Bank of Estonia: Pension reform to increase pressure to hike taxes later

Euros. Source: Bank of Estonia

Speaking at a meeting between Bank of Estonia Governor Madis Müller, Deputy Governor Ülo Kaasik and the Finance Committee of the Riigikogu, representatives of the Bank of Estonia once again drew the attention of committee members to potential bottlenecks in the implementation of the pension reform in its current planned form.

In addition to the pension reform, the meeting also touched upon the state of the economy of the euro area and Estonia as well as the bill of amendments to the Bank of Estonia Act, spokespeople for the Riigikogu said.

According to the heads of the central bank, the second and third pension pillars are useful when the population is declining more than expected, Estonia's economic growth turns out to be smaller or the retirement age does not increase at the estimated pace. The option to spend pension savings in a short period of time will also be accompanied by a greater risk of poverty in older people as well as an uncertain economy.

The representatives admitted that the economic growth of the euro area is decelerating. As the Estonian economy is small and open and strongly influenced by external demand, confidence regarding the future will thus deteriorate across most sectors as well.

According to the Bank of Estonia, the reliability of budgetary discipline will be ensured by adherence to budget rules, while the greater deficit in 2018 has enabled to plan structural deficits in 2019 and 2020 as well without violating the rules.

MP Aivar Kokk (Isamaa) said that the state of the state budget is good and that its loan burden is the smallest in the EU, which will allow Estonia to borrow in economic recession conditions if necessary.

Kokk noted that the reduction of the state budget deficit is also planned in the direction of continuous decrease.

"Next year's state budget is in a nominal balance and moving toward a balance structurally, being at a deficit of 0.7 percent of GDP," the MP explained. "By 2021, the structural deficit is to decline to 0.2 percent, and the budget is expected to reach a nominal surplus."

Committee deputy chairwoman MP Maris Lauri (Reform) said that the structural balance should be restored with a more powerful step.

"It is namely adherence to budget rules that will enable financial resources being collected during good times, which could be used during more difficult times for the economy," Lauri said.


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Editor: Aili Vahtla

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