The New Year’s holidays for the executive director of the Central Employers’ Union Estonia Hando Sutter and his team were fruitful. They tried to understand the state budget, and, in Sutter’s words, the picture they seen was depressing. The Union sent the
government suggestions to order the public finances. :format(webp)/nginx/o/2024/02/28/15917609t1ha2fa.jpg)
Money. Shot illustrative. Photo: DarioZg/Shutterstock
New Year’s holidays for the executive director of the Central Employers’ Union Estonia Hando Sutter and his team have been fruitful. They tried to understand the state budget, and, in Sutter’s words, the picture they
seen was depressing. The Union sent government proposals to reorganize government finances.
When analyzing the state budget the Central Employers’ Union Estonia took the base for 2019 year, as it was the last so called “normal” year before the beginning of different crises. According to Hando Sutter, at that time the public finances were in a balanced state.
But what is the real picture now of the public finances in front of entrepreneurs? In the last six years, that is, that is, in compared with the pre-crisis level, spending in the public sector has increased by 70 percent, while the nominal growth of the economy over the same period was only 45%.percent. In real terms, the economy has not demonstrated growth for three years, which has led to the government spending increasing significantly faster than the state of the economy allows.
Over the past years the public sector has clearly spent more than its capacity allows. Such unjustified spending, according to the Union, has led to an increase in the government debt from 9 to 24 percent of GDP. This means that in this year alone it will require about 300 million euros.
In addition, the tax burden in the country has also increased. In 2023 it was 35.8 percent of GDP, which is up from the level of 2019 when it was 33.1 percent. Although this indicator remains slightly below the average level of the European Union, the Central Employers Union suggests that it is probable, is the highest among the countries in Eastern Europe and is significantly above the average OECD rate, which in 2023 was 33.9 percent.
Where does the money go?
When government spending increased by 70 percent in the last six years, it is only natural to ask where are these funds going? Particularly on the background that the lists for medical care continue to increase, and teachers remain unhappy with the levels of wages. The Central Employers Union experts have analyzed the spending part of the state budget, and the results were surprising.
In Estonia the increase in taxes is often justified by the need to increase defense spending. The real situation is otherwise: even in the conditions of the current tense conditions in the situation.The growth of the defense budget of Estonia can be considered small. “The largest contribution to the increase in total government expenditures compared with the pre-crisis period is on social benefits, which increased by 31 percent, and health care, where the increase was 17 percent,” Sutter emphasized.
The growth in social and medical expenditures is due in large part to their indexation. For example, annually from 1 April pensions increase in accordance with the index. When calculating the index by 80 percent of the receipts from the social tax for the previous year, and by 20 percent of the changes in the consumer price index.
State closed circle
In Sutter’s words, this creates a closed circle, in which the state increases taxes, which increases inflation. Because of inflation the indexation of pensions increases, and the state is forced to pay every higher pensions. The increase in government spending, in turn, again leads to the need to increase taxes.
“The increase in government spending and tax burden in the last years has fueled and without that faster increases in wages and prices. which, in turn, sharply increased the indexation of expenditures. This indexation, as typically, is based on increases in wages or consumer prices, which has further increased the costs of the public sector,” the Estonian Central Employers’ Union said.
In its statement the union suggested that the government either freeze the indexation of spending until economic growth is restored, or revise its principles. For example, indexation increased budget expenditures for the current year by the current year by500 million euros, and in the period from 2019 to 2025 years the expenditure will amount to 2.5 billion euros.
“Estonia is in a state of stagflation: the economy is shrinking for the third year in-a-row, but because of a labor shortage and increasing taxes prices continue to rise. In such conditions to link government spending to increasing wages or prices is no longer sustainable practice. Stagflation is a new appearance for Estonia, and to cope with this, it is necessary to revise the current policy, ” the business representatives emphasized.
Sutter noted that their goal is not to reduce pensions or increase bills for medical services, but to order the systems. As explained Sutter, who also is in the Council of the HealthCare Council, Despite the talk about the underfunding of healthcare, the Budget of the HealthCare Council has replenished over the last seven years. But, evenevenwithoutthis,theHealth Fundoperateswithadeficitof160millioneuros.
“The rise inexpenditureinthehealthsystemisclearlynotsustainable,” he emphasized.–We have a highlevel ofprofessionalism inmedicine,butthesystemisproblematic.Fundingisbasedonthenumberofproceduresperformed,notontheresults achieved.Thentheprocess is funded,nottheendresult.”Also, inSutter’swords,thequestionablelow-onlytenpercentoftheprivatesector’scontributiontotheprovisionofmedicalservices.”There doesn’t seem to be a lot of trust in theprivatesectorinmedicine,” he said.
