Five billion gone already

Ardo Hillar Hansson is an Estonian economist. He was the Governor of Bank of Estonia from 2012 to 2019. Photo: Madis Veltman

The state has already borrowed €2.8 billion to alleviate the effects of the coronavirus crisis, while the government is aiming to borrow a total of €5 billion over two years. A part of the money has already been spent, with various parties debating how to use the billions still to be borrowed. The government has turned to a council of experts that includes former central bank governor Ardo Hansson who says that all €5 billion will be spent on things that have already been decided.

Hansson warns against mounting deficit as the state seems to lack a plan for returning to black at this time. Things are especially mournful as concerns Estonia’s strategy for exiting the crisis that is still in the making.

Ardo Hansson, what is the first piece of good news?

It surprised me that the government approached experts in the first place. A year ago, it seemed they do not care about the opinion of experts.

What is your opinion of how the government has handled the crisis so far?

First, I would mention three successes. The labor market measure (that was launched quickly and was aimed squarely at maintaining jobs), an accommodating tax board (whereas we can ask whether tax discipline will be restored as easily) and finally, reopening of borders.

Failures include KredEx measures that came too late, as well as massive direct support for agriculture that is not directly tied to the coronavirus and the decision to cut the excise duty on diesel fuel. Lobbying efforts shone through there. I would also not have frozen state payments to people’s second pension pillar as it will become a future obligation, even though it makes things easier on the budget today.

An economic crisis can be compared to a disease. First comes the acute phase, which is when resuscitation and an oxygen mask are in order, alongside potent painkillers. Next, the patient starts feeling better and is put on the road to recovery, while the person eventually recovers and tries to live in a way as to avoid falling ill again. I believe we are entering the second phase now where direct intervention could be dialed back.

The Estonian economy largely depends on the foreign environment that we cannot change.

The recent Bank of Estonia analysis suggests that two-thirds of our recession this year came from foreign effects. Foreign demand dwindling is like an unfortunate weather forecast – there is nothing you can do about it. That is why it does not pay to overstimulate the domestic economy. If you go overboard, you create new problems. We cannot just start throwing money around every time there’s a protest. We cannot dig our deficit too deep as we seem to lack a plan for returning to black at this point.

It is not about loan burden yet. Estonia has room to borrow so to speak. However, if we get used to overspending and lack political will to reverse these processes, we will forever be in deficit.

I hope that if we can keep the healthcare side of things under control, other things will get sorted out.

What baffled you when you analyzed the situation?

I was shocked by how much treatment of various social groups differed at the start of the crisis. It was party time in the public sector that even saw wage hikes, while private companies, including the media, were forced to cut salaries by 30 percent and lay people off. If at first some felt the pain especially acutely, we are all hurting a little today.

Rather, we should turn to general measures for livening up the economy for the next few years, with targeted support only aimed at companies where lesions develop.

What will happen in terms of taxes?

Things are complicated when it comes to taxes. Once lowered, a tax is very difficult to hike again. The democratic process leads to temporary measures becoming permanent ones. That is why cutting costs is easier.

The tax burden needs to grow in the future as there are no free lunches. Borrowing first and thinking about how to repay that loan second is highly risky. The economy has a certain absorption rate. Investing without analyzing the results equals squandering.

Other EU member states are also debating generous loans at present. Germany is stimulating its economy in great volume.

Germany has maintained a very conservative line, which is why they have considerable reserves and find such operations easier. However, regarding a lot of big spenders, we are discussing bailing them out of trouble. Estonia finds itself in a better situation, courtesy of our previously sensible policy. This proves that the conservative approach pays off in finance.

Many have plans for how to spend these €5 billion – Bigbank would construct Disneyland, while Kristina Kallas has proposed creating a digital school. What would be your bid?

As I see it, those €5 billion will be used to pay for things for which decisions already exist. Four billion will be spent on additional economic measures for this year and next, while deficit in the 2021 state budget will swallow the remaining €1 billion and that will be that! We could say the five billion ship has already sailed.

I’m a little afraid of rehashing old ideas under the coronavirus aegis. For example, the fuel excise duty cut. There are politicians, officials and lobbyists who will always be interested in things like that.

Unfortunately, the European Union’s package looks to be the same in places. The green and digital turns are necessary things, but tying them to the coronavirus… If we need to invest in order to maintain employment, that is how they should put it. Investing in the green turn will not pay off for years.

Who could say where we will be in five years’ time? We are waiting for the fall of the century.

Because we are not dealing with a natural disaster to physically destroy capital, shopping centers will reopen and buses will return to schedule. The core premise is for us to learn how to live with the virus. While the recovery will be arduous, there will be a recovery.