Dear Vice-Chairman of the Riigikogu, Members of the Riigikogu,

Today, I'm not talking about whether the state budget should be activity-based, classical cost-based or something else. This distracts from the main issue. It would be unfair to judge on the basis of the current budget whether an activity-based budget works or not, because our budget, which is called activity-based, isn't actually one. The experience of states shows that different elements are used at the same time in budgets. When we look at the content of some countries' annual budgets, which are considered classical, we can find more elements of activity-based budgeting than in Estonia's so-called activity-based budget. The issue is the approach's suitability, practicality, implementation capacity and skills.

I was very surprised and shocked when I heard from my colleague, the Latvian Auditor General, this spring that Estonian officials had presented the so-called success story of our activity-based state budget to the Latvian Ministry of Finance and, apparently, even to the Latvian government. The Latvian Ministry of Finance then supposedly started talking, rather seriously and quite actively, about implementing a reform in Latvia based on Estonia's alleged success.

Honourable Members of the Riigikogu,

We've certainly had minor conflicts with the Latvians in our history, including the so-called "Baltic herring war" nearly 30 years ago, but in my view, the Latvians have been excellent neighbors to us and they definitely don't deserve to share the so-called 'success' of our activity-based budget.

I felt embarrassed talking to my Latvian colleague, as I'm aware of the problems we're having with budgeting and the budget. Estonian officials manage to coldly tell our neighbors pretty stories about how we've linked the use of public money to results or have managed to increase the efficiency of public spending thanks to activity-based budgeting. The analysis of the National Audit Office – and not only ours – shows that this has not happened.

The most important thing about the state budget is not what we call the way we present it, but that it's forward-looking and understandable: where the money comes from, where it goes, and what it's supposed to ultimately achieve for the benefit of us all. And in retrospect, it must be possible to read from these same budget lines whether the money was allocated to what it was intended for, whether we got what we wanted for that money, and if not, why.

I've mentioned the problem of the transparency of the state budget, i.e. understanding to whom, how much and for what purpose money is allocated from the budget, on all six occasions when I've spoken before you. Also, in his audit of the 2016 financial statements of the state, my predecessor, Alar Karis, spoke in great detail about the problems and risks that were already apparent at the time in connection with the planned activity-based state budget reform. It's still worth reading today. It'll convince you that the situation where we find ourselves with the activity-based budget reform cannot come as a surprise. Over the past few years, many others – the president, the chancellor of justice, entrepreneurs, analysts, journalists and even some members of the Riigikogu who are more interested than usual – have pointed to problems with the lack of transparency of the current state budget. In response to this criticism, the state budget has been supplemented at the level of law and the content of the explanatory memorandum has indeed been improved. But the main problem remains. It's not possible to unambiguously identify to whom, how much and for what funds are allocated from the budget and its explanatory memorandum. There are fragments, but no whole.

Let's take a closer look at the achievement of goals. With the budget reform, the Ministry of Finance promised to focus on results and the ultimate goal instead of costs, to get better information in order to increase the efficiency of the use of money, and to improve the traceability of costs. This has not happened. Representatives of the ministries interviewed during the preparation of the report, who actually deal with the budget all the time in their work, explained that they provide the Ministry of Finance with budget information in the required format, but the connection between the money and the results described is weak. They also pointed out that it's very difficult to implement the activity-based mindset in the ministries and their subdivisions, as budget decisions do not actually depend on this. The ministries also explained that they prepare a performance report on the use of the funds for the Ministry of Finance every spring, because it's mandatory. But they do not address the more specific links between how the use or non-use of money affected the goals and metrics of the area of government. Another report is produced, which is just a waste of time. When allocating funds from the state budget, the Riigikogu and the government have also not required ministries to report on the links between goals and results, at least in previous years.

Although 13 out of every €100 of the state budget in 2023 were not used, nobody took much interest in how not using a large amount of money – €2.5 billion – affected the targets and metrics set. In the case of a meaningful implementation of the activity-based budget, it would be logical to think that this should be of interest. The talk that the use of money is linked to results, and new budget information provides a better overview of how the money can be used more effectively, is actually nothing but pretty words.

With the budget reform, the Ministry of Finance also promised better information, which would make it possible to increase the efficiency of the use of money, but the reform has not brought into the state budget preparation practices of either the ministries or the Ministry of Finance a routine effort to identify and remove expenditure unnecessary for the state and to make state agencies more efficient. If this effort worked as a natural part of the state budget process, the zero-based budget reform, which has shown limited performance this year anyway, would not last for years to get around to all ministries. And then, ideas can be put forward as a prominent result of the zero-based budget slogan, some of which have in fact been the subject of discussion before.

A major problem, however, is that the Ministry of Finance has for some time now withdrawn from the substantive preparation of the budget and from its role as a demanding assessor of the justification of expenditure. The Ministry of Finance has become a technical service provider in the budget process that collates requests of ministries and submits them to the government. If the Ministry of Finance itself no longer plays the role of analyzer of the justification of state budget expenditure requests, there is nobody to critically ask why one or another expenditure is necessary. The result of all this is that the state budget is like a rolling snowball, the size of which is adjusted mainly by coefficients, not by motivating efficiency.

Thirdly, the Ministry of Finance promised to make it easier to track state budget expenditure, but the traceability or understandability of expenditures has not improved in the slightest as a result of the reform. Quite the reverse. It's largely not possible to find unambiguous information in the explanatory memorandum on the expenditure lines (or activities) in the state budget and information that covers all the expenditure, i.e. really explains its content. Last autumn, the then Minister of Finance Mart Võrklaev confirmed in an interview that he understood very well for whom, how much and for what money is planned in the state budget. According to him, one has to look at the amount in the budget act, put a finger on the relevant place in the explanatory memorandum and read.

I agree that this is the way things should be, but they're not! It must be a special, magic finger that creates clarity like that. I'm sure that Mart Võrklaev will be able to explain this magic himself, but I'm afraid that he never really had to look at the budget in such depth, or that as the minister of finance, he had and his assistants had a magic finger to use.

Before the budget reform, the National Audit Office complained that a thorough knowledge of accounting was needed to understand the state budget, but even people with accounting skills have been deprived of the opportunity to understand the budget by now. In reality, many lines of the budget are such that you have to use all your fingers and toes to get a meaningful explanation of one or another amount from the various pages of the explanatory memorandum. Sometimes it happens that the information in the explanatory memorandum gives a lower amount than the one in the act. And it has also happened that the amount allocated according to the explanatory memorandum is bigger than the one in the act. This shows blunders in budgeting. But the people who, despite these inconsistencies, claim that they still understand where the money will be allocated, become even more admirable in the light of this.

The Ministry of Finance has made many efforts to better visualize the state budget and make the explanatory memoranda more informative, and this certainly deserves recognition. But adding more text or more attractive and colorful manners of presentation is not necessarily required to ensure understandability. What we need is more accurate – and I emphasize – correct figures on the content of the expenditure lines in the state budget that are in one place. Also a clearer use for each expenditure and comparability of the planned expenditure with the expenditure made for the same purpose in previous years. It's not that complicated. Anyone who doubts this can look at the annual budget of Finland, for example. In the Finnish budget, each expenditure line is numbered and its explanation can be easily found. In addition to the draft annual budget, the Finnish government presents a budget proposal, supported by additional sources, from which each representative of the people and the public can find out more about the content of each expenditure line.

So – the goal of the budget reform has not been achieved. But nevertheless, the Ministry of Finance still ostentatiously claims on its website: "[---] so far, no state [except Estonia] has linked performance information and budget expenditure or has done it only in a few areas such as health or higher education. Estonia is the first OECD country to link performance management and financial management, and the first to offer institutions a common basis for cost analysis software and reporting environment. It can be said that Estonia is innovating in the public sector through fiscal policy developments, resulting in a transparent budget and an efficient state!".

This enchantment of living in a parallel reality is dangerous for the state and public finance. We certainly have a lot of good will, and hopefully good intentions – but we don't have an activity-based budget, we don't have a transparent budget, and the budget reform has not made the country more efficient. What is particularly bad for our public finances is that the proponents of the reform's success confuse the narrative about the positive features of activity-based budgeting with the reality of our public budget. The public – and, regrettably, also the Latvians – hear a positive description of a situation that does not really exist. All this results in a confusing state budget that hinders the building of an effective state and is accompanied by tall tales about its qualities. And when the contradiction between the description and the reality is pointed out, the ridiculing response is that those who point to the obvious problems with the current budget think that "in the public sector it's neither sensible nor possible to target the use of taxpayers' money and measure results, and that this information should be hidden somewhere in a manner that is not linked to the state budget". That's sad... And, regarding the claims on the website of the Ministry of Finance, it's worth asking oneself – perhaps there is a very substantive and very real reason why no country has so far linked performance information to budget expenditure across the entire state budget. I think I know the answer.

However. More practical and mundane issues about the state budget and the use of public money need to be solved before we can move on to higher goals. Such as ensuring that the state budget approved in the Riigikogu and its explanatory memorandum do not contain different information. In other words, so that the explanatory memorandum is not full of inconsistencies with the budget. For example, in the 2024 state budget, the budgets of 25 performance areas have been approved, but in 20 of these, the explanatory memorandum allocates a different amount to the performance area than the budget itself indicates.

For example, according to the explanatory memorandum, the budget for the performance area "Environment" of the Ministry of Climate is bigger by €75 million than in the state budget. The budget for the performance area "Transport" according to the explanatory memorandum is, however, smaller by €70 million than in the state budget. The figures of the state budget and its explanatory memorandum in terms of investments match for seven of the 11 areas of government. If inconsistencies between the state budget and the explanatory memorandum arise during the process of refining the budget in the Riigikogu, the explanatory memorandum should also be updated. This is important in a situation where the explanatory memorandum is currently the only document from which it's possible to obtain any explanation of the amounts in the state budget.

But there are errors as well. The errors and inconsistencies could be called embarrassing, but it seems that when it comes to the state budget, nobody has been embarrassed about them for a long time. All you have to do is say, well, it was a bit of a rush in the end. I can't imagine there being such indifference about inconsistencies and errors in the case of any other act. At this point, I still admire those who, despite the contradictions and errors in the budget documents, say they understand the state budget.

The overview of the money available to the state is not good. In addition to the above, the problems revealed by the audit of the financial statements of the state indicate that the monitoring of budgetary discipline in the government departments has been pushed to the background and poorly organized by the Ministry of Finance. Much has already been said about the €100 million planned to cover the increase in energy prices in the 2023 state budget – twice. Just for the record, the amount of the money that wasn't noticed in the 2023 budget is about the same as the amount expected to be added to the 2025 state budget as revenue from the annual motor vehicle tax. Taxpayers do notice a tax increase of this size – it would also be fair for those responsible for the state budget to notice that money of the same magnitude exists in the state budget.

And, for example, financing transactions were also underestimated in the 2023 state budget by €121.7 million. The increase in the amount of money carried over from the previous financial year and the lack of clarity about why the money has not been used has already been discussed a lot in the past. There have also been cases where budget balances from the previous financial year that do not exist have been carried over. Or whilst ministries generally approve the balances of their areas of government to be carried over as late as 5 – 6 months after the end of the budgetary year, the unused amount of the 2022 reserve of the Government of the Republic was only approved 10 months after the end of the budgetary year, i.e. in October 2023!

Practice shows that it has become relatively common for ministries to incur expenditure first and only then adjust the budget accordingly. For example, the budget breakdown for 2023 was changed in 2024. Among other things, this means erring against the principle that the state budget is valid for a year. As the icing on the cake, one ministry approved amendments to the 2023 budget 6 months after the end of the budgetary year, that is after the consolidated financial statements had been signed. Acting like this does not provide correct information about the budgets or the budget balances. The meaning of the budget as a document has become increasingly a formality and in many cases seems to be a nuisance in everyday activities.

All of this confusion gives literal substance to a minister's announcement that money has been found in the budget to solve a problem that has arisen. You can find what's been lost, and things do get lost when there's confusion.

The debate about what information should be included in the state budget and whether the purpose of the money should be identifiable in the budgeting process has been called a secondary question of form. Even something trivial that distracts from the serious situation of public finance. It's certainly not secondary or a question of form. To whom, how much and for what money is given from the state budget is a substantive question. Especially in tougher times, but not only, it's necessary to understand where the money is spent. The state budget must allow this. At present, it doesn't. It's also a substantive issue because the public must have an overview of what tax money is being used for. And also, because it's the state budget that sets the limits on the use of money by the executive power and later gives the possibility to check whether the money was used for this purpose. The substantive question is not only how to increase state budget revenues, but also – and perhaps even above all – how the tax money is spent.

Three years ago, when I presented my annual report on how we coped with the corona crisis, member of the Riigikogu Valdo Randpere asked me if I also had anything good to say. Of course, I have. Always. Looking for the positive as well is in the nature of the National Audit Office. The truth is, it's difficult to find it in the current state budget, even after a long search. However, a glimmer of hope can be found in the coalition agreement, which explicitly targets the need for greater clarity and transparency in the state budget. The first attempt to amend the framework law on the state budget has been a failure, as the proposed amendments are completely useless – when we keep in mind the goal of achieving greater transparency and understandability – and do not change anything compared to the current situation. However, I hope that the goal will be taken seriously and a new, more meaningful attempt will be made to amend the framework law on the state budget. At least an attempt.

And good things can also be said about our state accountancy. The state accountancy is in order. Although we don't have an adequate overview of where the money is going in the state budget, good accounting means we'll find out where the money has gone when the budgetary year ends. As in previous years, I can confirm today that the state's 2023 financial statements give, in all material respects, a true and fair view of the state's financial situation. The 2023 state budget implementation report also provides reliable information on revenue, expenditure, investments and financial transactions, if we leave out the observation about the implementation of the budget of the Ministry of Defence. The observation was made because the Ministry of Defence did not follow the Estonian Financial Reporting Standard when recognizing some of its economic transactions. The ministry must work hard to maintain an accurate overview of expenditure and assets acquired in the conditions of an increasing budget.

And last but not least. What should we do? First of all, the state budget, the budgeting process and the use of money should be addressed as a matter of substance, not form. The Riigikogu has to rethink and decide what kind of information it needs to discuss the state budget, what principles should be followed and the level of detail to which the limits on the use of money will be established for the government with the state budget. In the discussions, a distinction should be made between the transparency of the state budget and the decision-making right of the Riigikogu. The new decision of the Riigikogu should then be used as a basis for the preparation of the state budget, and the budget information arising from this should actually be demanded from the ministries and used. And thirdly, the Ministry of Finance should take back its role as the strict analyzer of state budget expenditure and critically ask why one or another cost is necessary.

If we can't sort out our state budget and budgeting process now, in tougher times for the state, then we certainly can't do it in other times either and will pay for our inactivity with severe consequences. The current budget characteristically includes a program aimed at covering the costs of indecision and difference, which has an ambitious, fancy and somewhat inaccurate name – "Money Smart Nation". Ninety-five percent of its expenses are financial expenses that include the interest paid on the borrowings of the state.

Thank you for your time.

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