Tõnis Palts ⟩ A manual for the government: where to find the missing two billion euros

The most embarrassing thing is to not understand the basics and raise taxes during an economic crisis. This will deal a death blow to the economy due to the increased cost of inputs, and this, in turn, will have a devastating impact on future budget revenues. Photo: Elmo Riig

• As long as the government has not applied austerity to itself, it has no authority to make real cuts
• Where are we spending money that doesn't actually remain in Estonia
• With needs-based subsidies, the target group will always lose out in the end

Fixing public finances starts with oneself. If the government sector has not first applied substantive austerity measures to itself, it has no moral right in the eyes of the people to reach for taxpayers' pockets for more money. But once it has got itself into a decent shape, it can go out in a clean shirt to make major cuts in society. There are plenty of places where major cuts can be made – they will be listed below, former finance minister Tõnis Palts (Isamaa) writes.

The new government is behaving like the father of a family who tells his four children that, because their mother lost her job, from now on they will each get less porridge for breakfast. However, the father himself plays golf every weekend and has no intention of giving it up.

When faced with criticism, the father may argue that golf does not cost so much after all – food for the children costs much more every month. It's not so much a question of the total, but of moral authority. A government in the role of the father of a family is more credible and wields greater authority if it has its own skin in the game and has to give up something first.

At present, government members are talking in earnest about reducing child benefits before, for example, anyone has started cutting ministers' salaries. True, the financial impact of cutting ministers' salaries would be small, but in terms of setting an example, it could have a breakthrough effect. Moreover, it is possible to cut the overpaid armies of officials and communication specialists by at least 10 percent and to discontinue state funding for NGOs dealing with all sorts of woke pseudo-issues. These initial cuts alone could save 200 million euros.

At present, government members are talking in earnest about reducing child benefits before, for example, anyone has started cutting ministers' salaries. True, the financial impact of cutting ministers' salaries would be small, but in terms of setting an example, it could have a breakthrough effect.

Once these steps have been taken, the government will already have enough moral authority to tackle the real cuts. I agree with Andrus Ansip, who pointed out that, with a budget of 17 billion euros, managing to cut 170 million euros (one percent) is simply a mockery of the people. When there is a shortfall of 1.7 billion, we have to talk about cuts ten times as large.

When making large cuts, it is important to look at where the money that can be saved is going so that Estonia itself would lose as little as possible as a result. For example, investments to improve the birth rate go exclusively to the people of Estonia, whereas the lion's share of investments in Rail Baltic and renewable energy end up outside Estonia – starting with the mechanisms used and their fuel and ending with the materials and even the design. Also, the latter two come with a negative impact on Estonia's nature.

Let's take a look at the major areas for cuts, position by position.

1. Freezing the construction of Rail Baltic. It should be clear to everyone by now that regardless of the millions spent on public relations, it is impossible to turn a flea into an elephant in terms of profitability and reasonableness. Additionally, the prospect that Rail Baltic would make Riga an even bigger Baltic hub and further reduce direct flights from Tallinn Airport is not being addressed.

Moreover, we have no idea how much additional costs the commissioning of the railway will add to the state budget. If Rail Baltic were to be frozen, even temporarily, we would gain at least 500 million euros a year. After all, it also needs to be taken into account that, even if we continue to receive EU subsidies for this crazy project, we will have to use our own money, which could instead be used for the construction of roads. Also, the rate of EU subsidies for Estonia will start to decrease exponentially.

2. Ending renewable energy subsidies. Our business operators will have to start subsidizing offshore wind farm owners to ensure their profitability. According to experts, this amount is 200 million euros per year. It is not taken into account that shifting the burden of ensuring profitability onto consumers inflicts irreparable damage on the competitiveness of Estonian businesses, which in turn means hundreds of millions or even billions of euros in lost future fiscal revenues.

New offshore wind farms also necessitate the reconstruction of Estonia's power grid, such as building an undersea cable between Saaremaa and Latvia, which will cost at least one billion euros. Excessive and one-sided bias towards wind energy also reduces energy security.

3. After Putin's defeat, defense spending must go down. To get defense spending on the right track, we need to issue 1.6 billion euros in bonds directed to the public and then aim defense spending to return to 2 percent of GDP. Interest costs included, the amount saved would be at least 400 million euros a year. Admittedly, once the munitions have been purchased, the international situation must also be taken into account. Defense spending can be brought down after the international community has, metaphorically speaking, knocked Putin's teeth in. This will happen in a few years anyway.

4. Various pension reforms. By increasing the retirement age by two years, we could save 300 million euros a year. If we add to this Kristjan Järvan's proposal to dump the second pension pillar and direct social tax to the first pillar, it would be possible to reduce the budget deficit by another 400 million euros. In total, it's 700 million already.

The amount spent on pensions is the largest in the budget, and perhaps the new government wants to cut more from it. Now, in line with their own style, why not make pensions needs-based as they intend to do with child benefits? Since children are the last place where a country in a population crisis should cut anything, we should go and take some from the elderly before we take anything from children.

Imagine, for instance, a situation where the state is short on funds and has to choose between sending young athletes of the future and veteran athletes aged 40+, who have already ended their careers, to the Paris Olympics. It would be complete nonsense if the state turned its back on the young and only funded the elderly ones.

Everyone knows that children are our last hope and they should be prioritized for investment. This logic is being applied by the new government in a wrongheaded manner by rushing to take money away from children on a needs basis before taking away anything on a needs basis from wealthy pensioners.

Why, for example, should Siim Kallas receive a state pension when he already has enough assets and income from Europe? Kaja Kallas said from the Riigikogu rostrum in January 2022: «Not all pensioners are in need of aid. My parents are pensioners and they are not in need of aid.» Right! And if some 73-year-old has accumulated 100,000 euros worth of shares during their lifetime, why should the state still pay them a pension? If we were to follow Jürgen Ligi's way of thinking, there would clearly be a needs-based place for cuts in that.

Any fantasies about needs-based cutting collide with reality when the question of «how» arises. Administering needs-based support requires a huge army of officials, thousands of work hours, and bureaucracy. And the money for this comes from the same budget line that is intended to support the target group. This means that, in the end, the target group will still lose out – whether they are pensioners or children.

It is well known in business that the most expensive money is equity, while the cheapest is a loan.

The implementation of needs-based support also means that there will be no saving on government costs, which is a prerequisite for making any real cuts at all. However, if we leave the irony of needs-based subsidies aside and follow my previous recommendations, at least two billion euros in costs could be saved, which should be enough for the time being. There will be even room left to make choices according to political tastes.

The most embarrassing thing, however, is to not understand the basics and raise taxes during an economic crisis. This will deal a death blow to the economy due to the increased cost of inputs, and this, in turn, will have a devastating impact on future budget revenues. It is well known in business that the most expensive money is equity, while the cheapest is a loan. In the public sector, tax money is equivalent to equity.

What is going on with the «fixing» of public finances is sabotage, which only the Kristen Michal government on the Social Democrats' leash can come up with.