The cabinet has decided to relax the strict fiscal balance dogma of recent years. President of the Bank of Estonia Ardo Hansson perceives several dangers.
„It is opportunist and clearly only benefits the current government. Previous governments have set aside reserves for this one to use,“ he said. Hansson added that should this cast of mind persist, every future government can simply discard the fiscal balance rule to fulfill its election promises. „This will erode the foundation; it is a slippery slope,“ he added.
Hansson said that had the government really considered Estonia's fate in the long term, the amendment would have been made with a future perspective. „They could have said that we are not the ones to benefit from this, while it might prove useful for future governments.“
Minister of Finance Sven Sester announced yesterday that the government has decided to amend the state budget act to allow structural deficit in order to liven up the economy in the future. This would give the government use of 0.5 percent of GDP or €115 million for the purpose of taking loans with which to handle major investments: road construction, renovation of the Linnahall building in Tallinn, development of IT services etc.
„Looking at the current situation, the economy does not need fiscal stimulus. Employment is very high, salary advance is frantic. If we stimulate the economy further in this situation, we will see bubbles, and sectors will overheat,“ Hansson warned.
For example a decision to invest a lot of money in road construction would lead to salary advance in the sector. This would in turn hurt profits and through it investments.
„While some companies might experience growth, others will go bankrupt because they cannot keep up with the pace of salary hikes,“ the central bank manager said.
While Hansson believes national investments in major infrastructure objects are important, it is not something Estonia needs today. He said that the state needs to invest when there is a crisis, while last quarter figures suggest the economy is growing.
One of the authors of the new state budget act, deputy head of the finance ministry's fiscal department Sven Kirsipuu said that the aim of the amendment to allow deficit is first and foremost to balance the economy and render state investments more flexible.
The public servant gave an example. „Let us presume that you want to buy a refrigerator in December. And that you have a principle, according to which you can only use the money this year. However, when you reach the shop, it turns out they're out of fridges and will not have new stock until January. Will you decide not to buy the fridge because your principle does not allow you to use December's money in January?“ he asked.
Kirsipuu said that the example also applies to major national investments regarding which it doesn't matter whether they are made in December or January. „Summary investments are the same for the two-year period, while some annual displacement can cause a deficit in one of the years,“ he explained.
Kirsipuu said that it is merely a question of flexibility and not a case of living beyond one's means or saddling future generations with obligations. The new rules will simply see structural balance monitored over a longer period of time, as a four-year average. The principle that excess deficit during the fiscal year will have to be compensated for in the future will stand.
Concerning criticism that investing with loan money will lead to some sectors overheating, Kirsipuu admitted that it is something that needs to be discussed. He said that there have been very conflicting reports on whether the Estonian economy is in a crisis, recovering, or about to overheat.
„The OECD believes we are in a very deep crisis. The European Commission thinks we have a bubble. We find we are somewhere in between those things,“ Kirsipuu said.
The government sector budget has sported a surplus in recent years. The budget balance rule is in accordance with European fiscal rules. Amendments to the balance rule would concern the 2018 state budget and those of following years.
- Ardo Hansson
- bank of estonia
- european commission
- minister of finance
- state budget
- Sven Sester