Estonia's deficit to bring European Commission proceedings, no penalty yet

Even though Estonia's government sector deficit will quite likely exceed the permitted level in the EU for at least two years, we are still quite far from the so-called Greece scenario or the Commission's coercive measures.
The European Union treaties state that the nominal budget deficit of member states must not exceed 3 percent of the country's gross domestic product. Last year, Estonia's government sector deficit was 3.4 percent.
The head of the European Commission's representation in Estonia, Vivian Loonela, said the Commission would take action after the data from Eurostat, the European Statistical Office, becomes available, expected within April.
"Then, the Commission will analyze it and, depending on what those final numbers are, propose in its early summer economic package the initiation of the excessive deficit procedure for those countries where the budget deficit exceeds 3 percent," Loonela stated.
During the procedure, the Commission will communicate with member states, including Estonia, and prepare a report proposing more specific steps to guide the country towards budgetary balance. "And it will look at both the revenue and expenditure side, in terms of what needs to be done," Loonela said.
Coercive measures still far
"This does not mean a so-called Greek scenario. Although some Estonian politicians have hinted that at some point the European Union might take over the management of Estonia's budget, we are still very far from that.
At the peak of the economic crisis in 2009, Greece's government sector deficit was 15 percent of GDP. According to Loonela, Estonia's situation cannot be compared to that.
"A coercive mechanism certainly does not follow as the first step," said Loonela. "When a procedure is initiated, it begins with dialogue, reports and discussions."
According to Loonela, the Commission wants to understand the goals set by the country. "Our objective is to gain an understanding of Estonia's goals, what the priority reforms are, and what the investments are," Loonela explained.
Ministry: The source of the deficit matters
Raoul Lättemäe, head of the Ministry of Finance's fiscal policy department, said during the presentation of the ministry's economic forecast on Thursday that the European Commission also considers how the budget deficit occurred.
"Looking back at last year, we had the deepest recession in the European Union. Our GDP gap, meaning the difference between where we could have been using our potential production capacity and where we were, was over -5 percent," Lättemäe said. "And the rules themselves say that if this gap is more than -4 percent, these are very bad economic times."
However, the latest economic forecast predicts a budget deficit of at least 3.4 percent also for this year. Whether this means a new procedure awaits us next year will be clarified next spring, according to Loonela. However, she repeated that even in the case of a new procedure, the Commission would not focus on sanctions.
In defense of this year's budget, Raoul Lättemäe added that the potential budget deficit only became clear in spring. When drafting the budget in the fall, the Ministry of Finance forecasted that the government sector's deficit would remain within 2.9 percent of GDP.
"When looking at the European Union's past practice in handling these deficits, if a country acts according to recommendations and those recommendations are expected to bring the deficit below -3 percent, and then due to worsening economic conditions you reach a place that is below -3, then this is a circumstance that the Commission should consider in this process," Lättemäe explained.
Loonela: Member states' goals important but statistics still king
The future of Estonia's state budget depends on complex political decisions. The Ministry of Finance's spring forecast notes that if all the agreements made during the budget strategy formulation are implemented, we will see a 2.6 percent budget deficit next year. In this case, we would comply with the European Union's rules and gradually move towards a balanced budget.
This calculation assumes that an additional €430 million will be found from taxation, €114 million from an increase in unemployment insurance contributions, and €60 million from the reform of the renewable energy fee. Some government politicians have been rather hesitant about these measures.
The Ministry of Finance has indicated that the tax on sugary drinks, which was expected to bring in an additional €25 million next year, is likely to come into effect the year after next. The Ministry of the Interior has pointed out that increasing fine rates is expected to bring in up to €5 million euros instead of the anticipated €15 million.
Officials have also expressed doubt whether the budget review process will yield the expected savings of €150 million euros next year.
The mere absence of €430 million in unspecified taxes would raise next year's deficit above 3 percent again.
"For the Commission, it is very important to see the country's intention to normalize the situation. The European Commission's assessment becomes stricter if it is seen that this intention is lacking. Then, the Commission has different reactions," said Loonela.
However, ambitious balance targets can be written into every budget strategy, only to repeatedly find that there is no political agreement to enforce them. Commenting on this, Loonela said that the European Commission does not only judge intention and plans. "The basis for the Commission's decision is still pure statistics," Loonela stated.
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Editor: Mirjam Mäekivi, Marcus Turovski