New ruling coalition leaves a financial time bomb for future governments

Aivar Sõerd. Photo: Sander Ilvest

• They hope to manage this year thanks to increased taxes revenues.
• Borrowing is becoming more expensive.
• The new coalition accepts obligations for next governments.

The coalition agreement of the new government is not yet public, but the negotiators have already announced the most important issues they have agreed on. The agreements concern increased tax-free income, energy subsidies, compensation for nursing home places, family allowances and the Estonian-language school. It is a rather expensive agreement, which will increase the state's fixed costs not only for eight months, but also in the coming years.

Former minister of finance Aivar Sõerd (RE) said that hundreds of millions will be definitely added to the expenses side of the state budget, and despite the knowledge that in the coming years the budget will be permanently in a three percent deficit in relation to GDP.

“It is true that the amount of loan increase forecast in the spring may be smaller, as tax revenues have been better in the first half of the year, but we already have a big deficit this year. If these expenses come in the following years, it must be taken into account that we will have a deficit in the following years as well, so that it would be a challenge to reach even a three percent deficit level. We live in debt, we live beyond our means, and if in this situation we take on hundreds of millions of additional spending obligations, it means that today's prosperity will be created at the expense of the future."

Sõerd also pointed out that making loans is becoming increasingly expensive, while interest rate hikes are still ahead. "The Ministry of Finance has calculated that a one percent interest rate increase means an additional cost of 100 million euros considering our debt burden. In this situation, we are going to take on hundreds of millions of new expenditure obligations and finance these obligations with loans and start repaying both old and new loans, with ever more expensive loan money.

Former Minister of Public Administration Jaak Aab (KE) stated that this year poses no problem; there is tax revenue surplus and it will be managed. However, the coalition agreement includes fixed costs that need to be met for many years, as well as additional national defense spending. “I think that the new coalition agreed on approximately half a billion,” said Aab. He drew attention to the fact that the financial obligations the new government takes will remain. All subsequent governments must reckon with them. He pointed out that the increase in national defense spending alone for the next three to four years would mean an additional three hundred million every year. “If this year we can count on tax revenue surplus, then as the inflation recedes, tax receipts will decrease next year, and then we shall see how the economy will manage. In the future, it will be difficult to cover such large expenses.”

Economic expert Heido Vitsur considers the decision to switch to Estonian-language education to be costly as well. Regarding the entire package of promises, he said that there are a lot of expenses and the funds allocated to meet them insufficient. “In my opinion, the plan to make Russian-language schools study in Estonian requires strong support, but it must also be taken into account that it is very expensive and requires lengthy and strong preparations. One has to invest in it now, not from next year's budget.”

Speaking about meeting the expenses over the next eight months, Riina Sikkut (SDE) said that the energy benefits will come largely from the quota income and other expenses will be covered from increased tax revenues. “Almost one hundred million is also available in the government reserve for this year, and now the question is whether the increased defense spending will be viewed as an investment at the expense of loans.” When asked about what will happen in the following years and how the future governments will handle the obligations taken on today, Sikkut admitted that no fundamental changes in the tax system were planned for the eight months of the new government and there had been no discussions on it. “We all understand that this is an election issue and these decisions will be made after the next election."

Aivar Kokk (Isamaa), Chairman of the Riigikogu Finance Committee, is convinced that it is not very difficult to manage the promises of the new coalition. “When viewing the receipts of the budget, there has been surplus every month,” Kokk said, adding that the situation is not as bad as the press believes. However, he is convinced that the state's expenditures must be reviewed in the future, for example from the aspect that if more than 100,000 people are financed by the taxpayer, the state is obviously living beyond its means.

Why is the children’s benefit paid until the child’s 24th year?

Helir-Valdor Seeder, Chairman of Isamaa, sent a letter to his party comrades the day before yesterday emphasizing that the three political parties (Isamaa, Social Democratic Party and Reform Party) have reached the agreement. Among other things they agreed on child benefits and family allowances.

From 2023, child allowances will rise to 80 euros, benefits for families with three or more children to 600 euros, and for families with seven or more children to 800 euros. “The family benefits will be paid until the child turns 24, and they will be indexed from 2024,” he added. But why then is it paid until the age of 24?

Priit Sibul, Secretary General of Isamaa, explained to Postimees that if there are several children in the family and one of them becomes of age and goes to the university, the family's expenses will increase rather than decrease. “This is the reason for supporting families during studies at the university,” Sibul said. Sibul cited his acquaintances as an example of a case where two children had grown up, two smaller ones stayed at home and one went on to study in the university. “But it was necessary to rent an additional apartment,” Sibul explained. “The costs went up while the family support disappeared altogether,” he said.