The National Audit Office (Riigikontroll) has highlighted a gap between reality and theory in the situation with state revenues, finding that supervision of expenditure through a financial year has been deficient even ahead of the coronavirus pandemic. This has led to a rapid using up of reserves once the pandemic hit, the office says, and deficits should be spotted before they have grown large, it adds.
IN particular, the assessment of the Ministry of Finance concerning the situation with the economy has been realistic, albeit rather conservative, over the years, the office says. At the same time, state budget revenue forecasts have been more optimistic than reality, primarily due to overestimating the input of EU subsidies, and underestimating the impact of cross-border trade, the office says. The issues predate the current coalition government, which entered office just over a year ago.
Pandemic has shown up holes in keeping finances in order which were already there
Auditor General Janar Holm notes that the current crisis demonstrates the importance of keeping public finances in order, plus how rapidly buffers and reserves which could be enough to last for many years in normal situations could be depleted.
In the course of their overview, the audit office detected the conscious departure of governments from financially balanced fiscal policy even before the crisis.
In the preceding two years, central government spent hundreds of millions of euros more than it had planned, to the tune of €208 million in 2018 and €220 million in 2019, the audit office said.
During years of rapid economic growth when tax revenues grew by an average of 9 percent per year, this had still not been enough to cover costs. The budget deficit widened, reserves dwindled, and the state often postponed decisions on whether to contain an increase in expenditures or not.
The National Audit Office finds that there have been difficulties particularly with assessing the excise duties accrued in the state treasury, and the use of EU subsidies. Reality-based forecasts and the continuous monitoring of state budget expenditures and revenues play an important role in making rational budgetary choices which have a long-term effect on the well-being of the state, the residents, and companies, the office said.
"The current time provides an assessment of an attitude that was widespread for quite some time that 'reserves burn fuel to no avail', and that they should be used up, or that Estonia has a lot of room for borrowing, and this should be done immediately," Holm said, according to BNS:
"Today, we can be happy that central government still had some reserves left at the beginning of the crisis, despite the rapid decline in funds in recent years," he added, pointing out that disciplined fiscal policy is needed even more urgently in the coming years.
Signs already there in summer 2018
The higher-than-forecast budget deficit in 2018 was primarily caused by the incorrect assessment of the accrual of excise duties and state budget expenditures, the audit office added.
According to the Ministry of Finance, the first signs of this emerged in January 2019. However, in the opinion of the National Audit Office, these omens were already present six months earlier, in July-August 2018.
Fiscal council role should be taken more seriously
The National Audit Office finds that the fiscal council should be given a greater role in monitoring compliance with budgetary rules, which would help draw the government's attention to risks associated with planning state revenues and expenditures.
Criticisms made by the council so far have not been pointed enough, the office says, or it has simply not been made clear enough how the government should respond to the fiscal council.
It is necessary to agree on the council's role, and the internal requirements for the opinion of the fiscal council, and when and how the government should respond to the council's opinions.
The National Audit Office says it can see that it is necessary to obtain information about the accrual of state treasury revenues, and actual state budget expenditures, more effectively. Among other things, it is necessary to assess more realistically the extent to which EU subsidies get used during a financial year, and monitor which expenses, and to what extent, are made from the state budget year-round.
It should also be ensured that data from other ministries for forecasting and monitoring the revenues and expenditures is relevant and sufficient.
More coordination between finance ministry and other ministries needed
In order to mitigate risks upon preparing the state financial forecast, the Ministry of Finance needs to enter into agreements with other ministries on how to ensure reliable information from various areas of life, the office says.
The reasons the state has systematically overestimated its ability to use EU subsidies - by a quarter in recent years - should also be determined, and a decision should be taken on what to do to resolve the issue, the office says.
Taking into consideration the uninformative structure of the annual budget, the Ministry of Finance, in cooperation with other ministries, should introduce a substantive and analytical continuous monitoring of state budget expenditures throughout the financial year, the office finds.
Additionally, it is necessary to find a solution on how the forecasting of non-taxable state revenues could be improved, and the arrival of information on the state's economic transactions into the state's accounting could be accelerated.
The National Audit Office also considers it important to regularly obtain opinions and proposals on monitoring and the organization of preparing a forecast of state budget revenues and expenditures from the Riigikogu, the Government of the Republic, the fiscal council and the Bank of Estonia, and an overview of the submitted proposals and the potential implementation thereof should be published.
Editor: Andrew Whyte