The government and teachers agreed (following a nationwide strike that lasted a week – ed.) on an additional €9.3 million for teachers' salaries this year. Because the constitution provides that public revenue and expenses are decided by the parliament, the latter will have to pass a relevant amendment.

Processing the bill falls to the Riigikogu Finance Committee, and when committee member Aivar Sõerd (Reform) started looking into where the money will come from, it turned out €5 million will be carried over from the Ministry of Education's previous budget.

But one million will be taken from the Enterprise and Innovation Foundation's (EISA) e-residency program, €500,000 from the Ministry of the Interior's moving fund and €400,000 from its energy prices compensation fund. Another €400,000 will be taken from the Ministry of Regional Affairs and Agriculture's operational expenses pot.

While there is nothing wrong with any of it on the surface, the problem is that Estonia nominally uses activity-based budgeting (ABB). This means that instead of income and expenses, the state budget lists under expenses performance areas, such as a "smart and active people" or "effective state."

"Half a million has been earmarked to cover the Interior Ministry's moving expenses, but the category of moving expenses is not reflected in activity-based budgeting. It falls in the category of ordinary expenses and a resources-based budget," Sõerd said.

"Now, amending the budget to find €9 million for teachers' salaries constitutes a return to expenses-based budgeting," the MP noted. What is more, these are one-off expenses, while teachers' pay is a recurring expense.

The same goes for other expenses, which Sõerd said clearly suggests that while ministries are working with real, expenses-based budgets, the government presents the parliament with a version that does not paint a full picture of public sector costs.

Sõerd said that nowhere does it read in the State Budget Act as passed by the Riigikogu that the Ministry of the Interior planned to spend €500,000 on moving house in 2024. A sum that the ministry itself lists under investments.

"Had I known or seen such a line in the budget, I might have proposed reallocating the sum back in the fall," Sõerd said. "But it is impossible to make such an amendment proposal as the budget includes no such line."

The state budget does not give an overview of whether other ministries have similar expenses that could be cut or how many. The Ministry of Finance is similarly unaware of a situation where it should be responsible for the whole budget and process.

Sõerd gives traffic deaths in Estonia as an example of how no one really heeds performance-based indicators and how they're simply pasted over real expenses to comply with rules.

Fifty-nine people died in traffic in Estonia last year, an increase of nine deaths from the year before. Plus those who were injured. The explanatory memorandum of the budget reads that the target of the "Safe and sustainable transport system" performance area is having no more than 38 traffic deaths.

Sõerd said that this suggests road construction and maintenance budgets should grow – if the target value is moving in the wrong direction, more resources should theoretically be allocated. But we know that Estonia is cutting roadbuilding and transport funding instead.

Sõerd also gave the example of the social domain where benefits have grown substantially in recent years, while the explanatory memo's performance metric of relative poverty has gone up instead. "It makes no sense, while there is a reason in this case – inflation. These metrics have been pulled out of thin air," he said.

The politician said that the fact the explanatory memo is full of metrics ministries themselves do not use is also reflected in the amendment for additional money for teachers' salaries.

"These metrics have a life of their own and are not used to manage fiscal and budgetary priorities."

"I think I'm not exaggerating when I say that the activities-based budgeting experiment has failed," Sõerd said.

"The budget's explanatory memo sprawls on 500 pages, while descriptions of programs and administrative areas are mere summaries of activity plans and development strategies. Completely useless material," Sõerd noted.

Asked why he hasn't managed to convince his fellow Reform member, Minister of Finance Mart Võrklaev to drop ABB, Sõerd said it is not for lack of trying.

He said that the Reform Party has many new MPs in the Riigikogu and there are fewer critics of the budgeting reform now.

"There are many new people, and perhaps it will take more time for people to understand the problem well enough. If only as concerns public finances," Sõerd remarked.

There are those who take a different view. "It has been suggested that the Riigikogu should not have to bother with the details of the budget. That the Riigikogu can take care of general priorities, the level of programs and strategy. That a detailed expenses-based budget should be the business of the government and not the parliament," Sõerd said.

"Fine, but then we also need to amend the constitution. Because the latter states that income and expenses of the state budget are the purview of the parliament," Sõerd said, adding that the Riigikogu cannot fulfill its constitutional role in a situation where the budget is presented to it in the form of abstract programs and activities.

Public sector and expenses

In the final quarter of 2023, annual public sector salary increase came to 16 percent, while it was 8 percent in the private sector. Public sector wages continued to grow in 2024. Public sector salary expenses were up 11.7 percent in January year over year.

According to Sõerd, the state budget does not reveal who has seen such salary advances. Yes, hiking the salaries of teachers and increasing the number of conscripts were planned, while Sõerd said he has no overview of what accounts for the rest of the growth.

The MP also described as problematic a situation where the public sector is pulling salary advances. "This should not be the case when the economy is struggling to find its feet," he said.

As demonstrated by the salary advance matter, activity-based budgeting does not allow people who are not close to ministries to analyze whether and where costs could be cut.

Statistics Estonia reported Monday that the fiscal deficit came to €1.3 billion in 2023, while the 2024 state budget had a deficit estimate of €1.7 billion or 9.2 percent of the state's fixed costs. Excluding [things listed as] investments, this puts the deficit in GDP at 2.9 percent.

The Maastricht criteria suggest deficits should not exceed 3 percent of GDP.

Whether Estonia will hit that target in 2024 is unclear as economic forecasts on which the budget is based were more optimistic than recent ones.

Sõerd said that putting together the 2025 state budget makes for a separate challenge, more so as the fiscal strategy still includes hundreds of millions for which there is no real cover. Incoming tax hikes are not set to improve the situation markedly in a situation where the budget is short €2 billion.

The MP is also skeptical when it comes to austerity – whether the government will succeed in finding meaningful saving, even though three ministries are looking for ways to cut costs as part of the zero budget initiative. Last year's campaign managed to cut just a few dozen million euros.

"The Ministry of Economic Affairs needs to take the lead role here. While ministries can make proposals, the finance minister needs to provide clear guidelines," Sõerd said.

Estonia's public debt remains quite modest in the European context, falling under 20 percent as recently as Q3 2023. For example, this was 160 percent for Greece and 140 percent for Italy.

That said, Estonia's debt is growing among the fastest in Europe, second only to Belgium, while most other countries have managed to reduce their public debts instead.

Aivar Sõerd said that this rapid growth is all the worse since Estonia has no major investments to show for it.

"We need to look at why borrow. We should under no circumstances borrow to cover recurring costs over a long period," the MP said, adding that the cost of that in 2024 is €900 million.

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