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

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Estonian Song and Dance Celebration 2014 (video)

Estonian Song and Dance Festival celebration

Estonian Song and Dance Festival celebration

The celebration of the Estonian Song and Dance Festival takes place July 4-6, 2014 in Tallinn.

Song and dance celebrations are an old and very important tradition for Estonia and Estonians (the first song celebration took place in 1869 and the first dance celebration in 1934) and these celebrations are nowadays held every five years. In 2003 our tradition of song and dance celebrations was entered to UNESCO’s List of Intangible Cultural Heritage.

Program – http://2014.laulupidu.ee/en/

Tickets are quickly sold out, so check out here – http://www.piletilevi.ee/eng/tickets/teater/muu/xxvi-laulu-ja-xix-tantsupidu-aja-puudutus-puudutuse-aeg-32425/

Pictures- http://2014.laulupidu.ee/en/gallery/

 

Check out the video here

Estonians love SUVs

In spite of the virtual recession, Estonians are buying more SUVs than in the boom times.

Among best-selling models, SUVs now take up four places out of five.

The top-selling SUV is Honda CR-V with 431 cars sold this year, followed by Toyota RAV4 (414 cars), Nissan Qashqai (242 cars), Skoda Octavia (202 cars, the only non-SUV in the top five), and Subaru Forester (188 cars).

Read more from BBN

Annual growth in housing loans remained at 1.6 pct in May

The total volume of loans and leases to Estonian companies and households was 2.4% larger in May than a year earlier.The loan and lease portfolio of the banks increased by 75 million euros over the month and stood at 15 billion euros at the end of the month.

The annual growth in the corporate loan and leasing portfolio rose to 3.6% in May. As in April, loan growth was fastest in agriculture and manufacturing. Although lending to real estate companies increased in May, repayments meant that their total loan and lease stock remained at its average of the past six months.

Annual growth in the housing loan portfolio remained at 1.6% last month. Growth in new loans slowed in May and 3% less was taken in new housing loans than in May last year. The stabilisation of the new lending volume indicates that the rapid growth seen in the real estate market in recent months has slowed to some extent.

Loan interest rates remained low in May. The average interest rate on long-term corporate loans was 2.8% in May, and that on housing loans was 2.6%. Low base interest rates mean that the rates on loans have been favourable for borrowers for some two years now. The interest margins of the banks have not changed by much during this year either.

The value of loans overdue by more than 60 days fell slightly in May. Such long-term overdue loans made up 1.8% of the loan portfolio at the end of the month. The stock of overdue loans may continue to shrink in the coming months as economic growth picks up, although the improvement in the loan portfolio has already happened to a large extent.

Annual growth in household deposits picked up to 8%. Deposits by households and companies increased during the month by 80 million euros to 9.4 billion euros. Two thirds of the increase came from corporate deposits.

Source: Bank of Estonia

Author: Jana Kask, Deputy Head of the Financial Stability Department of Eesti Pank

The Estonian Medical Association concerned about foreign practitioners

The Estonian Medical Association is worried that due to a misinterpretation of the Recognition of Foreign Professional Qualifications Act, several foreign doctors have made their way into Estonian hospitals and are practicing without having undergone a proper background check.

The association and several other professional bodies issued an appeal yesterday urging the Social Affairs Ministry to carry out a review of the legality of registration of the doctors.

The association has previously formally sought opinions from the Chancellor of Justice and the Ministry of Social Affairs on whether the Estonian Health Board has followed the rules on qualifications needed for foreign doctors to practice medicine here.

The problem involves the uncontrolled registration of doctors from third countries (outside the EU), which poses many other concerns such as language barriers and unknown medical history.

In accordance with the Chancellor of Justice’s decision in response to an April query from the association that the Health Board has made mistakes in determining vocational qualifications of foreign doctors, the Estonian Medical Association has also proposed that all medical staff hired from outside the European Union must present documentation to prove adequate local language skills.

“We ask the Health Board to present to the Medical Association and professional associations the following details on these doctors: name, doctor code, specialty, registration date, position in Estonia, the name of the institution that conferred specialist qualifications and duration of the training, duration of specialist work experience in the five years prior to registration and the grounds for registration,” the doctors said in their appeal.

Source: ERR News

Plan for Estonian, Finnish LNG gas terminals hits bump

Estonia and Finland have suffered a minor setback in their plans for proposed paired liquified gas terminals in both nations, linked by a pipeline.

Officials from both countries said that the European Commission raised some flags after companies involved in the project and its promoters presented their plan for the terminal project to a member of the European Commission in Tallinn on Wednesday. But neither country said they were ready to abandon the paired model.

“The plan is not sufficient yet,” Timo Tatar, director for energy projects at the Ministry of Economic Affairs and Communications, told ERR News.

“The companies involved in the project need to work further to create more synergies between them,” he said, referring to the structure of the ownership and the operation of the terminals.

“The companies are now negotiating between them to find those synergies, and then they will submit an amended proposal for the terminal project.”

A thumbs-up for the project is needed by the Commission for the plan, which would increase the energy diversification of the two nations, as it will rely heavily on EU subsidies. The estimates for the cost of the project is in the hundreds of millions of euros, perhaps around 1 billion after the cost of the pipeline is added in.

Read more from ERR News

Tax inspectors visit construction and service companies

Estonian companies in the construction and service have been warned of a blanket blitz where 77 inspectors will take to the field in July and August to make sure the companies are keeping proper records on employees.

A change is taking effect on July 1 where companies must now register all employees directly with the tax authority rather than the Health Insurance Fund.

Read more from ERR News