Janar Holm: What happened to a comprehensible state budget?

Auditor general Janar Holm.
Auditor general Janar Holm. Source: Siim Lõvi/ERR

The role of the Riigikogu in state budget proceedings has become increasingly secondary. In addition to decision-making capacity, the legibility of the state budget has also shut the door to Toompea Castle behind it, Auditor General Janar Holm writes in a comment originally published in the National Audit Office's blog.

My predecessor Mihkel Oviir said in his annual speech to the Riigikogu 16 years ago:

"In front of you is the State Budget Act – an act, and I would emphasize this part, based on which our money will be allocated next year. /…/ But what the government plans to spend this money on is not written in the State Budget Act bill but rather in its explanatory memorandum. Now, if you think that the government is obligated to spend the money on what it claims to need in the memo, you are wrong. The memo carries no legal significance whatsoever. Once it has the money, the government will draw up the real budget so to speak that might but also might not coincide with the explanatory memorandum. And so, it is possible the government will ask for money to buy a horse but end up buying a donkey instead."

The auditor general was pointing to a trend where the power to decide how to spend taxpayer money is gradually moving out of the Riigikogu and onto the executive level. Has anything changed over the nearly two decades since then?

Yes. It has moved out – the role of the Riigikogu in budget proceedings has become increasingly secondary. In addition to decision-making capacity, the legibility of the state budget has now also shut the door to Toompea Castle behind it.

While we know where the power to decide ended up, the comprehensibility of the state budget headed in an unknown direction. Both need to be brought back.

Explanatory memo not a legal act

Information included in annual state budget acts has been reduced to a level of generalization that has made it impossible to draw any certain conclusions.

For example, the 2020 State Budget Act reads that the Ministry of Justice will be allocated €169.4 million for expenses, €8 million for VAT expenses, €295,000 for investments and €3,000 for financing transactions.

The act also reveals that the ministry has a performance area titled "legal order" that includes a program also called "legal order."

Expenses and investments of the two "legal orders" coincide to the letter. The figures are simply copied. In other words, the only binding guideline for the entire administrative area of the justice ministry is freedom to spend €169.4 million however the ministry sees fit.

I'm sure it can now be claimed that the explanatory memo provides greater detail for the use of funds.

But an explanatory memo is not a legal act. While it might show investments, support and other expenses on the level of agencies and objects, the government is within its rights to allocate the money for entirely different objects and institutions than what the memo lists. At least as long as it sticks to sums and budget lines detailed in the State Budget Act.

The new fiscal structure basically isolates MPs from effective control as the law no longer includes budget lines the changing of which could be proposed.

How can a member of the Riigikogu propose giving money from prisons to courts or vice versa in a situation where the law only consists of a single line? Proposals to amend the explanatory memorandum cannot be made on the level of the Riigikogu.

Allow me to give an example from a field we audited a couple of months ago. The 2020 State Budget Act includes a Ministry of Education and Research performance area called "Estonian language and Estonianness" that governs a language program with a budget of €5.486 million.

Unfortunately, the sum fails to provide a clear picture of language funding, despite the facts that the name of the program suggests it and the state budget makes no mention of language anywhere else.

Actual language funding is much bigger and involves other programs. But the act does not suggest this, leaving the reader to their own devices. At the very least they would have to have audited the administrative area or be working at one of the ministries preparing language programs.

Searching the memorandum, that can be found on the website of the finance ministry, for an explanation of how the state plans to spend those €5.846 million, it turns out the volume of the language program provided in the memo is €5.592 million. I'm sure there is an explanation somewhere, but it is not the explanatory memorandum of the state budget.

Efforts to access information

There was a time when a budget line in the act reflected how much money various ministries would be allocated. Such premature conclusions cannot be drawn today. The new budget picture displays monetary and non-monetary expenses on the same line.

For instance, one needs to keep in mind that a budget line could also include calculated depreciation costs. I will refrain from even reminiscing about the good old times when a plus stood for a surplus and a minus for deficit.

Looking at the level of generalization in the 2020 State Budget Act, one is tempted to ask whether there is any sense in even reading the document. While the act is supported by a 440-page explanatory memo, it is difficult and in places impossible to find systematic and reasoned explanations of what the state will be spending on and how it is believed to affect Estonia's development.

MPs have given colorful examples of the superhuman efforts necessary to extract relevant information from materials and how clarity might not be found even then.

Another major problem is that the structure of the budget and how information is presented in the explanatory memo is changed often, rendering different years incomparable and making it difficult for the Riigikogu to assess the government's use of money and placing new application in the context of recent expenses.

The state budget should be subject to the same rule of thumb used in statistics – the possibility of comparison with the previous period must be retained whenever the manner in which the budget is presented changes.

Debates and decisions regarding developmental priorities for the state can only be effective, well-weighed and reasoned provided the decision-makers can understand the nature and effects of changes.

The annotated edition of the Constitution emphasizes that the state budget is one of the most important elements of the sovereignty of the parliament. The state budget is basically a guideline and permit for the use of funds from the Riigikogu to the government for controlling and setting a framework for the latter's actions.

However, we have reached a situation where the executive power draws up its own guidelines and has the legislator add its stamp of approval, without even bothering to be clear about what the money will be used for.

The National Audit Office has been voicing its concern that in order to understand the state budget, the reader needs comprehensive accounting know-how and a lot of time for comparing different financial materials to both the parliament and the public for years.

The state budget should not be a mere accounting document but serve as grounds for management decisions. It should be a lever for managing the strategic development of the country.

The National Audit Office has been told as much by MPs from both the opposition and coalition over the years.

Matters of decision-making capacity and legibility of the Constitution were discussed as those of national importance in June of 2016. A report was presented according to which 85 percent of MPs interviewed found it important to increase the role of the Riigikogu in controlling the strategic aspect of fiscal policy.

But things continued moving in the exact opposite direction as it often happens. A year after discussing the matter as one of national importance, the Riigikogu passed amendments to state budget framework legislation the result of which was further reduction of the parliament's actual role.

The amendment also opened new and never-before-seen possibilities for rendering the state budget document even more general and difficult to understand. The justice chancellor warned in a letter that the changes narrow the Riigikogu's capacity to make fundamental decisions regarding political priorities for the coming year to an inadmissible degree and emphasized that the Constitution does not allow the Riigikogu to give up so much of its budget competency.

But it is likely decision-makers were swayed by the finance ministry's promise to tie every euro to specific services offered to people and institutions in the new and innovative activity-based budget model to be applied from 2020. Whether this has come to pass everyone can see for themselves.

The gradual erosion of the role of the Riigikogu and rendering the budget increasingly generic is gently referred to as boosting flexibility in various documents. Flexibility is no doubt needed to avoid having to constantly amend the budget or draft addendums.

But the question of the balance between flexibility and principles remains. If, for example, it was decided in the 1939 budget to allocate 200 kroons for the government's vehicles tax and garage expenses, the level of generalization should be greater today.

Deciding where that balance lies should rest with the Riigikogu – what it prioritizes. Today, the power to separate the important from the unimportant rests with the finance ministry, while the spirit of the Constitution puts it in the parliament.

The National Audit Office has sent the Riigikogu several letters on how it is gradually surrendering its power of decision over the years. Only the Riigikogu can take back the power and responsibility that belongs to it.

Only the Riigikogu can make decisions

A Riigikogu support group for restoring legibility to the state budget formed by MP Peeter Ernits (EKRE) met for the first time on January 23.

The tonality of the meeting and the composition of the group that includes representatives of both the opposition and the coalition, the speaker, former prime ministers, former finance ministers etc. clearly showed that the situation no longer satisfies members of the Riigikogu and that there is clear demand for change.

Restoring the role of the Riigikogu and comprehensibility of the state budget is necessary for the use and planning of public funds to be clear and transparent in the public eye.

Strategic priorities reflected in the state budget must form an object of public debate in an accessible form in Riigikogu committees and on the floor, not just on the level of ministries. A fundamental state budget debate is the first level of checks and balances for use of public funds.

The National Audit Office has promised to support the work of the Riigikogu state budget legibility group and make proposals to highlight different ways problems could be solved.

Only the Riigikogu can make the necessary choices and decisions. The prerequisite for making choices is clarity in terms of how the Riigikogu perceives its role in budget proceedings, the level of generalization it wants to see in the budget, what kind of information should be included and which questions answered in the explanatory memorandum.

A quick fix solution could consist of laying down minimum requirements for the state budget explanatory memo in the state budget legal framework to ensure availability of minimally required information and make it possible to compare data from one year to the next.

The ongoing state budget revision where the reasoning behind expenses and avenues of cost-cutting will be evaluated could include a revision of the format of the explanatory memo in government and Riigikogu cooperation. Decision-makers and the public being able to understand the central document of strategic development would make it possible to increase the quality of decisions.


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Editor: Marcus Turovski

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