Journalists: Will higher economic growth stop government cuts?

Anvar Samost and Toomas Sildam.
Anvar Samost and Toomas Sildam. Source: Ken Mürk/ERR

According to the summer economic forecast published by the Ministry of Finance, the economy will grow more this year than expected in the spring. Now it is time for the government to discuss whether to proceed with budget cuts and how to prepare next year's budget in an uncertain situation, ERR journalists Anvar Samost and Toomas Sildam discussed on their radio show "Samost ja Sildam".

Back in the spring of this year, the Ministry of Finance forecasted annual economic growth of 2.5 percent and inflation of 2 percent. In the economic forecast published on Thursday, the ministry now predicts 9.5 percent growth and inflation at 3.8 percent, Samost said.

Sildam said the growth figures are high because they are compared to last year's crisis when coronavirus severely stunted the economy.

The pair discussed if the increased tax revenues and higher economic growth forecast will allow the government to abandon the cuts planned so far during the budget discussions.

"It has now become clear that tax revenues have been €500 million higher than expected in the spring," Samost said. "This basically means that next year's tax revenues will be €600 million higher than expected in the spring, which in turn means that the planned deficit will be significantly lower."

Samost noted that the government must also take into account the €1 billion released by the second pension pillar, which may further increase revenues.

"Does the government have the idea of ​​making a budget of hope or a budget of disappointments? On the one hand, given all the frustration that has inevitably been created by the coronavirus in society and the people's understandable desire for positive news, on the other, there will be new elections in a year and a half," Sildam said.

Samost said the Center Party certainly does not want cuts and now economic growth and tax revenue support their arguments. "Probably a couple of savings or cuts will be found, which can be shown as the Reform Party's victory in maintaining budgetary discipline and the wage increases, investments and other nice things that the governing coalition parties can present to their voters," he said.

In the following years, the state must also reimburse pensioners' contributions suspended to the second pension pillar - with interest.

"It was thought that there would be no big rise in the stock markets, which still needs to be compensated there. It turns out that the stock markets rose so strongly that perhaps more than €50 million will have to be compensated, in addition to the few hundred million unpaid," Samost said.

"In my opinion, this is a very clear and direct example of what happens when we have a dogma that we are not taking loans. The credit card interest rate is close to 16 percent," Samost said.

Sildam noted that the decisions were made in a time full of uncertainty when it was not known where the world was moving to with the coronavirus.

"I remembered the terrible experience of 2008, everyone remembers how Latvia was on the edge of collapse. All those who made decisions were basing the decisions on the knowledge and understanding that was then and the aim was not to fall into a very deep hole," he added.

Samost highlighted the warning made by the President of the Central Bank Madis Müller that inflation may not slow down as fast as the European Central Bank predicts.

He said that the forecast of the Ministry of Finance is also optimistic about inflation: "Looking around, it doesn't seem very realistic. It means that on the one hand, the state budget receives more money in taxes, but on the other hand, everyone also has higher expenses, both as taxpayers and the state in distributing tax money."

Sildam noted that preparing the budget for next year is difficult because there is a lot of uncertainty.


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Editor: Roberta Vaino

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