Experts: State loans could create additional debts in future

The Bank of Estonia building in Tallinn
The Bank of Estonia building in Tallinn Source: Siim Lõvi /ERR

The interest on the billions of euros which the state has borrowed due to the coronavirus crisis has been very low so far. However, the interest rate could increase in the future and taxes may need to be raised in order to pay back the loans.

The state has taken out loans worth €2.8 billion with a 0.2 percent interest rate since the beginning of the emergency situation.

According to the evaluation of the Bank of Estonia (Eesti Bank), this is not a large amount but the important question is how the interest rates change in future, ETV's current affairs show "Aktuaalne kaamera" (AK) reported on Tuesday.

Head of the Monetary Policy and Foreign Economy Department of the Bank of Estonia, Peeter Luikmell, said it is easy to make decisions now in the light of the low interest, but as a rule, decreasing the debt burden is not easy.

"As a rule, no country has been able to decrease the debt burden radically in 10 years. The experience of the European Union shows that this debt is not paid back on the right date but needs to be financed with a loan again," Luikmel said.

Luikmel said interest rates could also increase in future.

"The loan will be in our service for a long time probably and not with the interest rate we have right now. In that sense, we definitely need to consider that even when the rate is zero, then in five or 10 years, we will have to take out a new loan," Luikmel said.

Undersecretary of Finance and Foreign Relations of the Ministry of Finance Märten Ross did not exclude the possibility of covering the loan with another one.

"It depends on the circumstances, what kind of an economic cycle we'll have then, if it's more reasonable to pay back the loan to cool down the economy," Ross told AK.

Jürgen Ligi, a member of the Riigikogu's Finance Committee and a member of the Reform Party, said the loan was inevitable but its usage has failed.

"Interest is not the problem right now. Interest is undoubtedly a result of past conservatism and the result of the current money supply that you can get money cheaply. But actually, the price of the loan should be looked at the reasonableness of spending and the spending part is more expensive now," Ligi said.

Peeter Luikmel said when the debt burden increases, taxes could increase as well.

"There is no other way to cover the state's expenses than by using taxes. In its choices, the state will then be forced to make decisions which are somewhat more similar to the average European state, which in a broader sense means that if costs cannot be cut, then taxes must be raised," Luikmel said.

However, Märten Ross said that the link between public debt and a possible tax increase is too indirect.


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Editor: Roberta Vaino

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