Local governments may not be able to use coronavirus aid for budget holes

Minister of Public Administration Jaak Aab (Center). Source: Siim Lõvi/ERR

Local governments in Estonia say they hope that they will be able to implement all planned investments in 2020, and with the help of aid from the supplementary budget, will invest in excess of this. However, to what extent the budget money can be used for new investments is not clear, and many local authorities are preparing negative supplementary budgets.

The supplementary budget adopted in mid-April in response to the coronavirus pandemic promises local governments €130 million. Of this, €30 million is earmarked for local roads, €30 million for shrinking revenue bases and increased costs incurred by the crisis, and €70 million for new investments.

What constitutes "new investments" began to be discussed quite quickly, ERR's online news in Estonian reports. 

One question is can the extra money be used to fulfill this year's plans, or is something completely new to be devised. 

Some local government investment restrictions on supplementary budget aid

Last week, the Ministry of Finance pledged that no restrictions would be imposed on local governments, with the principal idea being that money goes to investments. But now the ministry seems to have changed its plans

If a project is included in this year's budget or procurement plan, the new investment money received from the state cannot be used, though an exception is made for investments under €60,000.

Minister of Public Administration Jaak Aab (Center) says that he wants to offer support more flexibly, but the budget included few words on "new investments", which even Aab says is not entirely clear.

"We can't figure it out here anymore. But in fact, the whole structure of the supplementary budget, including the various subsidies to local governments, is aimed at giving a quick boost to the economy, in the regions, and local government can do the same," Aab has said.

Municipalities association chief: Authorities would have preferred freer rein

Veiko Luhalaid, executive director of the Association of Estonian Cities and Municipalities (Eesti linnade ja valdade liit), says that local governments would have preferred a freer rein in the stimulus package.

"The aid package could have also provided necessary help for those objects that have actually been prepared and are already under construction. It is clear that the municipalities will receive significantly less money for investments this year and the next," Luhalaid said.

Tartu one affected municipality

Tartu Deputy Mayor Gea Kangilaski (SDE) said that the city is preparing a negative supplementary budget, in fact.

"We are currently planning a reduction of eight to ten million euros at the expense of income taxes, and an additional €12 million at the expense of our own income. At the same time we will receive a total of €6.8 million in state support. Thus is obvious that it is not enough for us," Kangilaski said.

Tartu has reduced its management costs by about €3.8 million, it says. The next cuts are likely to come either from the workforce, or from those investments planned for that year.

"It is clear that we cannot easily make redundancies. We still have to look closely so that necessary city services can be provided," Kangilaski added.

Should this happen, it is likely the city of Tartu will have to cancel some of the investments planned for that year due to lack of funds, in other words. 

At the same time, the city will receive €3.9 million from the state to make an otherwise planned investment in the future, Jaak Aab said.

"They also wanted to write in the conditions that no investment should be left out. It didn't turn so crazy. And I defended this, so that the procedure could be as free as possible," said Aab.

Aab: Local governments's finances actually in good shape

Generally, however, Aab says he does not believe that local governments should make cuts, and are actually doing very well financially, he says. 

To back this up, he says that at the end of last year, local government accounts stood at €230 million, and the average debt burden stood at 27 percent.

To back this up, he says that at the end of last year, local government accounts stood at €230 million, and the average debt burden stood at 27 percent (the national government's debt burden has ranged from 8-10 percent of GDP in recent years, pre-crisis-ed.).

"In fact, we encourage local governments to behave in much the same way as the state has done to stimulate business, the economy, and the whole environment," said Aab.

Aab also noted that, in addition to crisis aid, local governments are also permitted a higher debt burden than before, rising from 60 percent of annual revenues to 80 percent for the next two years.

Aab adds that he will be able to see more accurately how much income tax revenue will reach the local government coffers in the autumn.

"For example, whether the personal income tax not received by local governments will be leveled out to some extent, since it may differ from region to region and from municipality to municipality; we will come back to that in the second half of the year."

However, Veiko Luhalaid says that even if not all local governments prepare a negative supplementary budget yet, it will be a nationwide topic for consideration anyway.

"God forbid that this is the case; [I hope] that the impact of this crisis is really short-lived and that the fiscal gap is small. But the municipalities still fear that it may be quite large," Luhalaid said.

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Editor: Andrew Whyte

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