New budget head sees trouble ahead in economy of Estonia

Photo: Mihkel Maripuu

As Estonia's veteran budget watchdog Andrus Säälik assumed post as permanent Estonian adviser at OECD in Paris, his chair in September was filled by Sven Kirsipuu with 18 years at finance ministry under his belt. Tomorrow, state budget undergoes its first reading at Riigikogu. To mark the occasion, we thought we'd ask him how Estonian economy is doing? 

- Sven Kirsipuu, how comfortable in times like these to head Estonian budget policy?

It’s never been comfortable, while we can’t directly compare it with 2009–2010 when work with the budget went morning till night. Compared to that, it is definitely easier now. But, then, it is a bit different with the budget, every year. Some years, there’s more work with tax policy changes. This year, there was less of that, as it was decided that while the budget is proceeded in the fall, tax amendments would not be enforced starting New Year. They will take more time. But then we have other issues.

- And these are?

Generally speaking, that the wishes are greater than what’s available. Not surprisingly, the ministries will never fail to substantiate where they need more money than others. Which is totally normal as every ministry is pursuing the policy of its domain, in a way. The finance ministry must be mean and set some limits. We must explain why the limits, and at times this is difficult.

-This year, the budget committee judged the state budget rather critically. They raised the issue whether the revenues have been calculated overly optimistically. That true?

We look into the revenues as we do the financial forecast. Definitely, finance ministry needs to be rather conservative. In some ways, it is indeed a matter of debate where we are with our economy – are we already overheating, or below our potential. On that hangs whether we keep a nominal deficit or surplus. The committee was cautious that we might be overheating already. But as this is difficult to assess, we cannot do much with mere assumptions. We cannot build a budget on assumptions. When comparing the base scenario with other forecasters, doesn’t look like too much optimism.

On the other hand, we do not want to be overly conservative, as then they will say we are hiding money. And the economy cannot be overly cooled either, if there is no actual need. This is seeking the balance. Endlessly we might debate whether foreign demand will be restored or not, next year. When it comes to tax revenues, then beholding the wage and consumer forecasts we are the most conservative compared to others.

- This year, Tax Board showed good results: the updates worked and revenues were good. To what degree have the additional income been counted for next year?

We do not expect the effect to double every year, but the positive effect of the VAT declaration annex shows, this is measurable with a certain buffer. There’s no reason to believe the effect would disappear next year. We are not predicting some wild growth; rather, that the current €90m will increase in tempo with the usual consumption and economy. The additional input by Tax Board has not been reckoned into the budget. Rather, this is positive risk.

Same goes for company VAT and the one-off Swedbank dividends. We will naturally not assume that next year another bank will again pay extra large dividends. This is separated from the base, and we are talking about the usual dividends growth which, by the way, we have underpredicted every year. Indeed, this is very complicated to predict as profit forecasts are not enough. You may make a profit but you simply won’t pay it out, or opt to pay profits of former periods instead.  

- Currently, company profits are going down. May this mean that dividends may substantially shrink as well?

It may be so, but even in the tough years of 2011–2012 when we were exiting the crisis, the dividends actually grew faster than we expected. Companies have buffers to pay salaries. The problem is that the buffer is created on account of investments. The companies are not investing and that holds back economic growth. But the reason they do not invest is the lack of foreign demand.

Talking about long-term economic growth, one cannot run a marathon on one’s hands. When domestic consumption keeps the economy going but there is no external demand and no investments, this is surely not sustainable long-term. Thus, the issue is when will external demand be restored. If it is restored, investments will also be restored and entrepreneurs will have more money to enlarge the salary fund. If it is not restored near-term, the risk is that wage growth will slow down.

- What does the shrinking industrial production say about health of Estonian economy?

Well it reflects the selfsame weakness of external demand. I always laugh a little, inside, when I hear the debates about GDP growth going to be half percent up or down. Last year was an excellent example of that, when first half  growth was –1.4 percent and the doomsday preachers rejoiced. Now we know the total last year’s growth has been adjusted to +2.9 percent.

I say we do not know exactly where we are this year. At the moment, the statistics are so hard to interpret. It is one thing that the data was adjusted, but that serves to show that the indicators as such contain so much controversy. I am pretty sure that as we again look back the same time next year, we will again see some other figures which are different. So I would not dare to predict anything about this year, especially not about GDP. The more so, however, we need to take a look inside the numbers: what is the labour market doing, what are the various sectors doing. Here, there are definite trouble spots.

- Which?

Like the way labour market is going: is the wage growth sustainable? Will the correction come on account of employment, or of salaries? If indeed it does come.

Talking about long-term economic growth; as the working age population is shrinking, this is even technically cutting into our hopes of economic growth. The more so our input into growth ought to come from increased productivity of employees, or investments growth.

Our agriculture is definitely in trouble. In the big picture, the effect is not that heavy if we talk about the dairy sector and its 3 percent share in GDP, but the sector definitely is in trouble.  

So we have trouble spots here and there, but in the big picture I’d not dare say Estonian economy is outright drowning.

- They do talk about the self-fulfilling predictions i.e. as the state talks about signs of danger, the entrepreneurs will cease to invest and will begin putting money aside. That true?

Next to the base scenario, we always put out the risk scenario. But until the situation turns not obviously crazy, we will not go by that for the obvious reason that we would sow extra unpredictability saying this is likely especially while not really believing that. Being too conservative, the self-fulfilment would be coded into it.

On the one hand, there are the enterprises and their investments as they actually see the micro level better than we do; and private persons would also limit their consumption and begin saving more. Which would have a negative effect on economic growth in a situation where it is not needed.

- On what basis do you predict restoration of external demand for next year?

That would be the growth expectations of major export partners i.e. they themselves do expect their economic growth to be restored which would mean we would be able to export more into these nations. In a way, this is a random approach as their growth may not necessarily mean growth in the domain of our export in these nations. But it is the best comparison at our disposal. If these states would say they are going into decline, the picture would be different.

We have no better basis available, as then we would have to say we are wiser in these matters than the Swedes, Finns, Latvians and Russians put together, which we would never want to say.

Sven Kirsipuu (36)

Starting September 2015 – fiscal department head at finance ministry

December 2014 to August 2015 – financial adviser to Prime Minister

Since 1997 – various jobs at finance ministry

Education: Tallinn University of Technology economy faculty; in-service training at IMF