Statistics Estonia reported this week that the Estonian economy grew 1.3 percent in Q2. It was a worse-than-expected result. In the following opinion piece, Aivar Hundimägi, deputy editor-in-chief of the business daily Äripäev, ponders whether it is a signal that the government should be more open to borrowing.
The slowdown of economic growth once again elicits the question of whether the Estonian government should boost economic development with the help of borrowed money. By contrast with many other countries, the Estonian government has stayed true to a firm principle: in bad times it will not try to add momentum to economic growth by way of borrowing, state investments and increasing public sector spending.
In an August 13 editorial, the business daily Äripäev criticized the current government for sluggishness in seeking ways to speed up economic development. Instead of encouraging the public debate, the government has impeded it. The long-reigning Reform Party has been inflexible and stubborn on the issue of increasing debt.
Contrary to the government coalition, I believe that now is the right time for society to weigh the benefits and detriments of increasing the national debt.
In both good and bad times, the economic engine of Estonia has been the private sector. That is understandable because the private sector is the quickest to sense the changes that are occurring in the economy and the quickest to adjust. If the government tried to level out economic cycles by investing, adjusting to economic decline would not be so abrupt and painful.
One of the reasons that economic growth is slowing is that the momentum of private sector investments has abated. In such a situation, the state could, through investments, take the role of helping to fill the gap. Once economic growth speeds up, the state can slow down the pace of its investments.
In Estonia, an important counterargument against increasing public debt has been that future generations must foot the bill for major loans that are taken today. They will be able to do that either by increasing debt or cutting spending. Several southern European countries are a good example of the seriousness of the hangover that follows a borrowing frenzy.
Another major argument is tied to Estonia's private sector debt. Private sector debt grew rapidly during the last economic boom. If the state had behaved like the private sector, the recovery from the economic crisis would have been even more painful. The low national debt acted as a parachute that gave the Estonian economy a smoother landing when the real estate bubble burst.
But the arguments against increasing public sector debt do not mean that the state should avoid borrowing at all costs in an economic recession. What is important is how and for what purpose borrowed money is used. Increasing public debt is not necessarily a bad decision when the state fast-tracks already planned investments during a recession.
The Estonian economy has not yet fallen into a decline and analysts see positive signs that indicate that economic growth will continue in the coming quarters (true, at a more arduous pace).
For instance, in July the European economic trust index rose, which the director of the Institute of Economic Research, Marje Josing, said is in good correlation with GDP indicators.
Analysts reckon that in the second quarter, the Eurozone economy began rising again after a long period. The Eurozone economy declined in the six previous quarters. Germany, to which the Estonian economy is closely tied through Scandinavia, is doing relatively well.
Since there is no reason to speak of a recession in Estonia either, the state does not have to rush to borrow money in order to soften the decline cycle or to help turn the economy around. Right now is the right time to set the plow and debate whether, in the event of a recession, it would be wise for the government to increase its debt. This question can only be answered once we have discussed the agreed potential investments, which the state could implement in a fast-track fashion in the event of a recession.
This piece was originally a weekly commentary on Vikerraadio.