Chief economist: Public finances about to go through unprecedented decline

Empty streets of Tallinn
Empty streets of Tallinn Source: Siim Lõvi/ERR

The state of Estonia's public finances is about to go through unprecedented decline, with the current state's aid package helping prevent the darkest scenario, according to Swedbank chief economist Tõnu Mertsina.

Mertsina said that according to the current forecast, Estonia's public deficit will grow to nearly one-tenth of GDP, and the funds borrowed by the state together with its treasury bill issuance will sharply expand public debt.

Mertsina said in a press release: "Virtually all states have put and are still putting large sums on the table to save their economy, which will result in steep public deficits and debt growth. Estonia is no exception in this regard."

The chief economist said that efforts to reduce public deficit will limit the government sector's expenditure over the coming years even if budget gaps are plugged with loans. 

Mertsina said: "Increasing public deficit to cover all running costs would not be reasonable, however. The lion's share of the state budget consists of earlier agreements and obligations, and the more flexible part, the financing of which can be changed quickly, accounts for a smaller portion. For that reason, it is paramount that the government make smart choices during its exit from the crisis."

He added that state support should encourage businesses to spend money on increasing their competitiveness instead of saving up.

He also noted that the state's aid package has been broad-based thus far and helped prevent the darkest scenario; however, a competitive economy cannot be based on the state's support alone.

Mertsina said: "Saving companies with a poor business model and weak competitiveness and leadership would be a disservice to entrepreneurs who have invested in developing their products and services as well as in improving their business operations, and which could strengthen Estonia's economy in the long run."

The chief economist added that the share of added value in businesses' revenues, the public sector excluded, is largest in services, particularly in real estate, finance, ICT and administrative and support service activities, and also in trade.

He added: "The share of added value is lowest in the processing industry, which is our main field of export, due to higher expenses on production inputs. Supporting exporting businesses should be one of the priorities, however. A study commissioned by the Foresight Center showed that 29 of Estonian businesses export directly and 80 percent are up to two transaction partners away from export."

Mertsina noted that the closer a business is to exporting its products, the higher its productivity, which means that productivity is lower in companies that are geared towards domestic final consumers.

He added: "Productivity is generally also higher in businesses with a broad-based customer base and value chain. When setting business priorities, the domestic value chain of the business should be taken into account."

According to Mertsina, in order to improve the competitiveness of Estonia's economy, businesses need larger investments in automation, digitization and improvement of worker qualifications. Investments in clean energy and other environmentally sustainable operations meanwhile also provide increasing growth opportunities.

He said: "Swedbank's study of the industrial sector conducted this year showed that approximately 36 percent of production processes in the processing industry have been automated and 35 percent digitized, both figures were highest in the timber industry."

Estonian businesses placed 14th in the EU n in terms of their use of digital technologies, according to the European Commission's Digital Economy and Society Index (DESI) -- below the EU average, behind Lithuania though ahead of Latvia.

Mertsina underscored that technologically advanced businesses will enjoy an advantage in the post-crisis economy.

Mertsina said that that Estonia is the last place among the Nordic-Baltic states when it comes to meeting the UN environmental objectives. Stimulating sustainable low-carbon economic development, on the other hand, means more (green) investments, which in turn will generate more added value and new jobs.

"Seventy percent of participants in a survey by the international McKinsey consulting firm opined that climate issues should take priority in our exit from the current crisis."

Mertsina said that in addition to the hospitality sector, tourism has an even bigger impact on air and water transport, travel agencies and tour operators, and the number of foreign tourists in Estonia, services used by domestic tourist and Estonian residents traveling abroad all play an important role in our economy.

He concluded: "The post-coronavirus crisis economy largely depends on the government's decisions. It will not be enough just to count on improvement in demand, particularly in foreign demand," he concluded."


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Editor: Kristjan Kallaste

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