Economist: Indexation could be temporarily suspended to balance budget

Annual indexation could be temporarily halted to keep costs down until the budget is balanced, said Bigbank's chief economist Raul Eamets. Additionally, more transparency is needed to see where cuts can be made.
Pensions, benefits and some public sector salaries and are indexed annually to keep them inline with changing prices and wages.
"As a starting point, we could freeze indexation for one or two years – this way, we would not reduce anything for anyone, but we a would also not increase costs. As employers also pointed out in their statement, this year alone, indexation increased state budget expenditures by €500 million. This could be frozen for a year or two; we do not need to immediately start restructuring everything," Eamets said on Wednesday's "Vikerhommik."
"If we do not freeze these expenses for next year, then due to price increases of 4–5 percent this year, next year's indexed costs will also rise. By fall — August or September — when the new budget is being put together, we will find ourselves in the same situation, not knowing how to cover half a billion in additional needs," he explained.
Eamets said freezing indexation would be a first step without making structural changes. It would then allow for a more in-depth discussion about the state budget's framework.
Another key issue, he said, is that the budget must be made transparent in order to understand it.
"This has been talked about a lot, but no real progress has been made. Right now, we do not actually see these expenditures in the budget, and we cannot make cuts if we do not know where the money is going or where exactly it is coming from," the economist explained.
As a third aspect of balancing the budget, Eamets pointed to cutting public sector expenditures.
He said Estonia has nearly 30,000 officials working in ministries, state foundations and agencies. "There is definitely room for cuts here," he said.
When asked specifically where state expenses should be reduced, Eamets replied that this is a political decision and added that it cannot be done from the bottom up, as that would not be effective.
"A clear-cut decision needs to be made — perhaps some agencies need to be shut down entirely, or more decisive actions are needed, because small, incremental cuts won't work," he said, giving examples such as the Ministry of Agriculture and PRIA (Agricultural Registers and Information Board), which both deal with the same sector but from different perspectives, or EIS (Estonian Business and Innovation Agency), whose expenditure structure and budget lack transparency.
Speaking about the need to increase defense spending, Eamets said many European countries are in a worse situation with Estonia when it comes to balancing the budget and debt burden
"Our debt burden is one of the lowest in the EU, and we can absorb this 5 percent [for defense spending] much more easily thanks to borrowing," he said.
At the EU level, this issue will likely be resolved through loans or joint funding, similar to how it was handled during the COVID-19 crisis, Eamets believes. "I think that's the direction things are headed this time as well," he told the show.
Discussing Estonia's overall public expenditure, Eamets noted that if Estonia wants to live like the Nordic countries, with well funded public services and a large number of people employed in the public sector, then taxes must rise to a similar rate.
Estonia's tax burden is 35 percent of GDP, whereas it is over 40 percent in the Nordics.
"If we decide that not everything needs to be state-funded, then it does not have to be. But the discussion about what kind of state we want has not taken place," Eamets said.
The Bigbank chief economist also expressed the view that frequent elections prevent an honest debate on this issue, and therefore, it might be worth considering consolidating different elections into a single year.
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Editor: Mait Ots, Helen Wright
Source: Vikerhommik