Banker emphasised to the parliament the importance of a balanced budget

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

Estonian current account was in deficit in February

The flash estimate1 put the Estonian current account at 42 million euros in deficit in February 2016. This was mainly because the deficit on the goods account was larger than in February 2015. Although exports of goods were some 2.5% up on a year earlier, imports were up 5.6% over the same period. The small increase in the surplus on the services account was not enough to offset the deficit on the goods account. Total spending by Estonian residents on foreign travel in February was more than spending by non-residents visiting Estonia, meaning that the balance on the travel services account was negative. Flows of transport services declined further, while exports of all other services increased and imports fell. The positive balance on the capital account meant that the total of the current and capital accounts was positive, which was not the case in January.

Eesti Pank is publishing the flash estimate of the balance of payments monthly for the last month but one. Eesti Pank will publish the balance of payments for 2016 on 9 June 2016.

1 The quarterly balance of payments is compiled from a combined system of representative primary data sources, including surveys of companies, while the monthly balance of payments draws from a considerably smaller database. Although the monthly report uses as much data available for the month reported as possible, including administrative data sources and reports on international payments, it is subjective to a certain degree, which is why it is called an estimate. Once the quarterly balance of payments is released, the monthly balances of payments are adjusted accordingly.

Source: Bank of Estonia (see graph here)

Estonian gross debt level is 9.7 pct of GDP

According to the preliminary data of Statistics Estonia, in 2015, the Estonian general government surplus was 0.4% and the gross debt level was 9.7% of the gross domestic product.

At the end of 2015, the total revenues of the general government exceeded the expenditures by 84.1 million euros, accounted as the Maastricht deficit criteria. By the end of 2015, the surplus of revenues of the central government sub-sector was 12.7 million euros. The consolidated budget of the local government sector was 47.6 million euros in surplus. The budget surplus of social security funds was 23.9 million euros, which is considerably smaller than in previous years.

The consolidated debt of the general government (Maastricht debt) amounted to 2 billion euros by the end of 2015, having fallen 4% compared to 2014. The local governments as well as the central government contributed to the fall of the debt level. At the end of 2015, the debt of the central government sub-sector totalled 1.4 billion euros and the local governments’ debt accounted for 0.7 billion euros. As in previous periods, social security funds did not contribute to the debt of the general government sector.

The loan liabilities of the central government decreased by 4% and the volume of long-term securities issued by the public-legal institutions and foundations belonging to the central government decreased by 6%. The share of foreign debt in the central government’s loan liabilities was 85%.

The Estonian involvement in the European temporary rescue mechanism, EFSF (European Financial Stability Facility) decreased by 30 million euros in 2015. At the end of 2015, liabilities towards the EFSF totalled 454.6 million euros, 79% of which went for the participation in the rescue package for Greece, 12% for Portugal and 9% for Ireland.

The overall debt level of the local governments fell by a little over 3% compared to 2014. While the volume of long-term securities decreased by nearly one-fifth over the year, the liabilities of short-term as well as long-term loans increased. Liabilities towards the rest of the world accounted for nearly 22% of the local governments’ debt.Diagram: Surplus/deficit and debt level of the general government in Estonia, 2007–2015

In Estonia, the general government sector comprises three sub-sectors: 1) central government (state budget 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).

Source: Statistics Estonia

The current account surplus was 1.9 pct of GDP in 2015

The current account of the Estonian balance of payment was in surplus in 2015 by 394 million euros, or 1.9% of GDP, making it nearly twice as large as in 2014. The growth in the surplus was driven mainly by reductions of 16% in the deficit on the goods account and of 14% in the deficit on the primary income account, which reflects labour and investment income. The balance of the goods and services account was in surplus by 820 million euros as exports of goods and services fell by 3% and imports by 4%.

The goods account deficit was 837 million euros, and narrowed mainly because imports of goods fell by 5% while exports fell at a slower 4%. The decline in both exports and imports was driven primarily by machinery and equipment and mineral products. Imports of goods crossing the Estonian border were 1.1 billion euros larger than exports going the other way. Estonian merchants earned 260 million euros from the intermediation of goods in third countries. The turnover of goods under merchanting was 17% of the total turnover of the goods account of the balance of payments, which is the same as last year.

The services surplus was only 1% below the record set in 2014 and stood at 1.7 billion euros. There was no particular change in the volumes of exports and imports. Sales abroad of most services were larger than the volumes bought in, and the reduction in the surplus for some types of service was balanced out by an increase in the surplus for other types. As people from Estonia travelled abroad more, the surplus on travel services decreased. A smaller volume of construction services was imported though, so the surplus on the construction services account increased. The surplus on the telecommunications, computer and information services account also increased, while that on the transport account shrank. About 60% of the services surplus came from travel, transport and other business services, down from 75% in 2014.

The net outflow from investment and other income1 was 427 million euros, or about 10% less than in the previous year. This was mainly because the inflow of income from portfolio and other investment increased while the outflow of direct investment income remained roughly the same. The direct investment income from Estonia for non-residents and the direct investment income from abroad of residents both declined. There was a preference for withdrawing earned income as dividends, meaning that reinvested income was smaller. Somewhat more was received from the European Union institutions in production subsidies than in 2014, but payments into the EU budget also increased. The net inflow of labour income remained at the same level as last year.

The surplus on the capital account almost doubled to 404 million euros. The growth came because more emissions quotas were sold than were bought in 2015, after more had been bought than sold in 2014. The volume of capital transfers, which are mainly investment support from the European Union Structural Funds, remained the same.

The net total of the current and capital accounts, or net lending (+) or borrowing (-), saw a surplus of 798 million euros. This means that the Estonian economy was again a net lender to other countries. A more detailed presentation of the statistics on foreign financing can be found on the Eesti Pank website http://www.eestipank.ee/.

1 Net flow is inflow minus outflow. If the inflow exceeds the outflow, there is a net inflow, if the outflow exceeds the inflow there is a net outflow.

Current account, % of GDP

Net lending (+) and net borrowing (-) / total current and capital account, % of GDP

See better graph from the website of the Bank of Estonia

The current account was in deficit in January

The flash estimate1 put the Estonian current account at 55 million euros in deficit in January 2016. This was mainly because the deficit on the goods account was larger than in January 2015. Exports of goods were some 9% down on a year earlier, while imports were up 2.4% over the same period. One factor affecting imports of goods was the acquisition of fuel stocks, as it was known that excise on fuel was due to rise. Exports of services increased, while imports were at the same level as in January 2015. Flows of transport services declined, while exports and imports of all other services increased. Even though the capital account balance was positive, the total of the current and capital accounts was negative. This means that the Estonian economy was a net borrower from the rest of the world, so the country as a whole received more funds from abroad than it invested there.

Eesti Pank is publishing the flash estimate of the balance of payments monthly for the last month but one. Eesti Pank will publish the balance of payments for 2016 on 9 March 2016.


The quarterly balance of payments is compiled from a combined system of representative primary data sources, including surveys of companies, while the monthly balance of payments draws from a considerably smaller database. Although the monthly report uses as much data available for the month reported as possible, including administrative data sources and reports on international payments, it is subjective to a certain degree, which is why it is called an estimate. Once the quarterly balance of payments is released, the monthly balances of payments are adjusted accordingly.

Source: Bank of Estonia (see better graph here)

The minimum voting age in local polls will be 16 years

A bill of amendments to the local council election law and related laws aimed at lowering the minimum voting age in local polls to 16 years passed its third and final reading in the Estonian parliament on Thursday.

The bill initiated by the parliamentary constitutional affairs committee was passed with votes 55 to 30 and four abstentions.

The Local Government Council Election Act had to be changed to bring it into line with a constitutional amendment that stepped into effect in August 2015, which reduced the voting age in local elections from 18 years to 16 years.

According to the amendment persons who have turned 16 by the day of the election will have the right to vote in the election of the council of the municipality they reside in.

The bill failed to pass last November, falling two votes short of the required majority of 51.

Source: Baltic News Service via Estonian Review

The Government gave an overview of the activities of 2015

On Dec.16, 2015 Prime Minister Taavi Rõivas, Minister of Health and Labour Jevgeni Ossinovski and Minister of Social Protection Margus Tsahkna gave an overview of carrying out the Government’s activity programme in 2015.

The Government’s priorities are strengthening Estonia’s security, promoting economic growth and reducing labour-related taxes, improvement of the subsistence of low-paid workers and developing an environment that supports childbirths, state and local administration reform and developing peripheries and preparing for the presidency of the European Union and carrying it out successfully.

To ensure security Estonia will continue keeping defence expenditure on the level of 2% of GDP, to which the expenses related to receiving allies are added. The Government has continued strengthening independent defence capabilities as planned and applied for the strengthening of NATO’s deterrence posture and increasing the presence of allies.

Several defence infrastructure objects have been completed this year: the NATO headquarters were opened in June and in February the Government made a principled decision to allocate 40.6 million euros over five years for the construction of infrastructure promoting the presence of allies and to allocate this money in addition to the 2% defence budget. Estonia also contributes to strengthening security internationally – we have supported the reducing of instability caused by Syria’s civil war, fight against the refugee crisis and terrorism. For example a police mission unit was sent to Slovenia and in May a team-size unit of the Defence Forces went to Lebanon.

To increase internal safety and ensure public order the salary fund of the police, officials of the rescue service and other internal security employees will be increased by 4% next year. The border line of the Estonian-Russian border was cleaned and the first border post has been placed there. In addition the Narva border point has been renovated and the renewed Narva-2 border point will also soon be opened. The Government also presented the Estonian-Russian border treaty to the Parliament for ratification.

To accelerate economic growth the Government reduced labour force taxation, which helps to increase competitiveness by shifting the tax burden more on the taxation of goods damaging health and polluting the environment. The Government reduced the rate of social tax from the current 33 per cent to 32 per cent by 2018. Tax exempt income will increase to 205 euros per month during the next four years, thereat to 170 euros in 2016. The additional basic exemption applicable to pension will continue to increase so that the average pension will remain exempt from tax.

To promote economic growth the Prime Minister has called an economic development working group consisting of experts and the Team Estonia cooperation platform is being created to improve the export capacity of Estonian companies and attract foreign investments into Estonia. The Government also simplified the opportunities for applying for e-residency.

A 5 million euro support measure for areas of growth was opened for enterprises to increase the productivity of enterprises and support export capacity. The availability of growth companies capital is improved by a 7 million euro support measure to accelerate start-up enterprise, i.e. Startup Estonia.

The work ability reform launching next year will bring more workers to the labour market and gives and opportunity to be necessary for the society. To increase the subsistence of low-paid workers the Government will launch a repayment system from 1 January 2016. Depending on the structure of income and tax exemptions the support is a maximum of 59 euros per month from 2017. In addition to increase social security from 2016 the subsistence level is 130 euros per month. The Government also agreed on the principles of the support scheme for pensioners living alone.

To improve the subsistence of families with children the Government decided to increase child support to 60 euros by 2019. From 1 July 2017 the benefit for large families will come into force for families with three or more children. The Government also approved the amendment, with which the housing benefit programme for large families will be extended to families with at least three children.

Launching the state reform is the first specific response to the forecast of population decline. To carry out the state and local administration reform the Government has agreed on the principles of the reform and the merging criteria of local governments. The content of the state reform is making principled choices on which activities, services and tasks to do differently compared to so far, what to do less in order to direct more resources into more important areas at its expense.

To reduce the volume of the Government, decisions have been taken in 2015 for structural reorganisation of the authorities of the government sector, consolidation of support services, increasing the efficiency of the Government and administrative arrangement, converting to an accrual-based budget and introducing spending review.

For the Estonian presidency of the European Union taking place in 2018 a supplemented preparation activity plan, Estonia’s European Union policy for 2015-2019 and a list of potential managers, who will represent Estonia in the leading positions of the negotiations of the EU Council have been approved.

Report of the Government’s activity programme (in Estonian): https://valitsus.ee/sites/default/files/content-editors/arengukavad/vali… (PDF)

Source: GOVERNMENT COMMUNICATION UNIT via Estonian Review

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