Although Estonia has been told for decades that the basis of our economic success is how well our finances are organized, now the opposite is true: our finances are not in order, and it seems that the only way to fix the situation is by fixing the economy, writes the economic adviser to the President of Estonia Heido Vitsur. /nginx/o/2024/07/11/16216715t1h4dad.jpg)
According to the plan, the car tax will bring between 200 and 230 million euros to the state budget. Photo: Liis Treimann
Although Estonia has been told for decades that the basis of our economic success is how well our finances are organized, now the opposite is true: our finances are not in order, and it seems that the only way to fix the situation is by fixing the economy, writes the economic adviser to the President of Estonia Heido Vitsur.
Translation: Ewa Ojrzynska
Therefore, let's start by looking for an answer to the question, what is orderly finances? Is this when government revenues are brought into the desired equilibrium? Or is it when it is known with sufficient accuracy for what purposes and why money is spent, as well as how much is actually spent? And also, why exactly do they want to spend so much and will their goals be achieved in the most effective way?
The current situation with public finances in Estonia raises questions. For example, why did the Minister of Finance only this summer find out that 750 million euros from last year's budget had not been spent. Our finances are organized in such a way that it can take a long time to figure out why and what money was not spent. Or how to deal with situations when, when trying to save money, budget cuts are accidentally made where they were not planned, because those in charge do not understand all the consequences of their actions.
Unfortunately, that's not all. The Special Commission on the State Budget believes that, given that last year the government had 18.7 billion euros at its disposal, and only 16.5 billion was spent, not 750 million, but 2,200 million euros should have remained unused, that is, three times more money, the location and reasons for which there is no information.
Although the unused amount amounts to approximately five percent of our gross domestic product and is more than ten percent more than public sector spending, I believe that this is not a scandal, but the reason lies in the gaps in our regulations.
Uncertainty about the future affects investment
The economy has contracted for the third year in a row, and the only thing that brings some relief is the occasional slowdown in the pace of decline. In addition, any government proposals to “put finances in order” do not suit either entrepreneurs or the population.
And how can a 45% increase in the excise tax on electricity suit entrepreneurs if our price for electricity for end consumers is usually higher than that of our trading partners or competitors? Moreover, in fact, we do not know how and under what conditions our competitors buy electricity.
Add to this uncertainty over future network tariffs, a 7% increase in fuel excise duty, and the introduction of a car tax, at a time when a prolonged recession and rising interest rates are already hampering the investment needed for business recovery.
The situation is no better for private individuals. So, the 38% rise in prices over the past three years was partly due to higher sales tax rates, so what good is cheaper renewable energy if network tariffs and other costs rise along with it? Moreover, people's purchasing power has already declined, and the abolition of the tax exemption for the land under the house, an increase in land tax and the loss of a number of subsidies will reduce it even more.
As a mitigation measure, only an increase in the tax-free minimum and the abolition of the tax hump are proposed. And this is taking into account a two percent increase in the income tax rate. Such an initiative will cause more problems than benefits. As a result, the budget will lose about half a billion euros, and only half of the workers will benefit from the changes: people with a median salary will receive an additional euro or two, and the benefit will gradually increase to one hundred euros with a monthly income of about 2100 euros, after which the increase in the tax rate will gradually begin to “eat up” effect of tax exemption.
The result of many years of omissions
Unfortunately, the hard truth at the moment is that we can criticize the government all we want, but we will have to accept a lot of what it offers, because the current impasse is not just a result of mistakes made now or in the last two years . Our current difficulties are the unfortunate but natural result of decades of action and inaction, as well as our inflexibility, which is called stability.
To some extent, we are victims of the successes of previous years. We have argued for decades that a simple and unchanged tax system suits us and that additional taxes are not needed, that talking about changes, much less implementing them, will only harm our development.
In principle, we could continue this way if we started to be honest about the fact that with a tax base like this and an aging population, rising health care costs and increasing educational demands, we will not be able to provide free public services at the same level in the future. And that if we want to keep our tax system the way it is, we will have to increase people's contribution to education, health, and social spending as needed. And then act on it.
With a tax burden ten percentage points lower than the European Union average, we can no longer play into the typical Scandinavian or Western European solidarity-based welfare state model
We, based on current opportunities and ignoring future risks, have done the opposite for a long time: we made higher education free, reduced the already almost non-existent property tax, made mandatory contributions to social insurance voluntary, and exempted those who do not need to pay income tax. needed…
Moreover, we have always shown rather little interest in the efficiency of our public sector. The public is constantly interested in the salaries and numbers of government employees, but not in what they actually do and how effectively they spend taxpayers' money.
This means that, in an environment where every euro is put to good use, we focus on issues related to the size of a relatively small part of the public budget, rather than on where the lion's share of tax revenue goes.
The impact of decisions on people is not taken into account
Today the focus is on the Ministry of Education's spending. Despite one of the highest levels of spending in the EU in relation to GDP, for decades we have failed to start paying teachers the promised, albeit modest by European standards, salaries.
The analysis carried out by academician Jaak Aaviksoo has once again demonstrated how much inertia there is in our society and especially in public administration, how inflexible we really are. It also showed that although we have always known where money goes in the education sector, because it has been written and talked about many times, we have done nothing. And in the same way, we have known for decades that our enterprises lack engineers and skilled workers, but here too we have done nothing to bring the education system closer to life and economic needs.
Moreover, although we have been told for ages about the shortage of skilled workers, engineers and teachers, we still have not realized that we either do not have economists who can competently plan and use the budget, predict the consequences of various financial decisions and evaluate their effectiveness , or we don’t know how to use their skills correctly. Without adequate feedback, it is impossible to assess the effectiveness of management and, if necessary, adjust it.
We must understand that, for example, the decision to build a new gymnasium or hospital is not an isolated political or economic decision. You need to know how else this money could have been spent, what was not implemented as a result of this decision, and what indirect consequences it will bring.
It is strange that when assessing various projects we pay so much attention to their impact on the environment and biodiversity, requiring detailed studies on these issues. However, when it comes to the impact of these projects on people and certain regions, we do not show such interest. We require detailed environmental impact studies, but explaining the socio-economic impacts of our actions often requires just a few sentences in a project brief.
We don't know if the costs are justified
We can guess where money is spent more freely, but we may be wrong. Clarity is needed, and to achieve this we need to radically change the way we budget. I'm not sure we need every ministry to write out its budget notes in as much detail as they do in Germany, where you can even find out how many pens a particular ministry is going to buy per hundred employees in the next budget year, but it's clear that our explanatory note to the budget is not detailed enough to make decisions. This applies to both income and expense parts.
Ultimately, however, all of the above problems come down to one thing: budgeting. Today, no matter how much we want, we cannot say whether spending on the state apparatus is justified, where expenses can be cut, and where more money is needed. There are only assumptions about where money may be spent ineffectively, but these assumptions may be wrong.
To solve these problems, greater clarity must be achieved, and this requires a fundamental change in the budgeting process. I am not sure that it is necessary to reach the same level of detail as in Germany, where you can even find out the number of pens that a ministry plans to buy for a hundred employees. However, it is clear that the current budget narrative is not detailed enough to make informed decisions. This applies to both income and expense planning.
We should start with the most difficult but fundamental question: how to move forward? Will this be a way of increasing taxes or increasing the share of personal participation of people? At current price levels and low economic growth, and with a tax burden ten percentage points below the European Union average (i.e. one fifth), we can no longer play into the typical Scandinavian or Western European solidarity-based welfare state model .
Treasury forecasts indicate that the gap between fixed government spending and potential tax revenue will continue and widen. This indicates problems ahead. It is also necessary to understand that it is impossible to cover the budget deficit only by reducing government spending.
