparison makes it clear that the faster adjustment in Estonia helped the country exit the crisis more successfully in terms of economic growth, employment, fiscal balance and debt.

The relatively rapid long-term growth in the Estonian economy and its ability to adjust have been based on a strong fiscal policy, a flexible labour market and relatively low debt levels, particularly in the public sector, explained Mr Hansson. The ability of the Estonian economy to escape from difficulties was aided by well-capitalised banks, consistent structural reforms and the desire to adapt economic policy quickly to changes in the economy. Unlike Estonia, several countries in the euro area were hindered in their reaction to the crisis by an excessively large financial sector.

Mr Hansson said that Estonia’s experience in the economic boom showed that a strong external anchor in the form of a credible fixed exchange rate arrangement might lead to policy complacency. The experience of the euro area during the economic crisis has proved that the economic policy of countries in a monetary union needs to be responsible and ready to react flexibly to economic changes.

The Ambrosetti Financial Markets Workshop on Friday and Saturday in Cernobbio, Italy, was attended by leading decision-makers from the world of financial and monetary policy. Ardo Hansson gave a presentation in the Saturday morning session on the Agenda for Europe.

For more information on the conference, see http://www.ambrosetti.eu/en/news/2014/financial-markets-workshop

See the presentation here

Source: Bank of Estonia

Defence forces buy military equipment for 111 mEUR

Minister of Defence Urmas Reinsalu approved on March 14, 2014 the MoD’s 2014 procurement plan, under which more than 100 million euros worth of weaponry, equipment and ammunition will be procured for the Defence Forces this year.

On the basis of the National defence development plan prepared 2013-2022, the procurement plan has a total volume of 111.5 million euros, making up 29.04 percent of the 2014 defence budget.

According to Minister of Defence Reinsalu, the steady commitment to maintaining defence spending at 2 percent of GDP will ensure that Estonia can allocate one-third of its defence budget for procurements of new weaponry and equipment. “This distribution of the defence budget allows us to equip and arm the Defence Forces’ current wartime units and start developing the new major capabilities in subsequent years, such as, for instance, procuring new infantry fighting vehicles,” said Reinsalu.
The largest part of the procurement plan will be spent on purchasing wartime equipment and stocks for the Defence Forces reserve units, for which purpose nearly 45 million euros worth of communication equipment, trucks and other vehicles, ammunition, engineering equipment, night vision equipment, indirect fire control devices, uniforms, personal equipment, bulletproof vests etc will be procured.

More than 13 million euros will be spent in 2014 on the ammunition, anti-tank missiles, uniforms and explosives needed to ensure the Defence Forces’ peacetime training activities, and nearly three million euros will be spent on procuring equipment for the Defence League’s territorial defence units.

The largest one-time expenses in the 2014 procurement plan – over 6 million euros in the case of each procurement – will be spent on making the scheduled instalments for the Ground Radar 403 mid-range air surveillance radar contract signed in 2009 and the SISU XA-188 armoured personnel carrier contract signed in 2010. To a lesser extent, procurements for purchasing the navigational devices and other equipment needed at Ämari air base will continue.

Close to 14 million euros will be spent in 2014 on scheduled repair and maintenance of the Defence Forces’ existing heavy weaponry, vehicles and equipment.

Source: Ministry of Defence Public Relations Department via Estonian Review

 

Government endorses 5.8 percent pension rise

The Estonian government on March 13, 2014 endorsed 1.058 as the value of the index of state pensions effective from April 1, 2014, which means that pensions will rise by 5.8 percent on average.

The value of the index is calculated to the extent of 80 percent based on the change in last year’s social tax receipts and to the extent of 20 percent based on the change in the consumer price index (CPI). According to data of Statistics Estonia, CPI rose 2.8 percent last year while figures available from the Finance Ministry show that 7.3 percent more social tax money than the year before flowed into pension insurance.

The index endorsed for 2014 is smaller by 0.6 percent than the calculated index because in the crisis years 2009-2011 the calculated value of the pension index was below 1.0 but pensions were not cut. The State Pension Insurance Act obliges the government to add or clear the part of index that was not increased or reduced within five years, and the reduction of 0.6 percent this year is the last reduction to offset the effect of the smaller receipts in 2009-2011.

The pension increase this year is estimated to take 62 million euros from the state budget.

The change would raise the old-age pension of a person with 15 years of pensionable service to 209.37 euros a month. With 44 years of pensionable service the new size of the state pension will be 353.33 euros a month.

Source: BNS / Estonian Review

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