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Minister: State budget deficit reduction set at €400 million for next year

Annely Akkermann.
Annely Akkermann. Source: Siim Lõvi /ERR

The coalition-to-be plans to cut the state budget deficit by €400-450 million per annum, Minister of Finance Annely Akkermann (Reform) says.

Akkermann said that the budgetary situation needs improving, in order to bring the state budget deficit below the 3 percent of GDP level agreed by the EU.

At the same time, the effort required to attain nominal budgetary balance would be less than that needed to achieve a structural balance.

The structural budget balance refers to a government's actual fiscal position, purged of the estimated budgetary consequences arising from the business cycle, and is designed in part to provide an indication of the medium-term orientation of fiscal policy.

Akkermann told ERR's radio news that: "This below 3 percent of GDP in nominal terms level derives from the goal of curbing inflation - a goal of the financial stability of countries. This is what the coalition is going to attempt."

"Structural budget balance is a method that also takes into account economic cycles and, in my opinion, it is a very useful method and allows to more accurately decide what kind of nominal deficit the state could adopt the surplus rule as a goal for the ensuing periods," Akkermann went on.

As for the deficit for next year, Akkerman put this at around €400 million.

"I think the coalition negotiators have yet to decide on this, but in my opinion it is enough to reduce the difference between costs and revenues to the extent of €400 million," she told ERR Wednesday, subsequently putting the figure at €400-€450 million.

"If we are talking about budget deficit, then for this year, both the Bank of Estonia and the Ministry of Finance think that the nominal budget deficit could be somewhere between 3.7 and 3.9 percent of GDP, though next year's target is 2.95 percent," she added.

"This difference lies somewhere between €400 million and €450 million. This does not mean cuts, but certainly narrowing the gap between income and expenditure," she added.

At the same time Akkermann stressed this was her view as finance minister, adding she could not instruct the coalition negotiators on the matter.

"The coalition negotiators are considering things, but I do not have the authority and I do not know in advance what they will agree on," she added.

The budget deficit, from the point of view of structural balance, could be reduced at much the same pace in the subsequent years, she added.

As to measures the new coalition could use to balance the budget, Akkermann said that her desire would be to to keep Estonia's tax burden below 34 percent of GDP.

Some types of taxation, such as property taxes, could be introduced, as the current levels are particularly low, Akkermann said, in relation to Reform's desire to get rid of the so-called "tax hump", also known as bracket creep.

This has arisen as the current income tax system in Estonia was set up over five years ago, when average wages, and rates of inflation, were lower than they are today, but with wages and prices both rising wages and the current soaring inflation, more and more people are hitting the "tax hump", as they move beyond the income tax basic exemption threshold.

Cuurently, the tax-free income tax threshold gradually fall in the €1,200-€2,100 salary range, and reaches zero at a monthly salary of €2,100.

Coalition negotiators have also indicated the possibility of leaving open the issue of raising the land tax limit.

Reform has traditionally been the party of balanced budgets, but challenges in particular from the Covid crisis onwards has seen the state budget move into deficit.

As to loans taken the Estonian state, Akkermann said that interest rates have been rising and, for instance, state-owned electricity generator Eesti Energia will not be able to obtain loans at the low rates it has been doing, due to its involvement in fossil fuels extraction and sue.

The network component of the Eesti Energia group, Elektrilevi, being made a separate entity, as planned by the coalition, also will not make borrowing cheaper, Akermann went on.

Elektrilevi cannot be used as a buffer, or a hostage, the minister said

"Elektrilevi must first and foremost deal with its end customers, while its management, its operations and financing must still be based on the customer, ie. the end consumer."

Under the terms of the EU's Stability and Growth Pact (SGP), Member States have pledged to keep their government deficit below 3 percent of GDP, while its debt may not exceed 60 percent of GDP.

The Reform-Eesti 200-SDE coalition negotiations are in their fourth week, while this lineup is expected to enter office next month, once a deal has been signed and the administration voted in at the Riigikogu.

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Editor: Andrew Whyte

Source: ERR Radio News, interviewer Madis Hindre.

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