Bank of Estonia opposes government plan for more relaxed budgetary regime

Ülo Kaasik.
Ülo Kaasik. Source: ERR

The Bank of Estonia (Eesti Pank) is not in favor of a government plan to replace Estonia's self-imposed budgetary discipline regime with the European Union's less strict rules, ETV news show "Aktuaalne kaamera" (AK) reported Tuesday.

Proponents at government level in favor of doing so argue that this will make moving towards budgetary balance more viable.

The Bank of Estonia argues however that if the relevant base legislation is changed – and this measure has been expedited – to implement the current EU rules, far from emerging from a budget deficit, that deficit may remain for the foreseeable future.

In any case, since budgetary requirements are currently under discussion at EU level, it is not clear what these might be in future, the central bank says, adding it does not support the domestic government's proposed changes.

Bank of Estonia Vice-President Ülo Kaasik told AK that "Changing the rules for such circumstantial reasons, ie. that we can't meet the rules, is never, I think, a good practice."

"It is true that perhaps there is scope in the budget regulations already, meaning really there's perhaps no reason to rush into implementing [the changes]; for instance, correction clauses, which have accumulated in the past," Kaasik went on.

"But I think we might calmly analyze things and wait and see what the EU's proposals are regarding the new regulations, and then we can also consider what solutions might be suitable for Estonia," he went on.

While the government wishes to slow down the rate of borrowing, more loans must nonetheless be taken up, AK reported, totaling up to €2 billion over the next four years.

Kaasik said that this meant that any government might get a freer rein to create an even larger deficit than the current one.

As things stand, the State Budget Act requires any budget deficit to move towards balance at the rate of 0.5 percentage points per annum.

This requirement was in any case suspended during the Covid pandemic; reaching balance would taken until 2026, though this would require plugging a €1.5-billion hole, AK reported.

Ministries have two days to approve the amendment to the law on the relaxation of state budget rules – the government must provide the state budget bill by month-end and announced Tuesday afternoon that it was ready.

Two former prime ministers associated with balanced budgets, Andrus Ansip (prime minister 2005-2014), current prime minister Kaja Kallas' party-mate who was at the helm during the economic crisis starting 2008, and Mart Laar, prime minister 1999-2002 after an earlier stint in the early 1990s and identified with Estonia's flat tax principles, have robustly criticized the plans.

The state budget has been running at a deficit for the past six consecutive years – as noted half of these fell during the pandemic; the finance ministry's summer forecast finds that the deficit will worsen in the next four years, to reach 4 percent of GDP by 2027.

This in any case goes against EU regulations, which require a deficit of below 3 percent of GDP.

Finance Minister Mart Võrklaev said Tuesday that the 2024 state budget will run at a 2.8-percent deficit.


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Editor: Andrew Whyte, Merili Nael

Source: 'Aktuaalne kaamera,' interviewer Kadri Põlendik.

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