The government started with bad budgetary news

In December all Estonia’s political parties signed the commitment to rise the funding of research to one percent of GDP. Photo: Sander Ilvest

The government reported yesterday that the budget strategy of the state for the next four years has been agreed upon. The two-week-long debate, which seemed time-consuming and hard, full of discussions lasting until late night, was finally completed yesterday.

It should be reminded that the government held a budgeting seminar in Vihula manor a week ago. The two days of debates seemingly brought no result as no new agreements were announced upon the completion of the seminar. The silence continued throughout the second half of the week. It lasted until the European parliament election results were made public in the first minute of Monday. Fourteen hours passed and the government announced the budget strategy agreement.

Even before the complete document with all its income and expenses columns has been made public, it is clear that the increased funding of research as promised by the Center Party, Isamaa and EKRE coalition, is not happening. There will be no extraordinary pension rise at least next year. On the other hand, the alcohol excise will be reduced by one quarter.

It was known earlier that the ministers mainly had to cut spending in order to balance the budget strategy. Yet the government has not revealed so far what and how much has been cut or whether new sources of income have been found.

The ministers’ decision to give up the rule agreed upon during Jüri Ratas’ first government, according to which the budget must maintain structural balance as the average of three years, shows that they may have failed to cover all the expenses. “The structural deficit will be reduced to 0.4 percent next year,” the government announced, thus admitting that the budget need not be balanced in 2020 either.

The promise to add funding to research was forgotten in five months

The government’s decision to retain the current level of funding of research and to postpone raising it to the promised one percent of GDP came as an unpleasant surprise to university rectors and brought a sense of being cheated.

It was as recently as in December as all Estonia’s political parties signed the commitment to rise the funding of research to one percent of GDP. The sole exception was EKRE, which considered the plan insufficiently ambitious and proposed two-percent funding.

“I believe that this promise and signing guarantee that once you give a word, you will keep it,” Prime Minister and Center Party chairman Jüri Ratas told the national broadcaster ERR back then.

Now as the new government has achieved first results in its budget debates, it has become clear that there is no money injection to be had within the next four years and the funding will remain at the current level of 0.7 percent of GDP.

“This is regrettable and unexpected and will place the universities financially in a very difficult situation. Support to higher education has not been increased for five years – we effectively have to provide quality outcome at the same level of funding as five years ago,” Tiit Land, the rector of the Tallinn University, commented, adding that the news was a disappointment. He said that they will now need to decide how to carry on and listed two possible options: to make cuts or bring back paid higher education.

The option of restoring tuition fee was also mentioned by Mait Klaasen, rector of the Estonian University of Life Sciences, who also admitted that the government’s decision made him feel cheated.

Mart Kalm, rector of the Estonian Academy of Arts, said that the news is regrettable and might harm the entire Estonian-language education. “Besides research, the funding of higher education should be increased as well. I cannot tell how much the teachers’ salary will be increased, but if it will remain the same, we shall certainly need to convene a crisis meeting at the academy and discuss which English-language curricula we have to open to earn some money. The state financing is insufficient and it is really depressing if we have to pay university lecturers the same wages as to secondary school teachers. I really regret having to reduce the share of Estonian-language education, but this is where the state education policy has been pushing us,” Kalm said.

Toomas Asser, rector of the University of Tartu, commented that this was hardly a statesmanlike way to act and expressed his dismay. From the university’s point of view this hits the hardest the future researchers and the work of research groups, Asser said. But the canceling of extra funding would also have wider consequences.

“Looking at the state, we have currently an economy of redistribution. There was a hope that we can turn it into research-based economy. Without the [extra] funding we shall continue with the national-level redistribution model,” Asser said.

Jaak Aaviksoo, rector of the Tallinn University of technology, admitted that they had already made some future plans based on the promise made in December, which are now under threat. “The worst problem is that existing agreements are changed unilaterally, without discussing it with the other party. This not just a matter of money, but also a matter of trust. Altogether a very bad practice,” Aaviksoo said.

Tarmo Soomere, president of the Academy of Sciences, said that the government’s decision is highly frustrating. “Apparently this demonstrates that the researchers, including the Academy of Sciences, have failed to explain it clear enough why they exist in Estonia and why they are necessary,” Soomere said.

Minister of Education and research Mailis Reps, who was in Sweden during yesterday’s budget strategy talks, said that she shares the rectors’ and researchers’ anger and still hopes to reach the one percent level. She said that the debates have discussed cuts in all spheres with education and research and national defense being the sole exceptions.

“There is some consolation in that research received 143 million euros so as to keep the funding at the present level, although I understand that all our hopes and expectations were and will be higher. The ambition is still there to reach the one-percent funding level. Hopefully it will be much closer in August when the budget forecast will be completed and we shall know the financial resources of the state for increasing the funding of science,” Reps said.

The government rolls back the budget rules

Since the state budget unexpectedly showed a large structural as well as nominal deficit, the troubled government made a clever decision to return to the requirement of balance so as to avoid the necessity of drafting budgets with surplus in the future.

When Ratas became the prime minister in autumn 2016 with the support of the Social Democrats and Isamaa, a fear emerged that the new government could make irresponsible loans. In order to alleviate the fears and show the government as more responsible than the previous ones, it was decided to amend the state budget act.

To put it simply, the earlier law did not permit planning the state budget with structural deficit, but it could run a deficit without much problems. For example – with the exception of the economic crisis years – the Estonian state budget during Andrus Ansip’s government ran a deficit in 2012–2013, both nominally and structurally. The reserves of the Unemployment Insurance Fund were included in the budget during that period precisely for the purpose of ensuring budget balance.

The amended state budget act passed during Ratas’ first government in summer 2017 allowed the government to plan budget with up to 0.5-percent structural deficit, but it had to be drafted with surplus in the following years. No previous government had that obligation.

Already back then it was seen as a threat for future government and dubbed a ticking budget bomb. The Reform Party in particular feared having to form the new government together with the obligation to fill the budget gaps left by the Center-Social Democrats-Isamaa rule.

However, Ratas unexpectedly became the prime minister once more and the budget ran serious deficit as unexpectedly. Ratas’ second government was essentially hoisted with its own petard as it had to draft cuts instead of keeping election promises so as to achieve budget surplus again. The need for making cuts already in 2019 became increasingly apparent.

This in turn would have been a painful blow to the newcomer EKRE, whose promises would have had to be cancelled. But Jüri Ratas, together with Isamaa chairman Helir-Valdor Seeder and EKRE’s leader Mart Helme, found a clever way to defuse the ticking bomb.

The government announced on Monday that it will amend the state budget act so that the budget will achieve structural balance in 2021 or immediately before the local elections. The annual balance requirement will come in force since then as well. Thus Ratas, Seeder and Helme achieved a respite for the government. On the other hand, this year’s structural deficit will be 0.9 percent of GDP, the largest since the crisis years of 2007–2009.

Pension rise depends on giving up the second pillar

When drafting the state budget strategy the government agreed that the old age pensioners’ income tax exemption will be increased by 50 euros and the extraordinary pension rise will be linked to making the second-pillar pension funds voluntary.

Prime Minister Jüri Ratas explained that the first half of the changes was motivated by the government’s desire to keep pensions income tax free.

“The tax-free income is currently 500 euros and the average old age pension amounts to 483 euros. According to forecasts the pension will increase to 517 euros next year. Therefore income tax would have been imposed on some pensions. We thus decided to increase the tax exemption for pensioners by 50 euros,” Ratas explained.

According to the Ministry of Finance, the amendment concerns 200,000 pensioners, 80,000 of whom are working. Total number of pensioners in 2018 was 375,649; therefore the amendment concerns more than half of pensioners.

The other part of the amendments concerns the coalition’s desire to realize the extraordinary pension rise.

“Making the second pillar voluntary would increase contribution to the first pillar, which is likely to partly meet the pension rise,” Ratas said.

The amount of the rise and its date are not yet known. “We shall look at it again in the autumn when we shall discuss the budget and view the bill being drafted by the ministries of Social Affairs and Finance,” Ratas said. The state contributes four percent of an employee’s gross salary to the second pillar; the total sum amounts to 300–400 million euros per year.

Helir-Valdor Seeder, chairman of Isamaa and initiator of the idea of voluntary second pillar, has previously said that if a person stops saving and withdraws the money from the pillar, the state would direct the four percent to the first pillar or the state pension.

The extraordinary pension increase will thus largely depend on how many people will decide to stop contributions to the voluntary second pillar, since the more there are such waivers, there more will there be money for pension rise.

Concerns over the alcohol excise

The government’s yesterday’s decision to reduce the excise tax on beer, cider and hard liquor by 25 percent staring from July 1 has caused a lot of excitement, since nothing like that has ever happened in Estonia.

Health experts had just expressed their satisfaction with Estonia’s residents consuming less alcohol last year as the horizon darkened. The Institute of Economic Research and the Ministry of Social Affairs presented yesterday the annual study of alcohol consumption showing that Estonia’s residents consumed an average 10.1 liters of absolute alcohol per capita last year. That was two percent less than in 2017.

Annika Veimer, director of the Institute for Health Development, said that when the accessibility of alcohol increases and its price declines, we must be prepared for increasing consumption once more. “Health damage and deaths will go along with it,” she said.

Lasse Lehis, tax expert and advisor of Minister of Finance Martin Helme, told Postimees last week that Estonia has no experience of lowering alcohol excise tax; therefore it cannot be predicted what would happen. For example, retailers could make loss dependent on the amount of their alcohol stock.

On the other hand, alcohol producers and vendors welcomed the news. “If the parliament should pass the law, Tallink promises to lower its prices immediately on July 1, 2019, when the first ferry departs,” said Paavo Nõgene, management board chairman of Tallink Group. Tarmo Noop, head of A. Le Coq, said that lowering of excise tax on light alcohol would restore the sales across the northern border and many residents would lose the motivation to buy beer in Latvia. But Noop also admitted that the excise tax reduction could boost the consumption of alcohol.