The Riigikogu State Budget Control Select Committee will discuss the National Audit Office's annual report in a session on Monday.

In the report, the National Audit Office points out that the objectives of performance-based budgeting have not been met, and that the state budget preparation process resembles an experiment lacking direction, purpose and completion.

"Five years ago, Estonia shifted to a performance-based budgeting approach, which, according to promises from the Ministry of Finance, was supposed to provide the Riigikogu and the government with a better tool for making decisions regarding state revenues, expenditures and areas for potential savings. However, our analysis shows that this has not materialized," said Priit Simson, communications director for the National Audit Office.

"Although the state budget appears performance-based, ministries, the government and the Riigikogu, when requesting and deciding on expenditures, do not focus on past or anticipated outcomes. Furthermore, the budget reform has not improved the transparency of how nearly €20 billion annually is allocated or why. Errors in the budget explanatory memorandum complicate understanding how much, to whom and for what purposes funds are planned," the National Audit Office stated.

"The main question is not whether the budget should be performance-based or not," said Auditor General Janar Holm. "Budgets can be based on any number of frameworks. The experience of various countries shows that many different elements are often used concurrently in state budgets. The central issue is whether the approach is appropriate, practical and implementable. The budget can follow any framework – the key is that it provides a clear picture of who is receiving funds, how much and for what purposes, and that the information presented is accurate."

Holm added that while some may attempt to downplay state budget issues as mere formalities, that is certainly not the case in reality.

"Determining who receives state budget funds, how much and for what purpose is a substantive issue. Especially in tighter times, but not only then, we need to understand where money is being spent. The state budget must enable this, yet currently, it does not. It is also essential because the public deserves an understanding of how tax revenues are used. Moreover, the budget sets limits on executive spending and provides the means to later verify if funds were used as intended. It's not just a matter of increasing revenues, but also, and perhaps even more critically, of how taxpayer money is spent," Holm emphasized.

"A glance at the budget lines in the state's finances remains confusing due to a high number of inconsistencies. The state budget and its explanatory memorandum, for instance, sometimes provide differing information on how much funding a given sector or performance area receives. The reliability of the entire budget memorandum is questionable, as even its core data does not align with what is written in the law. This inconsistency casts doubt on the relevance of other, more specific information in the memorandum," the National Audit Office remarked.

The National Audit Office also noted that, although €13 of every €100 in the 2023 budget went unspent, there has been little interest in understanding how this underspending affected established targets and metrics.

"With a truly implemented performance-based budget, there would be interest in such matters. As the government grapples with a growing budget deficit, paradoxically, the amount of unspent funds in ministries also increases. The €2.5 billion in unspent funds in 2023 exceeds the combined expenditures and investments of the Ministry of Defense and the Ministry of the Interior last year," the office reported.

The budget reform aimed to make state budget expenditures easier to track, but the reform has not improved the traceability or comprehensibility of spending, the audit office added. "The Ministry of Finance has worked to better visualize the state budget and enhance the informativeness of budget explanatory notes. However, it is still impossible to find clear and comprehensive information in the explanatory memorandum for individual budget lines (activities) that would fully explain all associated costs."

The audit office concluded that continuing with the current laissez-faire approach to budget preparation results in inefficient use of funds, unnecessary administrative work for the state and missed opportunities to incentivize efficiency within state institutions.

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