State budget deficit is modest, lower than a year ago

2023 state budget  explanatory memorandum.
2023 state budget explanatory memorandum. Source: ERR

The deficit stood at €163 million at the end of November, or 0.4 percent of the estimated annual GDP, according to the summer forecast of the ministry of finance. This is lower than previous year; the last time the second half of the year had such a small deficit was prior to the pandemic crisis.

At the end of November, expenditures outpaced revenues in both the central and local levels of government. The surplus of social security money has remained stable throughout the year.

However, in all three sectors, the situation is better than a year ago. In comparison, the deficit as a share of GDP at the end of November was two percent lower than it was a year earlier.

Tuesday's statement from the finance ministry credited the improvement partially to the higher tax revenues, which is nonetheless also due to price inflation. Non-tax revenues are also above average.

On the other hand, a supplementary budget for the same period in 2021 had already been approved, laying the groundwork for increased spending.

The expenditure in this year's supplementary budget has been lower than expected and will remain so until the end of the year.

At the end of November, the central government (primarily the state budget) had a deficit of €297 million. This is €375 million more than the same period last year.

The deficit has stayed unchanged over the past six months, indicating that expenditures and revenues were in balance throughout this time, with the deficit emerging in the early months of the year.

The last time there was such a small deficit in the second half of the year was prior to Covid-19 crisis.

The better-than-anticipated outcome is a result of both substantial tax receipts and lower-than-anticipated expenditures.

Despite the substantial amount of excess income tax received in October of last year on money taken from the second pension pillar, income tax receipts (from both individuals and businesses) are substantial. Both the increase in the general payroll (due to taxes paid by war refugees) and the income tax paid by people leaving the second pension pillar, albeit at a lower rate this year, contributed to the significant revenues. Indirectly, both are aided by rapid price increases.

VAT receipts are also rising rapidly, up 16 percent in 11 months, but the rate of increase is slowing now.

In addition to tax revenues, non-tax revenues such as sales of goods and services increased 31 percent, other revenues increased 60 percent, and financial revenues increased 678 percent year on year.

On the expenditure side, investments were lower than expected.

The Health Insurance Fund (Haigekassa/Tervisekassa) and the Unemployment Insurance Fund (EUIF) both have significant surpluses

The social security funds sector, which includes the health fund and the unemployment fund, recorded a budget surplus of  €171 million at the end of November. Compared to the previous year, the Health Insurance Fund's surplus has increased by €27 million, to €144 million. Recovering social tax revenues and ongoing financial support from the central government have contributed to this favorable development.

The expenditure side of the Health Insurance Fund has been exactly on budget.

The Unemployment Insurance Fund had a surplus of €27 million at the end of November, €51 million up than the previous year.

Despite higher costs associated with Ukrainian war refugees, the Unemployment Insurance Fund had a surplus for the first time since 2019.

At the end of November, the local government deficit was €40 million, which was €13 million less than the deficit at the end of November 2021, while the financial situations of local governments usually worsen towards the end of the year.

Total state budget expenditures increased, primarily due to a rise in tax revenues and subsidies received

In November 2022, the total expenditures of state budget agencies grew by €279.1 million, or 25.4 percent, compared to November 2021, bringing the total expenditures in November to €1.2 billion.

In November, the major increases in expenditures were due to the transfer of tax income and the awarding of domestic and international grants.

November expenditures affecting the position of the overall state budget rose from €724.4 million to €775.2 million, an increase of €50.7 million (or a 7 percent annual growth rate) compared to November of the previous year.

Increases in social and operating subsidies were primarily responsible for the rise in general government expenditure.

Social payments €43.7 million and operating subsidies €38.9 million grew by €49.2 million, or 10.6 percent, in November compared to the same month the year before.

Domestic targeted operating grants declined by €24.8 million, while domestic investment grants declined by €8.6 million. Among social benefits, old-age pensions increased by €11.5 million and parental benefits by €6.1 million. In addition, a price increase mitigation grant of €27.9 million was paid in November.

Domestic earmarked funding for operating expenses also fell due to technical reasons in November, when €31.9 million in grants to Estonian Public Broadcasting were transferred to the operating grants account.

Grants to public transport services, as well as grants to AS Elron and AS Eesti Raudtee, increased.

As a result of local governments' increased reliance on the 2021 supplemental budget to fund investment projects, domestic investment grants reduced.

As of November, state budget agencies utilized and mediated €197.8 million in foreign grants, 277 percent more than in November of the previous year. The amount of foreign grants for operating expenditure increased by €184.4 million in November, while foreign investment grants increased by €15.5 million.

In November, operating costs fell by 28.5 percent, or €36,4 million, compared to the same month the previous year. In November of the previous year, defense-related expenditure on ammunition and expenditure on health services and medical and hygiene supplies, due to the widespread spread of the coronavirus, were higher.

In addition, the November expenditures of the previous year included a write-down of €19.2 million on stocks of personal protective equipment.

Electricity, heating and energy expenditures for state-funded organizations' buildings and facilities climbed by €2,7 million in November, which is an annual rise of 86.2 percent.

In November, the cost of housing and food for war refugees was €4.2 million.

Labor costs increased by €14.1 million, a 15.3 percent increase compared to last year. The main reason for the increase in labor costs this year was the increase in wages and salaries in education, information technology and internal security.

In addition, €2.8 million of the 2022 supplementary budget was used in November for labor expenditure.

Investing grew by €6.8 million or 13.3 percent in November compared to the same month the previous year, mostly due to an increase of €6.2 million in defense spending.

This year, up to the end of November, investment growth has been much slower than it was at the same time last year. A number of investment projects and governmental procurement have been postponed due to rapid price rises and a deteriorating economic climate.


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Editor: Kristina Kersa

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