Minister of Justice Maris Lauri (Reform) said Estonia is set to receive so much in investments from the European Union in 2024-2025 that Estonia's own spending must be reduced to avoid overheating in sectors such as construction. Lauri told ERR that there is a clear danger of overheating in the construction sector if the Rail Baltic project and three main highways will be under development concurrently.
What should Estonia's budgetary situation be in 2025?
The goal is to reach a structural balance, meaning a situation where the state's revenues and expenses are equal. In doing so, the existing economic situation is also considered. If the economic situation in 2025 is good, the state's revenues should be higher than expenses. If the economy is in worse shape, the expenses should be higher than revenues so we can be close to zero. Structural balance aims to reach a so-called zero.
So we will slowly begin to cover for expenses we have made during Jüri Ratas' first and second governments and also those that [Prime Minister] Kaja Kallas' current government is making?
Before all, there is pressure from previous years. We have additional pressure from the extraordinary conditions of the coronavirus crisis, but the main problem stems from earlier years. Our reserves are running out. Too much was spent during good times and we were actually at a structural deficit. In previous years, they imagined that life will only go well and now we must inevitably make corrections.
Estonia's state budget makes up 18 percent of the gross domestic product (GDP), the absolute lowest in the entire EU. Italy's debts make up 155 percent, Finland's 70 percent and Greece's debts make up 205 percent of their GDP. Should we be dealing with balancing our budget during this period of massive money printing and depreciation?
As in every decent household, the state's revenues and expenses should be reasonably balanced. There are certainly situations where it is wise and reasonable to be in the so-called negative. But income must be compensated later. We cannot be in the negative forever. Debt burden is not the only parameter, they also look at how rapidly the debt grows and what are the capabilities of paying back said debt.
Save for a few concessions, the Estonian state has always been responsible in running its finances in recent years. This also means that we get a better loan in terms of paying it back than those whose debt burdens are greater.
When servicing a loan, you have to pay interest. Yes, interest rates are currently negative but they will not stay that way forever. And let us imagine that we had a high debt burden and interest rates, that can end up very burdensome for the country. We are luckily not threatened by this currently, but there is potential to reach that point. It is reasonable to react before things get worse.
Greece's debt level is still lightyears away when compared to Estonia's. Due to the coronavirus crisis, Estonia's debt level has climbed from 9 percent of the GDP to 18 percent. We are currently in an extraordinary situation, perhaps expenses made during the coronavirus crisis can be left out of structural balance discussions?
Well, there is no such rulebook. The European states have agreed on the common structural budget balancing rules. Setbacks resulting from the coronavirus will partly be added to the structural budget. Some of the healthcare expenses will luckily not be accounted for. If the economy is fully restored by next year or the year after, we must begin moving toward paying back the additional expenses during the coronavirus crisis.
Of course, it would have been simpler for us if we had more in reserves. You have to have a reserve for rainier days, you must be prepared for extraordinary expenses as an individual as well – whether it is a visit to the dentist or replacing a broken refrigerator.
The European Commission would likely not say a single critical word if Estonian parties agreed across the board to not account for coronavirus expenses in the structural budget. It was and is almost like a natural disaster and luckily we had very little debt and more money is printed in the world. Now let's look at the much higher debt levels of others…
We can certainly discuss how long and in what capacity should coronavirus effects be accounted for in monetary policy. It is not like we are rushing so that the budget must be balanced next year, although economic analysts predict that we will restore our pre-crisis economy next year. We are thinking of multiple years here and there is a little clearance. But I will also come back to it still being reasonable in the long-term to balance out revenue and expenditure.
Let's look over the ocean, the U.S. administration has announced it will allocate €2 trillion to the road network, bridges, power lines and other infrastructure objects. But we at ERR have received notices of the Estonian government instead opting to pull back on highways in 2024-2025. We cut investments to look for balance but Americans keep printing out money and will put it to use?
Our problem is that Estonia is set to receive very-very large shipments of money from the EU's new budgetary period. If we use this reasonably, there are many investments we can make with just this money. What can realistically happen instead is that the flow is so sizable that we can create additional inflation for ourselves. We might not have the constructional capabilities and workers; we might end up overheating.
We could also reach a situation where entrepreneurs cannot upgrade their production because construction prices have gone up. The state also holds responsibility to allocate these expenses reasonably. I really would not like to go back to 2005-2006, where every man went to work on construction, figuratively speaking. And then there was someone else brought in to fix it.
A similar thing is possible in 2024-2025 thanks to EU funding. Let us not forget Rail Baltic, which means large construction volumes and a so-called deprivation of people. We will use EU funding in 2024-2025 and then we will maintain pace in 2026-2027 with state funding, so this process would be distributed over a longer period. It is always better for the economy.
We have truly reached a phenomenal time for the Estonian state where we do not have to spend anything ourselves and can make these investments with EU money? In principle, this is the pattern of behavior the government agreed upon?
We will use EU funding in the capacity we can use it in. But there are places where we cannot use EU devices. And that is where we will use the Estonian taxpayers' money. I cannot state the exact rate of taxpayer money in these investments, but we also need co-financing. The Minister of Finance has these tables.
So the construction of four-lane highways will be put on hold then? It would take €400 million yearly by 2030 to complete them and since EU funding cannot be used for large highways in principle, we will wait until the budget is balanced?
This is a topic for the finance minister (Keit Pentus-Rosimannus - ed) and the economic affairs minister (Taavi Aas - ed) and I will not stick my nose in that field. Each minister is responsible for their own affairs.
Can we not leave out so-called future investments from the structural balance discussion? Even the construction of these highways? They will bring more money back in the future and are important for life to continue outside the capital?
Highways are undoubtedly future investments. But if we were to begin developing three main highways and Rail Baltic concurrently, the construction volume would be enough to exceed the capabilities of Estonian companies. We could bring in workers from outside of course.
Meaning, if we do all these things at the same time, it might go beyond our capabilities. We have had real estate developers who have taken on too many projects and it has exceeded their capabilities. They are all good projects on their own, but failure comes when there are too many of them. And that is the danger, that we start doing everything at the same time. Therefore it is reasonable to see when one thing can be done and where it could be placed in the schedule.
Editor: Kristjan Kallaste