General government budget position better than expected in 2014 July 31, 2015

The State Budget Act requires the general government budget to be at least in structural balance and to take corrective steps if there are significant deviations from that target. The Fiscal Council finds that the general government structural budget position in 2014 was consistent with the legal framework as well as fiscal policy targets set for 2014.

Based on the Consolidated Annual Report of the State for 2014 the general government’s revenues exceeded expenditures in 2014 in both nominal and structural terms. Budget position was better than in previous years as well as compared to forecast. The surplus was larger than expected mostly because of better tax receipts and the postponement of investment expenditures.

The Ministry of Finance estimates that the general government structural budget position, adjusted for the effects of economic cycle and one-off measures, reached 1.3% of GDP. The Fiscal Council is of the opinion that both structural balance as well as the target set for 2014 to strengthen the budget position have been reached. Other independent institutions have also estimated a structural surplus for 2014.

Even if the GDP remains below potential, a higher growth of some GDP components may bring about larger tax revenues than what can be assumed based on GDP growth. In 2014 the good tax receipts were supported by the relatively high growth of earnings as well as private consumption. The structural budget position was thus strengthened by changes in the GDP structure that may be reversed in the future.

The outcome in 2014 confirmed the previous experience that the size of the general government investments is volatile and difficult to forecast because of its large share of European Union transfers. As this can affect both nominal and structural budget position, the Fiscal Council finds it important to avoid large fluctuations in government investments.

Looking ahead, however, the Fiscal Council thinks it is still unclear whether the budget position figures in the state budget strategy are only forecasts or fiscal policy targets, and how binding these figures are for drafting the annual budget. If the budget position figures are revised, then it is important to know whether this revision was caused by changes in fiscal policy priorities or in economic outlook.

The achievement of the general government structural budget position target was discussed during the regular meeting of the Fiscal Council that was held on Tuesday in Tartu.

The Fiscal Council opinion and a more thorough explanatory report can be found here

Additional information:
Raul Eamets
Chairman of Fiscal Council
Tel: +372 514 0082

Background information

Under the new State Budget Act, entered into force in March 2014, the Fiscal Council must give its opinion on the achievement of the target for the general government structural budget position after the Consolidated Annual Report of the State has been published. The law requires the state budget for each year to be prepared so that the budget for the general government is at least in structural balance.