Ansip: Unspecified search for €400 million shows government's ineptitude

Andrus Ansip.
Andrus Ansip. Source: Ken Mürk/ERR

In an interview with ERR, Reform Party former Prime Minister Andrus Ansip said the government's austerity plans and search for new revenues must be linked to the goal of kick-starting economic growth in Estonia.

You have been Prime Minister of Estonia for a long time, including during the great economic crisis of 2008–2009. Now, in 2023, the current government wants to put in the national budget strategy that in 2025 there will be a tax increase of €400 million. We don't know what this tax will be; members of the government don't know either or won't say. What is it about? Is this OK?

This is primarily a reflection of the fact that not enough is said to the people and not enough has been thought about the future. The global financial crisis that you mentioned, which hit Estonia in full force in 2009, was a very different crisis from the one we are facing today.

And is there a crisis, or not? This remains open to debate.

But in 2009, we made most of the cuts with a minority government, which means you have to explain more to the public and you always have to get some kind of support from the opposition as well.

The people realized the necessity of these cuts and tax increases and the Reform Party won the subsequent elections in 2011. At the moment, the economy is in recession, but unemployment is relatively modest, so the government has not deemed it necessary to substantially increase social spending.

I find it hard to understand how, in the face of sharp inflation, it is possible not to run a surplus budget at all.

But we are here, and now we have to get on with it. We must be clear about why we are adjusting our budget and why we need additional funds.

Recognizing that the law mandates less spending is insufficient; there must be a greater cause.

In 2009, our objective was to prepare our public finances for entry into the eurozone.

The financial stability of Estonia attracted Finnish and Swedish firms that could no longer produce there profitably. They had the option of traveling to China or Estonia. So it happened. Ericsson consolidated its biggest European co-working factory in Tallinn, while Telia made a substantial investment. Once the two largest companies had invested, the lesser companies all followed suit.

Clearly, investment meant employment, so we emerged relatively quickly from the recession. Now, in the same manner, it has to be articulated how we will emerge from the recession.

Now, returning to the issue you posed right away, whether it is normal to budget only the expected revenue of €400 million without specifying the source, I do not believe it is normal and I do not believe it is good practice.

However, it must be noted that this is not unprecedented. Let us recall how the government led by Jüri Ratas and EKRE wrote a billion in revenue that was intended to come from state reform into the budget. Kaja Kallas' government then had to find a way to use this billion.

However, it is not a good idea to delegate the vague task of locating approximately €400 million. In that case, a contingency plan should be included in the budget, if we were compelled to pursue this course of action, detailing exactly what will be left undone if the money simply does not come in.

The current law for the national budget mandates an annual budget surplus of 0.5 percentage points of GDP to make up for past deficits. Now, a fast-track amendment will be made, and it will no longer be necessary to reduce about €2.5 billion by 2027; €1 billion will be written off by this amendment. It's as if we've eliminated a billion-euro need in a single weekend...

It is not a sound practice when, on the one hand, there are only two days remaining for the inclusion and coordination of numerous drafts and, on the other hand, it turns out that so much inclusion is required that we simply write €400 million of anticipated revenue into the budget.

Most likely, we have not yet reached the depths of the crisis. Or even if we are, we must still be prepared for the possibility that the situation might deteriorate.

So the proposal to consolidate the stabilization reserve and liquidity reserve is not particularly rational. Clearly, the purpose of this merger is to deplete the resources of the stabilization reserve. And if things continue to deteriorate, the state will be forced to borrow at exorbitantly high interest rates. This should not  happen.

All difficult decisions, including the lingering €400 million tax increase, will be postponed until the second half of next summer, when our situation will be even more dire. I have serious doubts that the current leader of the government will still be in office a year from now. Will this challenging decision be imposed on someone else?

It does show some kind of ineptitude if you can't agree on budget revenues and exact spending.

But I think the problem is more general. Discussions around the budget have become very unspecific. I think the main reason for this is still the adherence to the concept of an activity-based budget.

If somebody now wants to obtain €400 million from some nebulous source, to be honest, it doesn't really change that fuzzy picture of the activity-based budget.

The layperson does not understand this activity-based budget, and neither does the average member of parliament. I have the feeling that this activity-based budget is not even understood by the people who are so keen to promote it. So why do they use the rhetoric of a cost-based budget, such as a pay rise for teachers or a pay rise for police officers, if they are such big advocates of an activity-based budget? So let's discuss performance areas instead!

In the case of the Ministry of Education, don't talk about a pay raise; instead, talk about a smart and engaged population that needs more money. Or talk about a cohesive society and community. Or the Ministry of Finance in general could talk about an efficient state.

When you speak in this way, no one will turn off the radio or drop pondering the state budget. The ministers who praise the activity-based budget, however, do not use the terminology of the activity-based budget. They continue to use the language of cost-based budgeting and to discuss such topics as sluggish wage increases.

The discussion of an activity-based budget marginalizes many people who could contribute to the budget debate. They are simply incapable of communicating so ambiguously. Then, we indeed write in the budget that a billion will come from public reform or €400 million from an unknown source.

The scope of these discussions should be much broader. Members of Riigikogu must understand the budget. But if Aivar Sõerd already has difficulties understanding the budget, I am quite sure that there are not many in the Riigikogu who understand it.

In fact, the average person is listening, and he has no idea why we need to reduce spending. And how much must we reduce? When budget lines are increased by a billion over the course of a weekend with the flick of a finger, it is difficult to know whose story to believe. Or do the decision-makers themselves not understand?

Surely someone in the finance ministry is aware of what is goin gon. Emotionally, we are all aware that during the good times, the government did not accumulate reserves; it splashed out.

Now it would be a good time to recall the experiment with alcohol excise taxes. Two years in a row, a total of €357 million in tobacco, alcohol, and fuel excise duties and VAT on excise products were not collected. No funds were received despite their inclusion in the budget.

So they are now looking for 200 million and in the future 400 million from an unknown source. This is the same amount of money that was previously left unclaimed and sent to Latvia or Finland. And I am not saying it is only under this administration, but Estonia's attitude toward money has been inept for some time.

One of the main causes for this, I believe, is this activity-based budgeting that has pushed budget deliberations into the realm of highly informed people, but the average person no longer has a say.

The new governing coalition in Finland has decided to reduce excise taxes on fuel, and Sweden will follow suit. The Latvian Seimas is currently debating whether or not to reduce the value-added tax (VAT) on restaurants and accommodations. Clearly, neighboring nations are working to improve the economic climate. The government appears confident that future tax increases will enable us to outperform our international competitors. Isn't is an audacious assumption?

The standard practice is still to accumulate reserves during prosperous times. In addition, national reserves are utilized during recessions to stimulate the economy.

We have not yet reached the worst of the economic situation, but we must be prepared to stimulate it. Unfortunately, it is also true that people in good times do not save much. But when the crisis looms, people begin saving immediately: Estonians' bank accounts have grown, not shrunk during the recent crises.

Governments should not implement spending cuts and tax increases during a crisis because, in the grand scheme of things, these actions will exacerbate the recession.

Moreover, state investments, the construction of roads and public buildings, etc., should be the primary economic stimulants.

However, we don't want a future in which we must pay billions or trillions in interest over the course of a few years. Certainly, pulling the chord is required, but it is crucial to know where the cord can be pulled and which areas must be stimulated nevertheless. The development of the economy should be our top priority, and sectors should be stimulated accordingly.

So we need an explicit goal and strategy to restore growth. Is it merely a slogan?

There must be a strategy, and everyone must be aware of it. If the public did not recognize the necessity of the 2009 budget adjustments, they would not have been feasible.

Surely, we need an explicit goal for the people in 2023 as well; what is the government's plan, and how do they intend to exit the crisis?

The crucial question is how we achieve a balanced budget. We can balance the budget by deepening the recession and cutting spending.  And we can also do it by supporting growth and raising revenues.

It's not quite a case of taking from anywhere, as long as there would be a balance.


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Editor: Kristina Kersa

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