Former Bank of Estonia governor on fiscal policy: There are no free lunches

Ardo Hansson.
Ardo Hansson. Source: ERR

The state budget relies too heavily on borrowed money and the planned deficit is too large which will cost Estonia sometime in the future, said Ardo Hansson, former governor of the Bank of Estonia, on ETV politics talk show "Esimene stuudio".

Any estimations for the future must assume that next year will be better than the current one and that the virus will not cause further closures, Hansson said.

The former Bank of Estonia chief noted: "Estonia has actually been a country oriented toward tourism, we have the largest tourism sector of the northern Baltics and all contact services are important."

Hansson said the economic situation can change quickly and it is better to remain at a semi-realistic estimation when drawing up a state budget. "In this budget, you could probably take a look at the details of expenses, but there is quite a bit of fat programmed in," he said.

Hansson added that the state has had time since spring to learn and plan, also taking long-term investments into consideration. When the coronavirus crisis started in spring, decisions had to be made based on gut feeling.

The financial expert said cuts have to be made in addition to loans, but the current budget relies too heavily on loans. "Right now, if we are looking at the budget project, it is far too heavily skewed toward loans. If we look at it in actuality, it should be that as the situation worsenes objectively, we offer more stimulus," Hansson said.

He continued: "Now, as the budget estimations foresaw, next year we could live just a bit better than this year, we should presume that the budget would be more strict and some cuts would be made. But we do not see that."

According to the former central bank governor, a more reasonable budget should have been designed at first and then borrowm as need comes up. The current debt burden does not allow for more loans, if the crisis were to worsen.

Hansson said the budget for 2021 is built around borrowed money and it will be a difficult hole to to climb out of. "Let's say that this borrowing is like taking a painkiller and doctors never tell you that the more you take of it, the better. My biggest worry is that if we get used to the new level of expenses and can not fight our way out of them or leave it to the next government -they are forced to make very tough decisions," he explained.

Hansson's assessment was that the big picture should be considered when looking at the budget and it is abnormal that Estonia is the only country in the Eurozone, who stepped on the gas during the crisis.

"There are no free lunches and we will have to pay for this behavior in the future," he said.

Hansson noted that he is not in favor of the pension reform and a mandatory second pillar is the only way to manage with a pension in the future and that destroying the pillar will instead bring conflict and divides in society.

The former Bank of Estonia governor concluded: "It offered some relief in the conflict between generations, if we destroy it and the mandatory factor is no longer, then future governments will be put in a tough situation and they will not have the resources necessary to meet society's expectations."


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Editor: Kristjan Kallaste

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