Expert: Not all politicians serious about the need for austerity yet

Ülo Kaasik, vice president of the Bank of Estonia, told ETV's "Esimene stuudio" that not all politicians in Estonia have realized there is a real need to cut state spending.
Kaasik said that the Bank of Estonia has been talking about the poor state of public finances for years, suggesting that the problem is not temporary in nature.
"In a situation where we've been increasing healthcare, social and national defense spending since the coronavirus crisis, while only making minor changes to the tax system, it is clear there is now a permanent gap between income and expenses. We are living beyond our means," Kaasik remarked.
"I believe that the biggest problem is lasting deficit and the gap between revenue and expenses. We have been planning for expenses without planning for ways to cover them. I suppose we have hoped that miraculous growth might deliver us."
Kaasik said that while growth does help, rising income also tends to create new costs.
"The problem is that economic growth tends to see some of our expenses grow too. /.../ We are often tempted to fix spending as a percentage in GDP, whether spending 3 percent of GDP on national defense or keeping research and development at 1 percent of GDP. But that means a bigger GDP also adds to expenses."
The Bank of Estonia vice president suggested that consecutive governments have failed to prioritize generating revenue.
"Decisions to permanently hike spending, often through indexation, have been the number one problem in recent years, whether we're talking about pension hikes, national defense spending etc. These are probably all sensible decisions when looked at individually, made by politicians we have ourselves elected. But I believe the issue is that if we want to permanently hike spending, we need ways to generate revenue. And we've overlooked this side of things," Kaasik said.
"Alternatively, we should have discussed what the state would give up, not do in order to cut costs and make sure we can pay for what we've pledged."
In order to avoid a deepening fiscal deficit, Kaasik believes the government should carryout everything that's been written into the state budget strategy. "If we read the Ministry of Finance's forecast, it points out that the deficit would be smaller by a billion euros if all these things were carried out," he said.
However, the expert admitted that there is not enough time to execute all of these measures by next year as relevant legislation would need to be passed at least six months in advance.
"They include the car tax, which is not yet factored into forecasts as relevant discussions are still ongoing. They also include proposals of cost-cutting totaling over €100 million. There's environmental fee hikes etc. I believe some things on that list will be done, while it's doubtful everything will."
The Ministry of Finance forecasts a public sector deficit at 5.3 percent of GDP by 2025. Kaasik said that while Estonia could cope in the short term by relying on financial markets, the situation is not viable in the long run.
He said that Estonia's loan costs will spiral. "Secondly, if someone loans you money for a period of ten years, they want to know about your financial situation a decade on. They want to see concrete plans aimed at solvency ten years down the line. And if we keep up our annual deficit of 5 percent, our credit score might not be anything to write home about," Kaasik explained.
The Bank of Estonia vice president said that while austerity is also needed to improve the fiscal situation, this realization is yet to dawn on all politicians, adding that the government has not presented the central bank with any austerity plans yet.
"I hope that the forecast, putting next year's deficit north of 5 percent unless we take action, will cause people to think and take decisions to improve our fiscal situation."
Kaasik believes the government should set priority fields, as it is more difficult to cut costs in some areas.
"I believe we should think about the services the state offers and past political promises which have ended up costing a lot – whether we need to do all of it and whether we might be able to reverse some things, which while not effective in the short term, might help improve our finances in the future," he said.
However, the expert also said that the government should not go after investments in an attempt to dial back.
"When reducing state spending, we should consider how it might hamper our future growth potential. It can seem simplest to axe investments as the least painful option in the short term, but the effect might come back to bite us later on," he remarked.
--
Follow ERR News on Facebook and Twitter and never miss an update!
Editor: Merili Nael, Marcus Turovski
Source: "Esimene stuudio"