Jaak Aaviksoo: Estonia is underfunded

Jaak Aaviksoo.
Jaak Aaviksoo. Source: ERR/ Kirke Ert

Our strategic choice has been a relatively low tax burden, but we have failed to recognize that this is insufficient to provide public services to Nordic standards. This choice should be openly discussed in society, Jaak Aaviksoo writes.

Estonians began a new life with 150 Estonian kroons in their pockets just over thirty years ago. That is 9 euros and 58 cents in today's money.

Hope for a better future fueled entrepreneurship and hard work leading to the expansion of our economy and income. And yet, as time passes, we hear from different spheres of life and activities, that their industry is underfunded. First education and health, then police, rescue services and social welfare, then researchers and environmental protection, and finally artists, local government and transportation.

Along with the public sector, small and medium-sized businesses, as well as some large corporations, are already clamoring for various (price increase) subsidies in order to maintain international competitiveness. Estonia is severely underfunded.

This is also the message motivating the parties' manifestos for the next elections, which emphasize generous contributions to nearly every sphere of life. Even a tenth of these pledges would be beyond the state's budgetary means.

This should be a place for reflection. If everything is underfunded, it is impossibly to salvage the situation by reallocating the state budget, relying on EU subsidies, or consistently borrowing.

To avoid misunderstanding, I will add that there are times when people are truly unable to cope due to a lack of income, and when the extra attention and spending required makes perfect sense. This is not the point at hand.

It also excludes situations in which some groups believe their neighbors simply live better lives. In general, these cases will resolve themselves in some way or another and do not constitute a substantial problem.

The real issue is a pervasive, subjectively felt, and objectively describable lack of funding, which stifles productivity and kills motivation. Such situations, I would argue, are common and, sadly, on the rise. There is a problem, and it has underlying causes.

We begin by examining the political causes. Expecting political decision-makers to offer more and better public services is fair. Looking back over the past few decades, it is evident that each new coalition raises both the number of services and their quality requirements, which collectively exceed the capacity of public revenues.

There are three possible explanations for this.

To begin with, it is usually more politically advantageous to launch a brand-new program or effort than to simply increase funds for an existing one to offset rising costs. Second, in coalition governments, something has to be offered to all parties, and often the funds intended for two activities are divided among three applicants with the instruction to obtain additional funding from internal sources. And no one says no. Thirdly, by improving the criteria for services, such as staff qualifications or access to services, greater expenses, particularly indirect cost increases, are underfunded from internal reserves.

The consequence will be a nominal rise in both the quantity and quality of services provided, even though funding for existing operations is declining. This is the primary cause of national underfunding.

In addition to political factors, entrenched interests also contribute to chronic underfunding. Ministries, who are trying to increase their budgets, are not particularly encouraged to consolidate and streamline the services they provide, because the ministry of finance sees this primarily as a chance to save money. Hence, underfunded quantity is always preferred to properly funded quality. Moreover, inflation, when combined with the budgetary principle of not indexing expenditures, inevitably erodes any sustainable level of financing.

Finally, the behavior of the target groups as well as the institutions themselves merits consideration.

There are two approaches that can be distinguished. The "hard" sectors, particularly those with stronger vertical governance, are in the minority, with extra money being channeled to strengthen the existing system, including by raising wages. These areas are also distinguished by the fact that all investment decisions are made at a higher, or external, level, as well as centrally managed pay policies. In these cases, underfunding is also immediately evident.

The second group consists of "soft" sectors where administrative responsibility is more diffused and managers depend significantly on sectoral and community preferences. Listening to diverse democratically backed interests is of utmost importance in these budgetary decisions: less for everyone rather than consolidation of operations, more freedom (less work) rather than higher compensation.

The latter are characterized by a unique adaption strategy. They minimize their actual working hours in order to commit to an arrangement with a cash-strapped employer for further service. There are opportunities within or outside institutions and often for much more than the basic wage. These areas are easy to identify: despite the screaming underfunding there is no shortage of job seekers, while the additional funds are more likely to increase the number of employees than their pay. There is cause for reflection.

Something to think about in conclusion

Underfunding, as it exists in Estonian society, is not caused by a shortage of funds, but first and foremost by the quality of political leadership and administrative incompetence, particularly at the level of budget authorities. This issue cannot be resolved by allocating additional monies.

Our strategic choice has been a relatively low tax burden, but we have failed to recognize that this is insufficient to provide all public services to Nordic standards. This decision should be discussed openly in society and, according to the results, conclusions should be drawn.

Requests for a review of the public finances have been heard for a very long time. More than two decades ago, Siim Kallas proposed a zero-based national budget. These calls were made in the hope of saving a significant amount of money. This desire could be set aside now, for both substantive and practical reasons. If you start dealing with the authorities primarily in order to obtain money, all the effort is already wasted. Fighting underfunding is a different story.

Reform Party spokespeople have reiterated their commitment to examine our nation's finances. Presumably, if they choose so, they will have the opportunity to fulfill this promise. The steadiness of Estonia's governance will not be proved by a passionate dispute with EKRE, but by the ability to put an end to Estonia's underfunding.


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Editor: Kaupo Meiel, Kristina Kersa

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