Huko Aaspõllu: Finmin forecast based on unprecedented growth of loan burden

Huko Aaspõllu
Huko Aaspõllu Source: Siim Lõvi/ERR

The finance ministry's economic forecast includes several assumptions that might not manifest. At the same time, it clearly indicates that the government has plotted a course for rapidly increasing the country's loan burden, ERR's Huko Aaspõllu says in Vikerraadio's daily comment.

The Ministry of Finance unveiled its recent economic forecast on Monday. Even though the ministry forecasts a recession for 2020, its extent has been dialed back from 8 percent in spring to 5.5 percent. The ministry also supposes the economy will be back where it was last year in 2021.

This forecast is based on two important presumptions that might not come true. Firstly, the ministry bases its forecast on the coronavirus remaining in check and a vaccine becoming available in the near future. A vaccine that will then be adopted all over the world in a relatively short time. Or at the very least that the infection rate will not explode to require extensive economic restrictions in Europe.

This is a rather ambitious hope that no one can say will come true today. Even if a vaccine that really works is completed tomorrow, its manufacture and adoption on a large scale is bound to take some time. Still, it seems the hope that this spring's restrictions will not return is rather justified. Provided the infection rate allows.

The other assumption is that the Estonian economy will continue growing at the pace it saw before the coronavirus after it recovers next year. There is also no clarity here. The situation is difficult to forecast. We have no readability in terms of the future. In other words, the ministry expects things to stay the way they have been.

The ministry claims their recent forecast is more accurate than the one from spring. Because we didn't know anything back then. Minister of Finance Martin Helme said that the spring forecast was just so many numbers on a piece of paper. Because something had to be jotted down. There was no information or certainty.

It is to be understood. We need models to have a basis for, let's say, next year's budget. Even though one might also paraphrase Nassim Nicholas Taleb's question as what use does a pilot flying over Riga have for a map of Tallinn.

That said, the forecast also includes an indication of something we can affect. The growth of public sector loan burden. According to the plan, Estonia's public debt that has historically been the lowest in Europe will grow from 8 percent in 2019 to a whopping one-third of the Estonian GDP in just a few years.

Even though tax revenue is falling, the government does not plan to cut costs yet. What is more, coalition partners have set about using loan money to make good on election promises, whether we're talking about excise duty cuts, an extraordinary pensions hike or family benefits.

Public sector employees can rest easy then. There seem to be no wage cuts or laying off 30,000 people, as proposed by head of Tarmeko Jaak Nigul, on the horizon today. Rather, we will be issuing bonds and paying for things using new income.

The finance minister explained the growing loan burden through the Keynesian approach. That maintaining public spending will compensate for the recession and boost the economy, benefiting the entire country in the process. It also has positive political consequences. I'm sure the ruling parties like not having to dial back state spending and being able to realize election promises. Without having to make unpopular cuts or difficult choices. A good position for meeting elections.

I generally agree that hiking public sector spending can deliver the economy in a crisis situation and lend it new momentum through increased demand. That said, Estonia is too small and sports an economy that's too open. Our additional state spending quickly moves out of the country, even though measures taken by France or Germany to liven up their economies also end up helping us.

It is another matter still where the global economic system as a whole is headed. New money is printed in unprecedented volume. All countries have opened the loan taps, while interest rates remain nonexistent. No one seems to believe countries will ever repay these loans. However, while there is no inflation today, it is bound to return eventually. Should things come undone, Estonia's low loan burden might not help us too much.

Borrowing as much as possible no longer seems like such a bad idea in this situation. That said, spending money at random is never a good idea. In a situation where the government has decided to explode the public loan burden, we could try and do something useful with it. If only to build four-lane highways or insulate apartment buildings.


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Editor: Marcus Turovski

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