Fiscal deficit exceeded forecasts by more than €200 million in 2018 and 2019 despite repeated warnings from the Estonian Fiscal Council and rapid economic growth – annual tax revenue was growing by 9 percent on average, an overview by the National Audit Office suggests. The Ministry of Finance has had the greatest difficulty forecasting excise duty receipt and use of European Union subsidies.
The audit also found that costs supervision during the fiscal year is insufficient and creates the danger of deficit being noticed once it is already considerable.
“The way things stand today constitutes a critique of attitudes we saw for a time of 'reserves remaining idle needlessly' and calls to utilize them, or according to which Estonia can afford to borrow and should right now,” said Auditor General Janar Holm. “We can consider ourselves lucky that we still have some central government reserves left in the coronavirus crisis despite them having shrunk rapidly in recent years,” he said, adding that the need for responsible fiscal policy will only grow in the future.
Head of the Ministry of Finance’s fiscal policy department Raoul Lättemäe said the state shares the audit office’s concern for inaccurate forecasts regarding the use of foreign support and that the reason is known. “A part of construction and other tenders inevitably fail or become more expensive. Planned reforms are sometimes postponed, while mistakes are made when evaluating target groups. We plan to map out, analyze and find solutions for overly optimistic foreign support revenue forecasts,” he said.
The ministry gave as the reason for major forecasting mistakes the inability to evaluate the effects of alcohol excise duty changes in 2017 as border trade forecasts were a new factor. The audit office finds that risks of tax changes could not have been considerable as corresponding uncertainty was pointed out by the fiscal council that considered the forecast too optimistic.
According to Lättemäe, the fiscal monitoring process, border trade models and fiscal forecasts methodology have been made more effective. The forecast for last year’s alcohol excise duty reduction matching the actual situation serves as a good example of success.
The National Audit Office concludes that the government knowingly moved away from balanced fiscal policy even before the crisis. The state spent hundreds of millions more than it made in 2018 and 2019 – 208 and 220 million respectively. During years of rapid economic growth when tax revenue was growing by 9 percent a year, it was still not enough to cover costs. Fiscal deficit was allowed to mount, reserves shrank and the state often postponed decisions on whether it should contain growing expenses.
“The fiscal council, Bank of Estonia and experts kept repeating the mantra that money needs to be set aside for crisis years when times are good for years. Unfortunately, the government had no plan for bolstering reserves in recent years and major forecasting mistakes and the need to spend led to the reserves meting away instead,” Holm said. The central government deficit in the liquidity reserve grew by €180 million to €642 million, with unemployment and health insurance reserves the only things keeping it afloat.
Outlook remains poor
The first months of 2019 saw the Riigikogu elections campaign during which grand and expensive promises were made, while the finance ministry announced a bigger than expected fiscal deficit just days after the elections. The total gap between central government revenue and expenses had grown eight times compared to the forecast, with the deficit coming to €237 million instead of the €29 million planned. Only thanks to local governments, the Health Insurance Fund and Unemployment Insurance Fund the revenue of which exceeded expenses did final government sector deficit come to “just” €120 million.
Member of the Riigikogu Finance Committee, opposition Reform Party MP Aivar Sõerd said that state finances are poorly, while the government is under no obligation to improve the fiscal positions because of the coronavirus emergency situation.
“Things are even worse this year: revenue was adjusted down, while no one seems to be cutting costs, with ministries set to spend what they initially planned,” Sõerd said.
He believes tax receipt could fall below supplementary budget forecasts as VAT receipt for the first three months of the year is down 20 percent year-over-year, while the supplementary budget counted on a reduction of 6-7 percent.