There was a time in Estonia when city folk used to go to the countryside to help with the work. While this harked back to the traditional way of life on one hand, it was mostly because kolkhozes and state farms could not meet expectations. And there was little that agricultural organizations could have improved inside the system anyway, with dialing back expectations the only realistic course of action. But this did nothing to cure people of their habit to eat. Of course, the Soviet version of patronage did not solve these problems, while it may have alleviated them a little.

The government's inaction and indecisiveness has been raising eyebrows for the better part of a year. The drama culminated last week when it turned out that Kaja Kallas is about to secure the coveted EU high representative post.

It seems a perfect win-win situation. On one hand, she'll get a job to her liking where she can benefit both Estonia and Europe. On the other, the government will become unstuck as some decisions have been postponed for too long.

Almost nothing has been achieved in terms of fixing Estonia's fiscal deficit over the past year and we've only borrowed more and added to our interest obligations in that time.

Finding solutions is not a matter of flipping a switch and requires, in addition to government decisions, a broader public debate – so the people would accept the choices to be made on at least some level. The aim of the piece at hand is to sketch a few outlines, in the spirit of such patronage, that should be kept in mind when untangling the knot of problems that is the state budget.

Working on a fiscal strategy, it usually pays to understand one's position in the economic cycle. This should determine whether the budget is to have a surplus, deficit, or whether it should even be balanced. At last, that is how it would be in an ideal world.

In the current situation, the threat of war takes precedence. War would pull tens of thousands of people away from their daily work. We would also have to count on minor or major infrastructure damage.

Likelihoods are worth nothing in war. Whether it is one, five or 10 percent, you can flip a coin a hundred or thousand times, but you only have a single life to bet. Therefore, as long as the likelihood of war is greater than zero, it must be considered a possibility.

War is also a situation where you have to put up all of your resources sooner or later, not least of all money. What this means in fiscal context is the ability to borrow more money.

We undoubtedly have reason to count on our allies in the EU and NATO, but independent decision-making capacity should still be retained at least to some extent. And that means independent capacity to raise money. Borrowing money at market conditions is extremely complicated in wartime as it is. For example, investors expect a return of 60 percent on three-year Ukraine bonds.

All the more reason to try and convince investors that Estonia can maintain fiscal discipline and control.

Our public debt is not too bad, and there is room to borrow more should push come to shove. But things are far more complicated when it comes to current spending and revenue. Here, our capacity is much less. We can just remain inside the [EU's] 3 percent of GDP criterion this year, while fiscal deficit is on track to exceed 5 percent next year unless we take action.

Let us also keep in mind that these figures concern deficit in GDP. If we look simply at revenue versus expenses, we're spending nearly 10 percent more than we have coming in. This no longer looks particularly good in the eyes of investors. And they do not really care about explanations according to which countries cannot go bankrupt. Greece's recent example is a lively reminder of how a part of private dept can simply be written off. We should avoid even thinking about Estonia becoming the next Greece.

The aforementioned should make it clear that Estonia should not allow its fiscal deficit to exceed 3 percent of GDP without extraordinary and very good reason.

But there are other considerations next to the war cycle. Chief among them would be looking at the current state of the economy. The principles of counter-cyclic logic should be well-known: spend more in crises and less during booms. This approach is usually justified in the need to affect the pace of growth. However, we have reason to doubt the effectiveness of this approach in the context of Estonia (and other countries sporting small and open economies).

In addition to budgetary expenses, money supply is also affected by the success of export and banks' loan conditions. These factors can work toward different outcomes, whereas changes in budgetary expenses might not be the biggest factor also when talking about sums.

Rather, we should seek to maintain stable spending irrespective of over- or under-receipt of revenue.

Analysts do not fully agree on where we are in the economic cycle. Real growth has been negative for nine consecutive quarters, but there are questions whether the statisticians have used the correct deflator, whether price advance calculations have been correct. Real retail turnover is falling, while employment remains high and salaries keep growing. The latter may have to do with population ageing and might not reliably describe the economic phase. In summary, we should be able to afford a minor deficit based on the economic cycle.

So, if we wanted a small deficit (such as 0.5-1 percent of GDP) for the coming years, we would have to thoroughly revise the expenses side of the budget.

On one hand, defense spending is growing, and it seems impossible to reduce it to 2 percent of GDP in the foreseeable future. Spending €1.6 billion on ammunition – even if it is done over several years – will likely not be the last necessary expense. Now, thinking about a sensible deficit, it is obvious that we'll need to dial back elsewhere. And it would be wrong to blame defense spending.

Rather, we've been too quick to spend in past years. The budgets are biggest in the Ministry of Social Affairs (€7.2 billion this year), Ministry of Climate (€1.2 billion), Ministry of Economic Affairs (€1.4 billion) and the Ministry of Education and Research (€1.1 billion). This suggests austerity should also be the most sweeping there.

We should always make sure we can afford our state. Ideas are always plentiful and not nearly all of them can be realized. It is virtually taken for granted that life should improve from one year to the next. But there is no natural or economic law that guarantees that one's living standard has to keep improving.

Yes, people would like it if we had the resources to realize our dreams. Political logic leads parties to try and out-promise one another leading up to elections. And not all of those promises can be defaulted on after elections, with it necessary to fulfill at least some of them. It is a major shortcoming of democracy that organically leads us toward a perpetual fiscal deficit.

Meanwhile, the reality of the situation is that population aging and decrease will start to erode our well-being, slowly but surely. A quick comparison between USA and Europe is enough to make sure.

At times, there are attempts to brush off fiscal concerns. It is claimed that countries never have to repay their loans – which is a naive view at best. Even if principal loan amounts remain unchanged, interest still needs to be paid. And very few loans are forever. Loans mostly have an end date, the arrival of which at least forces one to refinance them. Whereas the conditions for new loans then we can only guess at.

A softer version of the same approach is talk of "outgrowing loans." Indeed, if the loan sum remains the same while the economy grows, arithmetically speaking, the loan to GDP ratio improves. However, this only works if you don't take new loans. In reality, it is too much to hope that politicians could overcome the temptation and continue with balanced budgets or even a surplus.

Thinking about fiscal balance, another temptation is to hike taxes. In a situation where Estonia's total tax burden is 34 percent and Sweden's 44 percent, it seems almost a natural solution. However, it is easy to get causes and effects mixed up here.

Those who ridicule the path of taxing one's way to prosperity are correct. Sweden's GDP per capita was €44,600 in 2023. Estonia's was €15,400 for a difference of 2.9 times. If we factor in tax burden, after taxes, people and companies got to keep €25,000 in Sweden and just €10,100 in Estonia. While higher taxation closed the gap slightly, the difference is still 2.5 times.

Therefore, greater taxation will not bring us wealth, revenue can grow based on better productivity and investments in business. Once you have enough revenue, you'll have something to tax.

It is to be hoped that the new government will not look at the world through pink tinted glasses, accept our realistic limitations and refrain from attempting Baron Munchausen's tricks. The situation is difficult, but it is possible to make our way back onto more solid ground by taking the right decisions one after another.

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