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Higher GDP growth unlikely to result in increased budget

Toomas Tõniste.
Toomas Tõniste. Source: (Siim Lõvi /ERR)

Statistics Estonia reported 5.7 percent GDP growth for the second quarter this year, a surprising and very high number. The Ministry of Finance’s fiscal department already cautioned that this didn’t necessarily have to result in a bigger state budget.

Director of the ministry’s fiscal policy department, Sven Kirsipuu, said on Thursday that the surprisingly positive growth could even mean that the state would need to be more cautious in terms of its spending in the coming years.

Kirsipuu also pointed out that the Estonian gross domestic product (GDP) had grown faster already in the last quarter of 2016, and again in the first quarter this year, and that growth beyond 4 percent had already been expected.

“What we can say is that growth is accelerating, certainly also supported by the low base of the previous year. Comparably fast economic growth can be expected for the next quarters as well,” Kirsipuu said.

He added that the ministry in its forecast in spring had expected a growth for the whole year of 3 percent, and that they would very likely raise that number. The new forecast would be published in September, and just how much growth they would predict would become clear over the next few weeks.

Though the faster than expected growth didn’t mean that the government now had more wiggle room for next year’s budget. “Rather the other way around,” Kirsipuu said. GDP growth didn’t immediately result in greater tax revenue.

In recent years the developments of the tax base as well as consumption had been very different from GDP indicators. “Tax revenue has grown quite a bit in recent years despite low GDP growth, salaries have grown and as a result consumption as well.”

While GDP growth had been much greater than expected, the development of social tax revenue, the state’s main source of income, had been relatively predictable. With this in mind, the government needed to try and intervene as little as possible as long as the steep GDP growth continued, which meant a rather more conservative approach to the budget, Kirsipuu said.

Tõniste: State can’t increase spending because of greater growth

Minister of Finance Toomas Tõniste (IRL) said on Thursday that the state couldn’t suddenly spend more because the gross domestic product was growing faster.

“Looking at the positive numbers of economic growth, we can’t ignore that this kind of growth isn’t sustainable if we lack the labor force, because the lack of qualified labor is becoming an ever bigger issue, and wage growth is also faster than productivity,” Tõniste told ERR’s radio news.

According to the minister, the basic decisions concerning the state budgets are made already in spring. In how far those decisions would need to be corrected would clarify once they had the new economic forecast, scheduled for publication in mid-September.

Asked if in the light of the latest growth indicators the government would consider using reserves or borrowing, Tõniste said he wasn’t going to speculate. “We have a state budget strategy until 2021, and these options are part of it,” Tõniste said.

Editor: Dario Cavegn

Source: ERR.ee, ERR radio news

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