Governor of Eesti Pank Ardo Hansson told the Riigikogu on May 3, 2016 that the Estonian government has acted correctly by keeping its budget in balance, as now is not the time from the economy’s perspective to increase spending significantly.
He explained that the central bank does not give an opinion on the total amount of income and expenditure in the state budget, nor on how the spending is shared out. “As a central bank we cannot say whether it is right or wrong for the government to spend its money on one thing or another. We talk about balance under the present circumstances, as we see that there are tensions in the labour market. We do not see any reason right now to start a wider stimulus of the economy given that several companies are already on the limit of profitability. If wages start to rise a lot faster than productivity, companies may start to go bankrupt at some point. Eesti Pank considers it more important to focus on structural reforms that would give a more solid foundation for faster wage growth”.
Governor Hansson said that it was necessary when planning the budget to assess whether the Estonian economy is in recession. “Estonia could spend and borrow more if all the economic indicators were showing that the economy is in recession. Right now the messages from those indicators are quite contradictory. Looking only at the speed of economic growth, it appears that growth is quite slow. In contrast, the labour market is overheated, and if you ask businesses where they see tight spots, most of the discussion is centred around labour shortages. By increasing government spending we would be adding fuel and stoking an already overheated labour market.”
He noted that the state fiscal position has in some ways been surprisingly strong as there has been a rapid rise in tax revenues, which make up a large part of the state’s income. “Value added tax and labour tax revenues have grown rapidly as wages have risen and retail sales have gone up fast. Things will be harder in future because we will receive less money from the European Union as we become richer, while our demographic situation will become worse, needing us to spend more on pensions and healthcare while there are fewer employees paying taxes. Looking at both the short term and the long term, now is not the right time to start spending more money”.
Source: Bank of Estonia
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