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Bank of Estonia: Estonia's current fiscal policy may create debt spiral

Bank of Estonia.
Bank of Estonia. Source: Siim Lõvi /ERR

The Bank of Estonia warns that the government's current budget policy may lead the state into a debt spiral.

On Wednesday, the government issued €1 billion worth of 10-year bonds, which is enough to cover the state budget deficit for six months. Another billion must be raised to cover the deficit in the second half of the year.

"Today we issued €1 billion worth of bonds and the interest rate ended up at 3.35 percent. /.../ This year's borrowing needs are forecast to be between €1.5 and €2 billion, so we will borrow some more during the year. /.../ Interest costs will increase by about €40 million compared to last year," said Janno Luurmees, head of the Ministry of Finance's State Treasury Department.

Interest will cost over €170 million this year.

The state will need to take a loan in the coming years. "As long as there is a deficit in the state budget, that deficit has to be covered somehow, and a loan is the means to do that. In the coming years, we will also borrow around €1 billion to €1.5 billion every year," Luurmees said.

Estonia has also increased its loan burden over the last several years. The Bank of Estonia said previous budgetary policy decisions are to blame and this is why a permanent deficit of 3-4 percent has arisen.

Rasmus Kattai. Source: ERR

"This essentially means that every tenth euro spent by the country is missing, and for this it is necessary to borrow. Over the next five years, if the fiscal policy remains on the previous course, the additional loan consumption will be about €8 billion, which means a doubling of the loan volume. With today's interest rates, we will probably see in five years that the interest payments for the state alone will amount to about €500 million," explained Bank of Estonia Economist Rasmus Kattai.

Until recently, interest payments were not a significant part of government spending, but in five years it could reach 3 percent, he said.

The Bank of Estonia has repeatedly called for the budget to be balanced, saying the country could otherwise fall into a debt spiral. Revenue must be found in the budget, it says.

"Estonia is a low-tax country when compared with other European countries. The scope for cost-cutting is rather thin. So, at least in today's circumstances, it seems rather perspective to review the revenue side," said Kattai.

Eurostat's data shows Estonia has the European Union's lowest debt as a ratio of government debt to GDP at Estonia 18.5 percent. Greece (166.5 percent), Italy (142.4 percent), and France (111.9 percent) have the highest.

However, it grew 1.3 percentage points in the second quarter of 2023, which was one of the highest in the EU.

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Editor: Merili Nael, Helen Wright

Source: Aktuaalne kaamera

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