RAUL EAMETS ⟩ The opaque state budget and non-existent cuts

Raul Eamets. Photo: Tairo Lutter / Postimees

• The budget is opaque.
• There's a reluctance to cut real spending.
• Public sector expenditure will not decrease due to the indexation of subsidies and wages.

The increase in state expenditures means that, in reality, no cuts are taking place, writes Raul Eamets, chief economist at Bigbank.

Looking at the budget, we see that next year's expenditures will grow by 3.5 percent compared to the previous year. Cuts, in the context of the budget pending, mean reallocating funds within the budget – adding to some areas while reducing others. However, if we were to talk about real cuts, it should mean that expenses are reduced or, at the very least, not increased. If total expenditures are rising, then we cannot speak of cuts.

So, this actually isn't a budget of cuts.

Second, the budget's clarity and transparency is a problem. The activity-based budgeting approach has been criticized a lot, as it is difficult to see where the money actually goes when the budget lists vague programs and activities. I haven't seen a single company where budget lines would include «improving employee well-being», «enhancing management assurance», and «making owners happy». But that's exactly how the state budget is structured now.

We have, for example, the «Money Smart State» program. If you dig deeper, it turns out that the main part of the program is interest payments (sic!). In addition, it includes around 50 million in labor costs and management costs. In the second graph, the same program includes the formulation and implementation of fiscal policy (including interest payments), the development of the financial environment and the formulation of tax and customs policies. Instead, there could be a clear breakdown of expenditure lines by ministries and agencies. Pensions are paid in our country under the «Senior Citizens Program». Why can't we just talk about pension costs? The reason is that, in addition to pensions and benefits, which amount to 3.8 billion euros, this program also includes a million euros for the well-being and social inclusion of the elderly. Additionally, family allowances and parental benefits are included under this program. The importance of children and families has been placed within the elderly program. Congratulations! And this could go on for pages.

Pensions are paid in our country under the «Senior Citizens Program». Why can't we just talk about pension costs?

The activity-based budget is neither clear nor unambiguous. In addition, it sends misleading signals to society.

The third problem is the increase in the budget, and not just the increase compared to the previous year. If you look at the budget numbers over time, then the first problem is that it is difficult to understand what the real numbers are. We have the revenue and expenditure that are in the explanatory memorandum to the budget, then there are tables that show the actual execution of the budget. In addition, every year there are charts in the explanatory memorandum to the budget which, in retrospect, show the budget numbers for previous years. However, the latter fall outside of the planned budget and budget execution.

I looked at the expense numbers in the explanatory memorandum to the budget (without investments), and if you compare the budget for 2025 with the budget planned in 2021, the expenses have increased by a total of 37 percent. All this has happened in just four years!

While the root of the evil is the recent price increases, it leads us to a third problem related to the budget. A significant portion of our budget is tied to legislation. The simplest example is the increase in pensions, which is indexed to inflation. It is claimed that pension payments will increase by 300 million euros next year. As long as we don't decouple costs from inflation, even on a temporary basis, government spending will grow exponentially.

Should the Finance Ministry's forecast of a five percent price increase next year come true, all kinds of subsidies, pensions and indexed salaries will also automatically increase. If, for political reasons, it is not possible to reduce pensions, could we consider freezing pensions for next year? Then 300 million euros would be gained without effort!

Indexation therefore prevents real reductions in public spending.

In summary, we have three very important problems: the opaqueness of the budget, indexed costs, and a reluctance to cut real spending. These need to be solved if we want to bring growth in public spending under control.