The current economic downturn is atypical in that it is primarily supply-side-related, and has no obvious light at the end of the tunnel, Bank of Estonia (Eesti Pank) chief Madis Müller said Tuesday.
This was a cause for concern, he added, with spend on areas such as defense, state pensions and other areas contributing to the problem, while further support measures may also exacerbate the continued high inflation rate.
Müller said: "Taking all the above into consideration, it seems that the state budget will be in a rather permanent deficit when looking ahead.
"Considering the total size of the economy, the permanent deficit will be about three percent of GDP, or, in other words, every tenth euro that the state spends is loan money," Müller went on.
Pressure has also been put on savings deposits more recently, the central bank governor said. "This means that deposits have been used to level the pressure of price growth on their consumption, trying to keep consumption unchanged,."
While deposits can shore up consumption for a time, he went on, this is not a bottomless pit, particularly with regards to the average person's savings.
"It should also be borne in mind that these deposits are not very evenly distributed. Those with larger deposits direct a smaller proportion of that into consumption than those with smaller deposits," Müller said.
Several measures that will permanently worsen the budget position will come into force next year, Müller said, namely an increase in family allowances, an one-off increase in pensions, a pension income tax exemption and the planned boost in the income tax-free threshold.
Public sector wage pressure and defense spend will also have their effect, he noted, as will the effect of the liberalization of the pension system, which allowed wage earners to withdraw their employer/employee contributions, if they wished to, as will energy support measures and support to those fleeing the war in Ukraine.
None of this suggests a budget deficit fall, even in the future, which, Müller said, is a cause for concern.
Furthermore, the current downturn is not a calssical-type recession that goes hand in hand with low demand and consumption. The problems behind inflation are primarily related to issues of supply, meaning excessive support of consumption and demand would also be dangerous and set up a vicious spiral of inflation, Müller added.
The Bank of Estonia issued its economic forecast for the year Tuesday (link in Estonian), which puts 2022 inflation at 19 percent for the year, and at 7 percent for 2023. Rapid inflation is behind a contraction in the Estonian economy and the subsequent reduction in consumption
Traditionally, the senior coalition partner, the Reform Party, had had balanced budgets as a central plank in its platform.
Editor: Andrew Whyte