Central bank governor on state fiscal policy: Can't live above our means ({{contentCtrl.commentsTotal}})

Governor of the Bank of Estonia Madis Müller.
Governor of the Bank of Estonia Madis Müller. Source: Priit Mürk/ERR

Governor of the Bank of Estonia Madis Müller says the state's strategy to cover fixed costs by increasing debt burden is not a responsible one, and if the state were to consistently live beyond its means, everyone would be poorer in the end.

Müller wrote on his social media account that the Bank of Estonia's recommendations regarding the state budget have always been based on the logic of being frugal during good times, to retain the ability of supporting the economy with additional spending during tougher periods. "We are currently in a crisis and it is reasonable to support the economy," Müller noted, adding however that it is not smart to do so indefinitely.

The central bank governor wrote: "Experts agree that the economy will need support in the form of additional public spending in 2020 and 2021 because the effects of a crisis do not disappear right away."

Müller said temporary expenditures, such as unemployment benefits, retraining and KredEx loans are measures which will not be necessary after the economy recovers.

No reason to keep state budget in deficit after economy recovers

Due to current uncertainty, Müller said it is currently hard to forecast if Estonia's economy will recover in 2022, or later.

He said: "We must maintain flexibility, but a long-term state financing strategy should be clear. If Estonia's economy recovers by 2022, there is no reason to keep making crisis-related additional expenses, keeping the budget in a deficit."

The Ministry of Finance predicted a return to pre-crisis levels by 2022 in their latest forecast.

Müller noted that taking the budget to its pre-crisis levels does not call for cuts in comparison to the level of spending before the pandemic hit in March, leading to an extensive economic recession.

"If the economy has recovered, we do not need temporary support measures implemented during the crisis. The new starting and reference point should not be the extraordinary spending of 2020," Müller said.

Müller continued: "The state budget and Estonia's economy - through European Union funds - will receive a substantial boost, also from the EU economic recovery fund. The pressure to cover expenses and investments with borrowed money should therefore be much smaller."

The EU's budget for the next seven years will be €1.074 trillion. In addition, there is a €750 billion recovery fund based on a joint loan from the EU. €390 billion of this will be used in the form of grants, and €360 billion as loans, across the union.

Estonia will receive €6.8 billion from the new long-term budget for 2021-2027. In addition to the budget, Estonia will receive more than €1.5 billion in subsidies from the economic recovery plan over the next three years. This means the country will receive almost €2.17 billion more from the next EU budget than in the current period. 

State expenses have been too high for the past four years

Müller noted that the state budget's recovery, as the economy recovers, allows for a relatively modest increase in expenses. "This is so because expenses have already been too high for 2016-2019, considering the economic situation and costs. This does not mean that we should not strive for a reasonable balance however," he wrote.

The central bank governor added: "Obviously, it is not smart for the state to plan increasingly larger expenses if less is received from taxes. That would mean borrowing money to cover fixed costs and a constantly increasing debt burden, which is not a responsible strategy in the long-term."

Müller said: "The state consistently living above its means will make us all poorer in the end: Prices will increase and Estonian companies will find it more difficult to export due to higher prices because our products and services will be made more expensive, leading to jobs and wage growth being in jeopardy."

He noted that loans will also have to be paid back and it is also reasonable to maintain borrowing capacity for any coming crises.

Müller concluded: "Politicians who received support during elections must decide how to spend state finances because people have given them a permission to do so. If the desire is to increase the level of expenses, this can be done by increasing tax revenue or by cutting other costs, thought to be important until now."

The Bank of Estonia's forecast will be finished by September's end.

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Editor: Kristjan Kallaste

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