President of the Bank of Estonia Ardo Hansson said on Monday that a small budgetary deficit right now would create issues with long-term economic growth in Estonia and that more conservative budget policy would better suit the country.
Hansson spoke before the Riigikogu on Monday, taking questions from Free Party MPs about allowing the state budget to go into deficit after the MPs submitted an interpellation regarding what counsel, if any, he wished to give the Prime Minister and Minister of Finance regarding the government's recent decision to allow the state budget to go into deficit.
"I believe that in Estonia, a small deficit right now would create problems for long-term economic growth, however it would not create problems in the near term for the sustainability of the budget as our national debt is small," he said, stressing that a slightly more rigorous budgetary policy and bigger reserves than in Europe are a better fit for Estonia.
Hansson explained that Estonia has an aging population and in the future will have less EU funding than currently and thus a more rigorous approach was needed.
"In fact you could say that due to the use of EU grants — they have made up approximately 2.4 percent of the GDP over the past five years — we are essentially in a proper deficit," he said.
The bank president noted that as these are grants, they are not taken into consideration. He explained that they do not create debt, however they stimulate and affect the country's economy and that Estonia has to some degree gotten used to spending them.
"We know that budgeting will get more difficult in the future; EU grants will decrease and the population will age," said Hansson. "There are cautionary examples in Europe of budgetary minimum requirements becoming typical behavior, which creates economic difficulties. And so this is more a risk of ending up on a slippery slope than 0.5 percent by itself having a big influencing effect in the short term."
Hansson: We are not in a deep recession
Hansson said that the Bank of Estonia understood the government's desire to add some flexibility to the principle of a balanced budget. He found, however, that the issue right now was that this specific proposal provided a great deal of flexibility in a way that he called opportunistic, as cardinal law on the state budget should foster confidence in the longer term and keep governments away from short-term temptations, reported ETV news broadcast "Aktuaalne kaamera."
"We believe that the current economic situation does not justify the government proposing an additional demand and we believe that it would more likely generate long-term damage," explained the bank president. "First of all, this is not an emergency situation; we are not in a deep recession. In fact our economic indicators are fairly close to balanced. In recent years, Estonia's average wages have increased 6-7 percent or even more per year and if this wage growth is too rapid, if expenses grow and revenue does not, then businesses' profitability suffers. Sooner or later they will begin investing less, some will close their doors and move elsewhere. Overall I believe that it would begin inhibiting our long-term economic growth."
Per the Bank of Estonia Act, the Bank of Estonia advises the government on economic policy issues and the government will not make any important economic policy decisions without first hearing the central bank's position on them.
Editor: Aili Vahtla