I'm sure we've all heard of cases where children have refused an inheritance after the loss of a parent because of considerable debts attached to it. Unfortunately, our children cannot just opt out of the "inheritance" of public debt. This realization should make today's decision-makers extremely cautious.

We can say with certainty that the state budget is the most important law the Riigikogu has to pass on an annual basis. The topic of public finances seemed unimportant for a long time as expenses and income were balanced and Estonia spent over a decade as the unofficial champion of fiscal policy in Europe. Today, even a blind man realizes that things are not okay.

It is not the place of the fiscal council to tell the government and parliament what to do and how. That is up to elected politicians. Our task is to say whether the country's fiscal position needs to be improved, which even the biggest layman realizes is the case today.

The coming year's state budget traditionally gets the most attention, whereas the parliamentary debate tends to zero in on a few acute priority topics. It was healthcare during the pandemic and has been national defense since February 22, 2024, for obvious reasons. This is a good place to quote former British Prime Minister Harold Macmillan who, when asked about the greatest challenge for a statesman, famously said, "Events, dear boy, events." There is no shortage of world events today, nor is one likely in the future.

Effects of public finances span decades

When processing the State Budget Act, the four-year fiscal strategy (RES) also gets a look, while the broader public, unfortunately, does not take an interest. We should pay a lot more attention to the strategic outlook of the state budget, which spans decades.

While having a four-year perspective is practical and necessary, it still amounts to a tactical view. And we might even say, admittedly somewhat arrogantly, that the annual budget can be described as unimportant insofar as political choices are concerned as budgets are largely made up of longer-term choices that are difficult to amend for a single year.

This in turn results in public debate on relatively unimportant topics. Examples include arguing over austerity to the tune of a few dozen million euros in various places in a situation where total budget expenses are nearing €20 billion. And yet, short-term cuts generate a lot of media attention as someone will have something they were counting on taken away immediately.

When it comes to the survival of the Estonian culture, nation and language, people often quote the preamble of the constitution, and rightfully so. But reading on, the document also mentions current and future generations, their social progress, rights and justice. Therefore, it would be more than fair to also reference the preamble of the constitution in the context of public finances strategy. However, we are just as likely to experience a solar eclipse these days as everyday problems outweigh the transgenerational view, even though they shouldn't.

The main thing is to maintain a deficit below 3 percent of GDP as outlined by the Maastricht criteria from when the Eurozone was created, which seems to be the only solid nominal criterion. Next to that, we also chase structural balance, calculating which is subject to inaccuracies because it requires assessing our position in the economic cycle. It is easy in hindsight and tricky looking forward, depending on quite a few suppositions.

No government wants to be slapped with European Commission infringement proceedings, which would place us in a bad light in Brussels. But narrowly meeting the Maastricht criteria should not be the peak of our ambition. It is like a student who only hits the books once they've receive a bad grade. We need to aim higher and at a much lower annual deficit.

What might we mean when talking about transgenerational fiscal fairness? Here it is as phrased by the UN in 2013: "The current generation's pursuit of well-being must not diminish the opportunities for future generations to enjoy a good and dignified life."

We could consider in Estonia whether we need a transgenerational state budget framework, which would be flexible and not too complicated while ensuring for our children and grandchildren at least the same level of well-being that today's decision-makers enjoy. We are not just talking about the next generation, but also those not born yet. Our decisions or failure to decide directly affect them.

The Ministry of Finance has forecasts stretching as far as 2070, but the public, unfortunately, takes little interest in them. Thinking on state finances has been reactionary rather than strategic because, "Events, dear boy, events." But we must try to rise above to take a look beyond the horizon.

What would we see? The population is ageing and has stopped growing, the ratio of workers to those on social benefits is worsening, while our neighbor to the east is still extremely aggressive. Things aren't terrible yet, but they will be if these trends are allowed to persist. What might be our strategic response?

Decisions that cannot be postponed forever

Should we go down the Netherlands' path and boost every person's responsibility in healthcare and education, or are there other solutions? It is up to the politicians to decide. Unlike in France, where the state budget last had a surplus 50 years ago, in 1974, we can still reform social expenses without having to fear major unrest. Will that still be the case ten years from now?

The retirement age makes for one good example. In France, people took to the street following a proposal to raise the retirement age by two years to 64. Estonia decided to tie the retirement age to average life expectancy starting from 2027. It was decided in calm public debate and the streets were quiet. And yet, the European Commission believes that it was the retirement age reform that ensured the longevity of our pension system. In other words, we are capable of improving the long-term fiscal position if we want to.

It is in a way paradoxical how long-term political choices the effects of which are felt for years to come tend to be less painful in terms of political technology than amending next year's budget. We must consider not only how to balance the budget in the near term, but also how to ensure that balance ten or twenty years from now.

The question of whether the legislator should limit those eligible for social benefits, put in place annual expenses growth ceilings or make support necessity-based, as Estonia has access to more personalize data than other OECD members, remains. So we could give future generations the chance to make their own choices, instead of having to pay debts we created through unpleasant decisions we opted not to take.

All of the developed world is grappling with similar issues. The average age of people living in OECD member states grew by 8.2 years on average 1990-2020, reaching 41 years. By 2050, the organization estimates the average citizen of its member states will be 47 years of age.

Long-term outlooks also consider the fiscal effects of climate change. This poses the considerable problem of the inaccuracy of presumptions. Man-made climate change is having an effect today and will have an even greater impact in the future. It could be the biggest single financial factor, while it is extremely complicated to forecast in budgetary terms.

Every financial model is more or less sensitive to changes in base conditions. Especially if relevant calculations span decades. It is too easy to get climate change predictions wrong, while it's almost impossible to "hit the bullseye." When it comes to climate change, the rule "if you can't do your best, at least do no harm" applies. Things are far simpler when it comes to demographic projections, which also need to be taken into account.

Rainy day fund

Sweden pays a lot more attention to the transgenerational outlook than we do. In Swedish thinking, future generations must also have the possibility of sharply hiking the debt burden should something unexpected happen. This requires keeping debt manageable today.

Sweden recently experienced something we have not experienced on a national scale: the 1991-1994 banking crisis and its effect on the state budget. By the summer of 1992, the domino effect that started with a real estate prices crisis had caused the loan losses of Sweden's seven largest banks to make up 12 percent of the Swedish GDP. The state could not remain a bystander and had to bail out the banks. In just three years, Sweden's public debt grew from 40 percent to 68 percent, while it has been brought down to a solid 35 percent of GDP by now.

Or what about an even closer example. Latvia was forced to bail out its largest commercial bank, Parex Banka, following the Lehman Brothers collapse. Because national securities markets were virtually shut down in November of 2008, the IMF and the European Union stepped in with a €7.5 billion aid package, which took Latvia's debt burden from 8.5 percent in 2007 to 48 percent in three years.

The effects of the global financial crisis went beyond banking. It culminated in foreign institutions being involved in fiscal policy choices, which is both unpleasant and works to erode sovereignty.

The lesson here is that states need to be prepared to handle such economic shocks or so-called black swans themselves. Are we? Looking at our national debt, which, while the second smallest behind Bulgaria, is the fastest growing in the EU, our position is still quite safe. But the emphasis needs to be on the word "still." We need to make sure our children inherit at least the same situation.

Learning from the Swedish and Latvian examples, we need to consider that the state needs to be able to help out vital companies, such as Eesti Energia or Elering, should credit markets completely lose faith in them for whatever reason. We need buffers to retain the state's ability to borrow from money markets in difficult situations.

One prerequisite for this is annual income-expenses balance of fiscal hygiene. Right now, state-owned companies rather function as ad hoc state budget contributors through their dividends. It seems to be an unwritten rule that we'll take as much as we can where we can. But this is never sustainable. Perhaps it would be good to proceed based on the real productivity of assets in the case of state businesses (productivity after inflation) in the interests of having transgenerational assets.

Let us take inventory every decade

The world's largest national wealth fund is Norway's Government Pension Fund, also known as the Oil Fund. It's volume is three times the GDP of neighboring Sweden at over €1.5 trillion. By law, disbursements from this fund to the state budget cannot exceed the fund's annual real return. To mitigate political risk, the parliament decides on the corresponding disbursement.

Perhaps we could also learn something from this, thinking about our forests and natural resources as national wealth. We could consider opening a wider natural resources debate, as we know the ground hides more than oil shale in Estonia. But the decisions are up to politicians.

Returning to Sweden's example, their thinking has led to a criterion which could be described as retaining national net assets across generations. States always have a lot of assets, whether state-owned company stakes, other more profitable liquid assets or natural resources owned by all citizens. The other side of that are the state's obligations, mainly national debt.

We could consider taking inventory of relevant transgenerational net assets every decade to evaluate our long-term outlook. It is our task to leave the next generation with at least as much in net assets as we had starting out. It also requires an excellent overview of what the state owns. I'm sure this overview exists on a sectoral basis, but do we have a big picture in market value so to speak?

The U.S. city of Pittsburgh provides am amusing example. Before a municipal audit, it was known that the city had around 400 buildings with a total value of $57 million. After the property audit, it turned out the city owns some 11,000 real estate pieces, with a total value of $3.9 billion. The city spent $20,000 on the analysis by hiring an outside consultant.

Examples are myriad. The first such exercise in history was undertaken by King of England, the Duke of Normandy Willian the Conqueror when he asked officials to write up the Domesday Book in 1085, which contained all of the king's assets, especially real estate, and a precise overview of the population. We face the same challenges over a thousand years later.

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