Finance minister: Next year's salary advance disputes will be difficult

Keit Pentus-Rosimannus.
Keit Pentus-Rosimannus. Source: ERR

Finance Minister Keit Pentus-Rosimannus (Reform) said in a lengthy interview with ERR that the quick increase in costs in the public sector necessitates a pay raise. Rosimannus also added that it is too soon to predict whether the budget will be in surplus.

We are in an actual emergency situation. Europe, and Estonia in particular, are confronting a crisis in energy prices and an inflationary cycle has begun. The latter will permit the government to quickly refill the state's coffers. Will next year's budget be at least a fifth larger than this year's?

It's too early to tell, but a new economic forecast will be released next week that will give a far more accurate picture of what is to come.

We don't know yet whether Estonia's recent rapid increase in tax revenue will continue next year. After all, the economy has recently seen an uptick in volatility and uncertainty, so it is the economic forecast that will allow for the establishment of a concrete framework for budgetary negotiations.

I am currently engaged in one-on-one talks with the heads of the government departments, in particular, we go in more detail over the changes that directly result from the new coalition agreement. Because the time for this coalition government is limited, we should make sure that nothing is overlooked and that the major, significant changes agreed upon during coalition formation discussions are properly reflected in the budget.

Is the so-called three plus two system still in effect, in which the previous administration required each ministry to provide its top three objectives and two additional requests?

This was important in light of a previous integral context. Since then, there has been a government change as well as a new coalition agreement with lofty goals. We skipped this bureaucratic round of collecting additional requests because the extensive coalition negotiations had just ended.

It is critical that we now include all of the changes outlined in the coalition agreement in the budget.

In essence, the new requests from the ministries should address the coalition agreement's provisions that are set to take effect next year.

Have the ministries prioritized cluster projects? For example, do several important funding requests and needs fall under the same priority?

Based on previous experience, I would say that this is nothing out of the ordinary; it is still attempted on occasion. If a government agency is allowed to submit no more than three additional requests, there is always an attempt to combine 15 separate requests for additional funds into a single request. This has happened in the Ministry of Finance before, and it is likely to happen again. This is not to say that sending out bundles of parts and pieces will increase the likelihood of success.

Next year, an increase in family allowances will be a very pricey change for us. In terms of costs, pension increases are automatic; pension will for the first time exceed €700.

We have also decided that the average pension will be tax-free starting next year. Also, the tax-free minimum will play an important role in the upcoming budget as well as the high cost of transitioning to Estonian-language schooling.

Obviously, salary has been a recurring topic in all of my budget related discussions and meetings with public officials to date. Since a few years, fiscal policy has included pay rises in such priority fields as teachers, police, and rescue workers, as well as cultural workers.

For the time being, however, the pressure on wages is the hope that they will not remain at the levels they have been since 2021, when they were effectively frozen. Some form of catch-up is needed.

During the upcoming budget negotiations with all government members, we will have to discuss this in depth.

In what are already difficult circumstances, we should not give inflation a further boost or leave major issues unresolved.

In January 2023, a person whose salary was last increased in January 2021 will earn at least 30 percent less in real terms. Would you agree that a 2-3 percent increase is no longer acceptable?

I will not provide percentages at this time; of course, the situation is not uniform across the entire public sector. Internal changes have been successful in increasing pay in some parts of the government, despite the fact that no new funds have been made available. Nevertheless, the situation is far from equal. At the start of budget negotiations, we will provide the government with a comprehensive summary of the state of the payrolls of the various government departments.

In fact, we attempted a comprehensive comparison by government department. We looked into what salaries are paid in different government departments for comparable positions with comparable qualifications. And I must say, there is quite a difference.

At this point, we should consider whether to prioritize areas where wage disparities are already severe, or to take a different approach entirely. Wage and compensation discussions could be lengthy and in-depth.

Is it now clear, as of mid-August, that the Estonian government will have a budget surplus this year?

If someone has such a clear perspective, I'd be interested in hearing it.

If we continue at the current rate, the state budget will undoubtedly be in surplus, according to the budget execution numbers for the last few months.

I wouldn't be so certain yet. The overall confidence index, which measures the confidence of both businesses and individuals, has recently been declining. The external environment has also increased uncertainty. Although not as severe as in the spring, this may have an effect on the second half of the year as well.

We have seen in recent times and years how a once-bright picture can change dramatically due to sudden and unforeseen circumstances. That is why I would rather advocate restraint in jumping to conclusions.

If the relatively fast increase in tax receipts seen in the first half of the year continues, the budget will be in a significantly better position by the end of the year. However, we cannot ignore the fact that this year has seen, and will likely continue to see, a very high level of crisis-related costs: the energy crisis, the security crisis, and the unfortunate pandemic crisis. In this sense, there is still a long way to go until the end of the year, and we should keep a clear head and be prudent when preparing any sort of state budget expenditure.

You removed the Tallinn Hospital and several other projects from the list of the European Union recovery funding requests when only Reform Party ministers were in office. Do you have a plan for how you intend to spend the funds that have been released? The Ministry of the Environment, for example, requires €34 million to restore peatlands, which could be covered by the restoration scheme. Are you going to divide this money among projects like this?

Ministry and ministerial requests have now been submitted. The Recovery Fund's entire premise has been to provide immediate relief from crises while also supporting reforms that will help to reduce future crises costs. I'm not talking about one-time grants here, but rather investment assistance to help us address the most severe bottlenecks.

The energy crisis will almost certainly be a major focus. Discussions on how to specifically present the recovery budget amendments to the European Commission, i.e. how to flesh out this recovery plan, will take place alongside general budgetary negotiations. We will have made these decisions by the end of September.

As finance minister, you must be rather pleased that the price of CO2 quotas has reached a new high, as it costs more than €96 per ton and the government receives much more money. However, should there be a clear price ceiling in this system?

I'd be happier if this system worked without too many glitches and increased consumer and business confidence.

True, the state's sale of CO2 quotas will generate far more revenue than expected this year, but these funds can be used to make additional investments. We can significantly encourage energy sector investment while compensating domestic consumers for high prices.

Whether or not there is a justification for changing the entire CO2 trading system, these discussions should and must take place at the European Union level, not at the national level.

I don't think I have a single finance ministry colleague who does not discuss inflation and energy prices as causes of inflation at every meeting.

These debates will continue, but the underlying logic of CO2 quotas is that they act as a signal. A sign that more investment in clean energy capacity is required. It is still true that when there is a problem in the backyard, people act very quickly.

We are currently witnessing an increase in renewable energy capacity as well as a search for bottleneck solutions. If this had been done years ago on the basis of a well-thought-out and comprehensive plan, we would not be in the critical situation we are in today.

Why hasn't the government made a proposal to the other European Union Member States to control the price of quotas at this critical juncture? Former Economy Minister Taavi Aas suggested it could be €25. You go to meetings where people complain about high inflation and energy prices. But where are the concrete proposals?

The finance ministers' discussion on inflation with the European Central Bank has resulted in decisions to raise interest rates that were previously delayed until later this year. In the end, their sole goal was to keep inflation under control.

On the fiscal side, keeping spending under control is the most effective fiscal lever for controlling inflation.

Looking at Estonia's own national budget, we can see that the budget we established at the end of last year once again had much larger income than expenditures.

It is clear now, in the middle of the year, that this is not the case...

This is the current state of affairs. Revenues exceed budgeted revenue expenditures. Our spending is not growing faster than our revenues, which I believe is appropriate. There is no other way out of this chasm of transition.

Clearly, there will be people who believe that the government should spend far more and for whom balancing their income and expenditures is a difficult task.

However, looking ahead, our nation's reputation and strength will be determined by its financial health. Times of crisis naturally lead to very urgent emergency spending, there is nothing to be done. However, we must exit the crisis by spending no more than we earn.

Unfortunately, I did not receive a response regarding the price of CO2 quotas.

Is there a substantial solution for the upcoming winter given that there is a severe electricity deficit in our region? We have support measures for private consumers but what about businesses that depend purely on either electricity or gas? Some companies will be forced to cease operations, or production may move to Finland or Sweden, where electricity is cheaper.

I am sure that the Minister of Economic Affairs and Communications will be able to discuss in great depth the strategies that have been developed in this ministry and which, in fact, the previous Minister of Economic Affairs Taavi Aas was responsible for developing.

Long-term fixed-price contracts have been one of the most important ways for large customers and industry to hedge their risks. While private consumers have only recently been able to lock in a price for an extended period of time, industries have had this option for a long time.

Industries are also changing their energy sources. This is especially true for large gas consumers as the price of gas is skyrocketing in response to Russia's actions.

Of course, changes in energy prices have an impact on business competitiveness, and solutions are being sought.

However, the increase in heating prices last year foreshadowed what was to come.

Our businesses have been preparing for the upcoming winter; the situation is dire.

Isn't that what you see, a disaster on the horizon? Many businesses rely on electricity for production, and there is no substitute; they cannot use wood burning or other sources, can they?

It is going to be a very difficult winter in many ways. Let's look at what is happening in the field of security, since yesterday we have had to fight the worst cyberattacks in 15 years.

It will undoubtedly be a challenging time for our companies, and it will not be easy for families.

If you ask me if I predict a disaster, I will tell you that it will be a difficult time.

And this has been clear to us since February 24th.


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Editor: Kristina Kersa

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