Estonian state budget strategy

The table below shows the revenue and expenditure of the general government by government levels and by components after the impact of fiscal policy measures.

Revenue and expenditure of the general government budget in 2020–2025

	2020	2020	2021	2022	2023	2024	2025
	million euros	% of GDP	% of GDP	% of GDP	% of GDP	% of GDP	% GDP
Budgetary positions by government levels
1. General government	-1305.0	-4.8	-6.0	-3.8	-3.2	-2.2	-1.7
2. Central government	-991.0	-3.6	-5.6	-3.8	-3.4	-2.4	-1.5
4. Local governments	5.6	0.0	0.0	-0.1	-0.1	-0.1	-0.2
5. Social security funds	-319.5	-1.2	-0.3	0.2	0.3	0.3	0.1
General government
6. Total revenues	10,928.4	40.2	41.7	40.2	40.1	39.4	38.9
7. Total expenditure	12,233.3	45.0	47.6	43.9	43.3	41.6	40.5
8. Budgetary position	-1305.0	-4.8	-6.0	-3.8	-3.2	-2.2	-1.7
9. interest expenditure	10.0	0.0	0.0	0.1	0.1	0.1	0.1
10. Primary balance	-1295.0	-4.8	-5.9	-3.7	-3.1	-2.1	-1.6
11. One-off and temporary measures	0.0	0.0	0.8	0.2	0.0	0.0	0.0
Revenue by components
12. Tax revenue (12=12a+12b+12c)	5,753.1	21.2	21.8	21.0	20.8	20.5	20.3
12a. Production and import taxes	3,651.2	13.4	13.5	13.3	13.4	13.1	12.7
12b. Income and wealth taxes	2,101.9	7.7	8.3	7.6	7.4	7.4	7.5
12c. Capital taxes	0	0	0	0	0	0	0
13. Social security contributions	3,564.6	13.1	13.3	12.4	12.4	12.4	12.4
14. Property income	150.5	0.6	0.4	0.4	0.4	0.5	0.6
15. Other revenue	1,460.2	5.4	6.1	6.4	6.5	6.0	5.6
16.=6. Total revenue	10,928.4	40.2	41.7	40.2	40.1	39.4	38.9
p.m.: Tax burden (D.2 (incl. paid to the EU)+D.5+D.611+D.91-D.995)	9,281.3	34.2	35.0	33.3	33.1	32.9	32.6
Expenditure by components
17. Compensation to employees + intermediate consumption	5,215.1	19.2	19.7	19.1	18.6	18.3	18.0
17a. Compensation to employees	3,451.2	12.7	12.6	12.3	12.1	12.1	11.9
17b. Interim consumption	1,764.0	6.5	7.1	6.8	6.5	6.3	6.0
18. Social transfers (18=18a+18b)	4,225.1	15.6	15.9	14.7	14.7	14.7	14.7
of which unemployment benefits	482.5	1.8	1.4	0.7	0.6	0.6	0.5
18a. Social transfers in kind	646.8	2.4	2.4	2.2	2.2	2.2	2.2
18b. Financial social transfers	3,578.3	13.2	13.5	12.4	12.5	12.5	12.5
19.=9. Interest expenditure	10.0	0.0	0.0	0.1	0.1	0.1	0.1
20. Subsidies	432.7	1.6	1.6	0.4	0.3	0.3	0.3
21. Total capital investment	1,553.8	5.7	6.6	6.4	6.8	6.1	5.5
22. Capital movement	193.3	0.7	1.1	0.9	1.4	0.8	0.6
23. Other expenses	603.3	2.2	2.6	2.5	1.4	1.3	1.3
24.=7. Total expenditure	12,233.3	45.0	47.6	43.9	43.3	41.6	40.5
p.m. General government’s consumption	5,928.6	21.8	22.4	20.3	19.9	19.5	19.3

Source: Statistics Estonia, Ministry of Finance.

General government expenses by government functions (COFOG) (% of GDP)

	COFOG code	2019	2020	2021	2022	2024
1. General government services	1	3.5	4.8	6.4	4.7	3.5
2. National defence	2	2.1	2.4	2.2	2.1	2.0
3. Public order and security	3	1.8	1.8	1.8	1.7	1.8
4. Economy	4	3.9	4.3	5.0	5.4	5.8
5. Environmental protection	5	0.7	0.7	0.7	0.7	0.7
6. Housing and utilities	6	0.4	0.4	0.4	0.4	0.4
7. Healthcare	7	5.3	7.3	7.7	6.9	6.3
8. Recreation, culture and religion	8	2.0	2.0	2.0	2.0	2.0
9. Education	9	6.0	6.3	6.2	5.8	5.0
10. Social protection	10	13.2	15.1	15.3	14.1	14.2
11. Total expenditure of the general government	TE	38.9	45.0	47.6	43.9	41.6

Sources: Statistics Estonia, Ministry of Finance.

Revenue and expenditure according to the forecast compiled by the Ministry of Finance in the spring of 2021, excluding budgetary policy decisions

	2020	2020	2021	2022	2023	2024	2025
million euros	% of GDP	% of GDP	% of GDP	% of GDP	% of GDP	% of GDP
Revenue forecast of the general government	10,928.4	40.2	41.7	40.1	40.3	39.6	39.1
Expenditure forecast of the general government	12,233.3	45.0	47.8	44.1	43.4	42.0	41.0

Source: Statistics Estonia, Ministry of Finance.

Read more from the Estonian Ministry of Finance-> State Budget Strategy 2022-2025 and Stability Programme 2021

General government budget is in deficit

According to the preliminary data of Statistics Estonia, in 2020, the Estonian general government deficit was 4.8% and the gross debt level was 18% of the gross domestic product. At the end of 2020, the general government consolidated expenditures exceeded the revenues by 1.3 billion euros.

In Estonia, the general government sector comprises three sub-sectors: central government, local governments and social security funds. According to Evelin Ahermaa, leading analyst at Statistics Estonia, last year, expenditures exceeded revenues both for central government and for social security funds; their deficits were respectively 991 and 320 million euros. “In 2020, the situation of the general government was considerably less favourable than the year before. The rapid growth in expenses was primarily due to coronavirus-related measures, such as support. In the case of local governments, however, revenues surpassed expenditures and their budget surplus was 5.6 million euros,” said Ahermaa.

The general government consolidated debt* (Maastricht debt) amounted to nearly 5 billion euros by the end of 2020. Maastricht debt doubled compared to 2019 and was at its highest of the last 20 years. At the same time, Estonia’s debt level is significantly lower than the upper limit of the Maastricht criterion. Both the central government and local government debt increased. Long-term loan liabilities grew by 38% year on year.

The central government consists of state budget units and extra-budgetary funds, foundations and legal entities governed by public law. The central government gross debt was 4.9 billion euros, of which 802 million euros were liabilities towards social security funds. The share of foreign debt, i.e. liabilities towards the rest of the world, in the central government’s loan liabilities increased to 66%. Foreign debt increased due to the issuance of long-term securities and loan taken from the Nordic Investment Bank. The volume of long-term securities of the central government increased substantially, totaling 1.5 billion euros at the end of the year. Short-term securities were also issued, and their volume at the end of the year was 425 million euros.

The local government sub-sector comprises city and rural municipality administrations with their subsidiary units and foundations. The sub-sector’s consolidated debt grew by 16% in 2020 compared to 2019 and was 876 million euros. The volume of long-term securities dropped by 17% and loan liabilities increased by 21% year on year.

Social security funds, i.e. the Estonian Health Insurance Fund and Estonian Unemployment Insurance, did not contribute to the general government debt.

Read more from Statistics Estonia

The Tree of Truth shows how Estonia is doing

Statistics Estonia and the Government Office presented a new web application called the Tree of Truth on October 17th, 2019. It is a gauge of important national indicators, giving a simple, honest and objective picture of how the country is doing.

Director General of Statistics Estonia Mart Mägi explained at the presentation of the new application that the need for such a tool became strongly evident last year when Statistics Estonia introduced sustainable development indicators. Contrary to expectations, the audience included very few members of the Riigikogu, who could take advantage of reliable and good quality information in decision‑making.

“Sorting through large amounts of data is often daunting and difficult. Coming to conclusions based on these data takes time. Often conclusions are not made or not used as much as they could be. The Tree of Truth shows the state’s goals and governance principles in a more understandable way,” said Mägi. The application can be used by public and private sector employees, but it is mostly meant for people who are interested in how the country is actually doing and wish to make informed decisions based on real data.

Henry Kattago, Director of the Government Office Strategy Unit, said that the comparisons visualised on the Tree of Truth are a good basis for planning strategic activities and analysing results currently and in the future. “The tree shows very clearly where we currently stand. It should become an important tool for making decisions and planning activities in specific domains,” said Kattago.

The Tree of Truth compares results using 135 measurable indicators included in the government action plan 2019–2023 (short-term goals), reform programme Estonia 2020 (medium-term goals) and the Estonian National Strategy on Sustainable Development Sustainable Estonia 21 (long-term goals). The tree displays data of 15 activity areas and the results are visible on either green, yellow or red leaves.

“Green leaves mean that the goal has been reached or we are on track. Yellow leaves signify that there is some progress to be made. Red leaves show that we have significant catch-up to do to achieve the desired goals,” Mägi explained.

The launch of the Tree of Truth took place today in Kadriorg next to one of the oldest oak trees in Estonia to symbolise how the data reflecting Estonia’s progress are now conveniently available in a tree-shaped application. Actor Priit Loog gave a speech and President Kersti Kaljulaid also addressed the audience.

Data in Tree of Truth are continuously updated. The application is available on Statistics Estonia’s website. Statistics Estonia is a government agency. Its main task is to provide objective information on the economic, demographic, social and environmental situation and trends in Estonia. The goal of Statistics Estonia is to become by 2022 the most effective and innovative producer of reliable and user-friendly statistics in Europe.

Source: Statistics Estonia

See more here – https://tamm.stat.ee/

Estonia’s state budget strategy

In the state budget strategy for the years from 2020-2023, the government of Estonia has set five priorities: family-friendly Estonia, a cohesive society, a knowledge-based economy, efficient governance, and a free and protected state. The strategy spells out specific activities and funding in order to achieve the government’s aims.

The budget for 2020 is forecast to be in nominal balance and moving toward a structural balance, with a structural deficit of 0.7 per cent of GDP. In 2021, the structural deficit will decline to 0.2 per cent and the budget is forecast to be in a nominal surplus.

General government debt will decrease both as a sum in euros and as a share of GDP. General government debt will decrease to 8 per cent of GDP in 2020 from 8.8 per cent in 2019. In absolute terms, government debt will decrease to 2.3 billion euros in 2020 from 2.4 billion euros this year.

The tax burden will remain stable at 33.2 per cent of the GDP over the next two years and is projected to fall to 32.7 per cent of the GDP in 2022.

Source: Estonian Ministry of Finance

2017 was the most successful since the economic crisis

• The economy was driven upwards mainly by a burst of growth in demand
• Increased investment is required for the economy to continue to succeed
• An increase in employment rather than in investment has brought the labour market very close to overheating

The year 2017 was a successful one for the Estonian economy. Growth climbed to almost 5%, having been stalled in previous years, and this is one of the fastest rates since the crisis. Growth was boosted by a notable recovery in export markets and faster rises in prices there. The economy also benefited from the rapid growth in the incomes of residents of Estonia, which was reflected in household consumption. Increased demand and a higher price level in both domestic and external markets allowed companies to increase both their turnover and their profits, for the first time in some years. Data on industrial output and from corporate surveys in recent months have shown the rapid growth in the economy continuing at the start of this year too.

Catching up with richer countries will need more investment than has been seen so far. Having fallen for several years, spending on fixed assets increased last year in both the corporate sector and the general government. The increase in general government investment was largely down to more efficient use of structural funds, while companies were encouraged to invest by the much improved state of foreign markets and the goal of increasing output to claim part of the growth in demand. Even so, Estonian companies put a smaller part of their value added into investment, the source of future growth in the economy, than did companies in the other countries of the euro area on average. This means there is still not enough investment activity for Estonia to catch up with the income levels of richer countries.

The labour market is very close to overheating as companies have preferred to increase their number of employees rather than making investments. Low unemployment, a rise in the number of unfilled vacancies, deepening labour shortages, and rapid growth in labour costs are all indicators that the strong growth last year was driven mainly by short-term growth in demand, not by increases in the production capacity of companies or in labour productivity. However, success in exporting and competitiveness and the overall development of the economy depend on productivity.

There has been no clear indication that the competitiveness of exports has declined because of rising wages and production costs.The market share of exported goods and services increased slightly last year and prices have risen more than those of competitors, which is one reason why the trade surplus increased last year. Surveys of exporters do not point to any decline in competitiveness either. However, given the small share that Estonian exports have in foreign markets, it is possible that success in exporting last year was mainly due to the favourable foreign environment and problems will only appear if demand weakens in Estonia’s trading partners.

The success of the economy was also reflected in the state finances. More was taken in VAT and labour taxes than was planned, though the budget for the year as a whole was in deficit and the deficit was larger than forecast. Outgoings exceeding income means that the state contributed to boosting growth in the economy alongside the private sector. Although the deficit was not large, a surplus in the budget instead would have helped to smooth the economic cycle. Forecasts show that growth in the economy will slow in the years ahead, but will still remain above its sustainable level. For this reason it would be wise to plan a surplus in the budget, so that in the longer term it would be possible to support the economy if needed without breaking the budget rules that have been set in place.

Source: Bank of Estonia

Central bank allocated a quarter of its profit to the state budget

• The central bank has allocated one quarter of last year’s profit, or 1.1 million euros, to the state budget
• Eesti Pank’s capital has increased by around 0.5 billion euros and the long-term goal is to increase its capital to 1.4 billion euros
• Eesti Pank’s share of the assets purchased by the central banks of the euro area for monetary policy purposes is 4 billion euros

The Supervisory Board of Eesti Pank decided on April 3, 2018 to accept the proposal of the Executive Board to transfer one quarter, or 1.1 million, of the 4.3 million euros it made in profit last year to the state budget. The Supervisory Board allocated 3.2 million euros of last year’s profit to increasing the capital of the central bank.

Since 1992 Eesti Pank has allocated a total of 149.8 million euros to the state budget.

Chair of the Supervisory Board Mart Laar said, “The long-term goal of the Supervisory Board is to create a large enough reserve that the central bank would be able to help the state if problems were to arise. The loose monetary policy of the euro area central banks of recent years and the large volume of assets that have been purchased in connection with it have increased the financial risks faced by Eesti Pank, and that risk is likely to increase in the years ahead”.

The ratio of Eesti Pank’s increased capital to the assets used for monetary policy is one of the lowest of any of the central banks of the euro area. The comparison with the other central banks of the euro area is important, as the balance of risks to capital of the central banks of the euro area and the European Central Bank as a whole is considered when joint monetary policy decisions are made.

For this reason the Supervisory Board set a long-term goal in 2012 of increasing Eesti Pank’s capital ratio to the average level of the central banks of the euro area. This means it is necessary to raise the level of capital from the current level of half a billion euros to 1.4 billion. The central banks of the euro area have purchased a total of 1.5 trillion euros of assets for monetary policy purposes and the income and risks from them are shared equally, and Eesti Pank’s share of that is 4 billion euros.

Eesti Pank received 32.7 million euros last year in income from the joint monetary policy and currency issuing of the Eurosystem, up from 30.5 million euros the year before. Eesti Pank’s operating expenses were 19.8 million euros last year, which was 2.1 million euros more than a year before.

The net income was reduced by a general risk provision of 7.5 million euros to cover risks, which was the same amount as last year. In the past five years Eesti Pank has built up a risk provision of 45 million euros in total. Risk provisions are the first line of defence against losses on top of the reserves already held at the central bank.

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Background
Risks to Eesti Pank in monetary policy
The risks to Eesti Pank under the currency board came from the investments of the central bank and from the banking system. When Eesti Pank became a euro area central bank, it also took on the risks of the joint activities of the euro area central banks, which mainly stem from monetary policy loans and asset purchases.

The euro area central banks divide the income and costs of the single monetary policy, so that the income earned from monetary policy loans to commercial banks, or the costs from them, is divided among the national central banks to match their participation in the European Central Bank. This participation is called the capital key of the European Central Bank, and since the start of 2015 Eesti Pank’s capital key has been 0.274%.

The total volume of assets bought by the central banks of the euro area in their monetary policy transactions stood at 3.2 trillion euros on 23 February this year. Of this, 1.5 trillion euros is in monetary policy assets where the risks and income are shared among the euro area central banks using the capital key. Eesti Pank’s share of all the assets purchased by the central banks of the euro area for monetary policy purposes is 4 billion euros

Hedging of monetary policy risks
To hedge against the risks of the monetary policy loans, the central banks of the Eurosystem have the right of claim against banks that have taken loans. The content of the collateral is the equity of the bank that has taken the loan. The euro area central banks only give out loans if collateral is provided, meaning that if the bank cannot pay back its loan to the central banks, then the central banks can instead take the collateral. If even this is not enough, the credit risks for the central banks are reduced by the national authorities and their desire to recapitalise their insolvent banks.

The SMP is backed by the promises of governments to meet all their obligations in full, meaning that if governments fail to meet their obligations fully or partially, including their obligations to the central banks of the euro area, then the euro area central banks suffer the loss.

The capital of central banks and its importance
In this case, the capital of Eesti Pank and the other central banks that is meant is the wider sense of the part of the reserves and capital that the bank can use to cover losses.

The level of capital of the central bank is important because a central bank that has little or negative capital can cause two sorts of public concern. The first is the question of the central bank’s independence, if the bank needs to ask the government for additional capital. The second is the question of how much the central bank really wants to meet its inflation targets, which will then cause increased public expectations of inflation. The result of both these concerns is a loss of trust and of public faith that the central bank will be able to keep inflation under control successfully.

Source: Bank of Estonia (Estonian central bank Eesti Pank)

General government continued in small deficit

According to the preliminary data of Statistics Estonia, in 2017, the Estonian general government deficit was 0.3% and the gross debt level was 9% of the gross domestic product.

At the end of 2017, the total expenditures of the general government exceeded the revenues by 66.1 million euros, accounted as the Maastricht deficit criteria. The central government as well as the local government sub-sectors ended the year in deficit. The budget surplus of social security funds increased to 58.9 million euros. By the end of 2017, the deficit of the central government sub-sector was 67.4 million euros and the consolidated budget of the local government sector was 57.6 million euros in deficit.

The consolidated debt of the general government (Maastricht debt) amounted to slightly over 2 billion euros by the end of 2017, having risen by 4% compared to 2016. The debt level increased in the local government as well as the central government sub-sectors. At the end of 2017, the debt of the central government sub-sector totalled 2.3 billion euros, of which 898 million euros were liabilities towards other sub-sectors.

The share of foreign debt in the central government’s loan liabilities was 49%. Long-term loan liabilities decreased by 3% year on year. The volume of long-term securities issued by the public legal institutions, foundations and enterprises belonging to the central government was 98.6 million euros and it increased by 83% compared to the previous year.

The overall debt level of the local government sub-sector increased by 7% compared to 2016 and stood at 0.8 billion euros at the end of 2017. The volume of long-term securities decreased by 1% and loan liabilities increased by 9% year on year. Liabilities towards the rest of the world accounted for 22% of the local government debt.

Social security funds did not contribute to the debt of the general government sector.

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).

Eurostat publishes the data on the preliminary debt and deficit levels of the Member States on 23 April 2018.

Source: Statistics Estonia

The current account surplus was boosted by services in November 2017

The flash estimate¹ put the Estonian current account at 53 million euros in surplus in November 2017. The surplus on the goods and services account was 97 million euros, which was 12 million euros more than a year earlier. Goods exports were up by 8% over the year and imports by 10%, and so the deficit on the goods account increased by 20 million euros over the year to 55 million euros. The surplus on the services account was 33 million euros larger than a year earlier at 152 million euros as services exports grew by 12% and imports by 7%. The net outflow of investment income and current transfers, or the primary and secondary income accounts, was the same as a year earlier at 44 million euros.

The current and capital accounts were in surplus by a total of 87 million euros, meaning that the Estonian economy was a net lender to the rest of the world, so the country as a whole invested more financial assets abroad than it received from there.

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 of the 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. For more on the principles used in compiling the flash estimate, see http://statistika.eestipank.ee/failid/mbo/kiir_mb_eng.html

Source: Bank of Estonia

Population of counties after administrative reform

Statistics Estonia recalculated the population of counties in 2017 according to the administrative division in place after this year’s local government elections.

After the administrative reform, 79 of the previous 213 municipalities remained. Of these, 28 had no change, but 10 former rural municipalities were divided between two or more municipalities. In the case of counties, there change was smaller. There are still 15 counties in Estonia, but the area and population of the majority of these have changed. The borders did not change for Hiiu, Saare and Viljandi counties. Harju county borders are also the same after the administrative reform, but compared to the beginning of the year, there is one village less in Harju county. After the administrative reform, Lääne county lost the most area.

Population increased the most in Tartu (+3,700), Pärnu (+3,600) and Võru (+2,900) counties and decreased the most in Lääne (-3,600), Ida-Viru (-3,500) and Põlva (-2,400) counties. The largest population share was lost by Lääne county (17%), followed by Põlva county (9%). In the new borders, the population increase was largest in Võru county (8%).

Read more from Statistics Estonia

The current account was close to balance in April 2017

The flash estimate¹ put the Estonian current account at 9 million euros in deficit in April 2017. The surplus on the goods and services account was 21 million euros, which was 16 million euros less than a year earlier. Goods exports were down by 3% over the year and imports by 1%, meaning the deficit on the goods account widened by 22 million euros to 109 million euros. One cause of the decline in foreign trade in April 2017 was that there were two fewer working days than in the previous April. The surplus on the services account was 130 million euros, which was 6 million euros more than at the same time a year earlier. Services exports grew by 8% and imports by 9%. The net outflow on the primary and secondary income accounts increased by 10 million euros to 30 million euros.

The current and capital accounts were in surplus by a total of 5 million euros in April, meaning Estonia was again a net lender to the rest of the world.

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