Borrowing should be capped at 20 percent of GDP

Marica Lillemets
, vanemtoimetaja
Deputy secretary general for the Ministry of Finance Dmitri Jegorov.
Deputy secretary general for the Ministry of Finance Dmitri Jegorov. Photo: Erik Prozes

Estonia’s strong financial situation means it is too early to lament public debt running away from us, Dmitri Jegorov, deputy secretary general for the Ministry of Finance, finds in an interview.

What’s the word from the tax receipt front? How have our people and companies fared so far?

Naturally, the month of June ended in the red in terms of the state budget. We missed about €90 million in revenue. Compared to the supplementary budget, however, we’ve done better than we initially feared. That said, we do not know what the second half-year will bring. Epidemiological forecasts are far more important than economic ones today.

We are counting on a 3 percent decline, meaning hundreds of millions of euros. VAT and fuel excise duty receipt missed the forecast by the widest margin. The labor market situation will deteriorate. Unemployment will probably reach 20 percent before coming down to 12 percent for the whole year. Problems will be created when Unemployment Insurance Fund measures run their course. Benefits are distorting the real picture today.

Turnover of companies fell by €1.3 billion in May alone. What about tax revenue?

This situation will not hold. Many businesses were closed in May, while restrictions have largely been lifted today. We forecast tax revenue to fall back to the level of 2017.

We will come to the next milestone in late August, early September. That is when we will put together the 2021 budget plan and renew forecasts. Everything could change should a second wave of the coronavirus hit.

Will borrowing change our economic policy? Will we become like Greece?

Ask one group of politicians and they’ll say our road to Greece has already been laid down for us, while others say we are far from it. The question is how to use loan money. Considering the fact our state finances are very strong, it is too early to ring out the bell. We should make sure not to allow loan burden to run away from us. We could cap it at 20 percent of GDP. The latter will grow in the long run that will also increase loan burden. In a controlled manner!

When will we see that debate?

The debate is ongoing. We needed rapid decisions in spring and they were made. There is no sense in waiting for a construction permit and authorization for use when the roof is on fire.

Minister of Finance Martin Helme (EKRE) sees no need to dial back spending and is taking advantage of Estonia’s capacity for borrowing. Greece also started somewhere. Experts should highlight the dangers more clearly.

If the public sector loan burden is low, it puts us in a better position on the international money market compared to our competitors so to speak. A high loan burden will make loans more expensive and it will be much harder to solve problems in future crises.

Once labor market instruments run their course, people will find themselves out of work and the state out of income tax revenue. It will be a serious blow for local governments.

Seasonal jobs will be the first to go. We will have exhausted the measures and funding by fall. The construction and industrial sectors have been filling old orders, but the situation will deteriorate. We will be taking these risks into account when putting together the supplementary budget.

Companies owed €400 million in taxes by June. The Tax Board will soon be looking to collect. How to restore the normal tax situation?

Tax discipline is working also when entrepreneurs turn to the board as soon as they see problems to negotiate a payment plan. It is rather commonplace today. Amendments have been made to allow the board to exempt companies from having to pay interest. The board’s website has an automatic solution for deferring the date of payment and offers tax behavior assessments. However, businessmen should not count on being able to simply walk away from a company owing tax arrears.