Estonian Second Supplementary State Budget for 2009 improves the public sector budget position by a total of EEK 5.5 billion. Within 2009 the public sector budget position has been improved a total of EEK 16.1 billion (7.3 percent of the GDP).
Based on the Second Supplementary Budget volume of state budget revenues of the year is EEK 85.1 billion and the volume of expenditure is EEK 89.3 billion.
Background Brief on the Second Supplementary Budget for 2009
Economical background
From 2005 to the beginning of 2007 the economic growth was very fast in Estonia and clearly exceeded the potential sustainable rate. The fast growth was accompanied by the loan boom and increase in real estate prices.
Consumer confidence reached the highest level of all times and the increase in private consumption exceeded 20% in the beginning of 2007. However, in spring 2007 the real estate market experienced a turnaround – the price increase was replaced by a decrease and the number of transactions started to decline. This caused a decrease in the real estate wealth of residents and uncertainty started to grow which had a negative impact on the consumer behaviour and investments.
These domestic negative trends were intensified by the international financial crisis in 2008 which outgrew into the global crisis and decreased considerably the export demand of Estonia. In addition to the growth in global risk margins and decrease in the loan demand, financial sector became cautious which also intensified the decline in investments and limited the economic activities of companies.
Current Status of Estonian Economy
As a result of the above, the Estonian economy has experienced a deepening fall from the Q2 of 2008, which has been accompanied with the fast growth in unemployment starting from the end of 2008. The Estonian gross domestic product (GDP) decreased by 15.1% in Q1 of 2009 in comparison with the same quarter last year. The fast decrease in domestic demand was the most important factor influencing the foregoing (21.4%). Export of goods and services also declined due to the shrinkage of external demand.
In Q1 of 2009, the number of employed persons amounted to 612,100, which is 44,400 persons less than at the same time last year. The unemployment rate increased to the highest level within the last eight years in Q1, being 11.4%. The average gross wage per month was EEK 12,147 within the period. The monthly wage has decreased by 1.5% or EEK 190 in comparison with the same period last year.
At the same time, the current account was balanced in the first quarter of this year, which means that involvement of extensive external loans is no longer required to finance the current deficit. Consumer prices decreased in June by 0.9% in comparison with June 2008; the monthly comparison shows that a price decrease commenced in Estonia in November 2008 and this is alleviation for all the consumers under the conditions of decreasing income.
The economic sentiment indicator improved in May for the second month in a row.
Tendencies in European and World Economy
Economic growth of the US, European Union and eurozone was? also negative in Q1 of 2009. Annual inflation of the eurozone was -0,1% in June.
Figure 1. Annual economic growth in different countries in the first quarter of 2009 (%)
| Country | EE | LV | LT | DE | HU | SL | SK | FI | GB | US | JP | SE |
| GDP growth in Q1 of 2009 | -15,1 | -18 | -11,8 | -6,9 | -4,7 | -8,5 | -5,4 | -7,6 | -4,1 | -2,5 | -9,1 | -6,4 |
How Does the Foregoing Affect the State Budget?
State revenues depend on the internal development as well as the development of economy of our trading partners. The Estonian economy, like the economies of almost all the other countries, is in the recession and this has also caused the decrease in revenues. Estonia is a small country and irrespective of the reserves accumulated during the years of economic growth, it is impossible to incur expenditures in the same manner as earlier based on the current revenue base.
The state has decreased the expenditures of the state budget this year and has searched for solutions from the revenue side twice. The state budget has been planned with a deficit from the very beginning, which means that the state revenues of the current year form less than the planned expenditures.
Figure 2. State Budget Volume in 2009
| State budget for 2009 | Along with Supplementary Budget 1 | Along with Supplementary Budget 2 | |
| Revenues (billions of EEK) | 97,8 | 88,2 | 85,1 |
| Expenditures (billions of EEK) | 98,4 | 91,9 | 89,3 |
NB! The Maastricht criteria take into account the general government deficit which is considerably more extensive than the central government position. In addition to the state budget, the general government includes the Health Insurance Fund, Unemployment Insurance Fund, local governments, state foundations, etc.
Within 2009 the general government budget position has been improved a total of EEK 16.1 billion (7.3 percent of the GDP).
Savings
Operating expenses are decreased all over the state in the amount of EEK 613.4 million, incl. personnel expenses of EEK 288.2 million and management costs of EEK 325.2 million. Compared with the budget of 2008, operating expenses have decreased by a total of EEK 1.865 billion or 10.6%. Personnel expenses have decreased by EEK 955.6 million or 9.6% and management costs by EEK 909.9 million or more than 12%.
Provisions decrease by a total of EEK 1.929 billion and most of arises from the temporary suspension of contributions to mandatory funded pension. In addition to the above, provisions decrease by another EEK 520.7 million mostly on account of the activity support.
Investments decline by a total of EEK 54.2 million, incl. investment aid of EEK 51 million. The major part of the cut is formed of the decrease in the support assigned to the construction of the Narva bridge (EEK 50 million).
The major decline in budgetary expenditures were made in the Ministry of Finance (EEK 1.440 billion), Ministry of Defence (EEK 187.4 million), Ministry of Culture (EEK 123.6 million), Ministry of the Interior (EEK 251.2 million) and Ministry of Social Affairs (EEK 182.8 million).
The greatest decreases in expenditures were the following:
- state contributions to the funded pension in a total of EEK 1.408 billion;
- expenditures of the state health insurance of the Health Insurance Fund in a total of EEK 376.4 million;
- decrease in defence expenditures in a total of EEK 187.4 million;
- decrease in expenses on renovation of the Narva bridge in a total of EEK 50 million;
- state-commissioned education to universities in a total of EEK 45.3 million;
- provisions to local governments, incl. educational costs, expenses of school lunch, subsistence benefits, funds for provision of social benefits and services, local government revenue base stabilisation support and supplementary payments to rural municipalities of islands and rural municipalities which include small islands in a total of EEK 36.8 million;
- decrease in expenditures intended for the purchase of land in a total of EEK 35.5 million;
- decrease in management costs of custodial institutions by EEK 30 million;
- decrease in death grant in a total of EEK 20 million.
Changes in Revenues
Taking into account the changes to be made by Supplementary Budget 2, the expected tax receipt of 2009 is EEK 63.4 billion and the expected non-tax revenues form EEK 21.6 billion. The total expected revenue of the state budget for 2009 is EEK 85.1 billion. In comparison with the State Budget Act for 2009 adopted in autumn, the state budget revenues have been decreased by a total of 13.1% under Supplementary Budget 2.
Figure 3. Major Tax Changes
| Substance of the change | Impact on budget position of 2009 | Impact on price of goods | Impact on inflation* | |
| 2009 | 2010 | |||
| Value added tax, the tax rate increase from 18% to 20%As from 01.07.2009 | EEK 800 million | 1,7% | 0,81% | 0,81% |
| Fuel excise duty, excise duty rate increase by 10.8–12%As from 01.07.2009 | EEK 175 million | 2,3% | 0,15% | 0,15% |
| Natural gas excise duty, excise duty rate increase from EEK 157 to EEK 367 per 1,000 m3As from 01.07.2009 | EEK 45 million | 3,7% | 0,05%** | 0,05%** |
| Change in environmental charges. ***As from 1.01.2010 | – | 0% | -0,04% | |
* Irrespective of the inflationary impact accompanying the tax increases, the consumer prices continue to decrease, therefore these changes do not endanger the compliance with the Maastricht criteria.
** Including impact on inflation through appreciation of heat.
*** Electricity production environmental charges decrease in 2010, wherefore the impact on the CPI is negative.
Review of Tax Changes Related to Supplementary Budget 2
In connection with the Second Supplementary Budget, the Value Added Tax Act, Alcohol, Tobacco, Fuel and Electricity Excise Duty Act were also amended. In terms of time the amendments are as follows.
Changes from July 1st 2009
1) value added tax rate is raised from 18 percent to 20 percent, reduced rate remains 9 percent;
2) fuel excise duty rates are raised by 10–12%:
new excise duty rate of unleaded petrol is EEK 6,228 per 1,000 litres (formerly EEK 5,620);
new excise duty rate of diesel fuel is EEK 5,787 per 1,000 litres (formerly EEK 5,165);
new excise duty rate of diesel fuel for specific purposes and light fuel oil is EEK 1,056 per 1,000 litres (formerly EEK 960);
excise duty rate of natural gas increases to EEK 367 per 1,000 m3 (formerly EEK 157);
3) the quantities of tobacco products exempt from excise duty brought by a traveller into Estonia from outside the EC territory are reduced as follows:
from 1 July 40 cigarettes instead of 200 cigarettes and 50 grams of smoking tobacco and chewing tobacco instead of 250 gram may be brought into Estonia;
4) cigarettes, the revenue stamps subject to fastening on the sales packaging of which have been issued by the Tax and Customs Board prior to 1 July 2009, may be transferred at a price which is higher by the increase of the value added tax which is up to 1.7 percent of the maximum retail price until 30 September 2009.
Changes from January 1st 2010
1) excise duty rate of cigarettes is raised by 5%:
the new fixed rate is EEK 525 and the proportional rate is 33 percent of the maximum retail price of cigarettes (the current rate is EEK 500 and 31%);
2) a requirement of a minimum amount of excise duty to be paid on cigarettes is established:
excise duty of at least EEK 1,001.40 per 1,000 cigarettes must be paid on cigarettes;
3) the volume of the sales packaging of strong alcoholic beverages subject to revenue stamping decreases from 0.2 litres to 0.05 litres:
alcohol in a sales packaging of 0.05 litres to 0.2 litres (0.2 excluded) released for consumption prior to 1 January 2010 may be sold without revenue stamping until 31 January 2010;
5) the requirement of revenue stamping for alcohol which is a medicinal product within the meaning of the Medicinal Products Act is declared invalid.
Source: fin.ee
Estonian Ministry of Finance
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Brilliant Fixer reports on the Estonian economy 