Half-truths are being said about the budget balance November 20, 2014

Raul Eamets
Chairman of the Fiscal Council 

This article is a comment on the assertion by Helir-Valdor Seeder (IRL) of the Riigikogu Finance Committee that the recent assessment of Estonia by the European Commission shows that there is a hole of 300 million euros in the state budget for next year.

Who is wrong, the European Commission or the Ministry of Finance? The Fiscal Council has frequently emphasised that there are multiple possible estimates of the structural position of the Estonian general government, and the estimate of the Ministry of Finance remains valid alongside the others. The estimates for the fiscal position of the Estonian general government contained in both the spring forecast of the European Commission and the recent autumn forecast are quite different from those of other international institutions and we clearly need more information about the causes of this difference.

What could those causes be? The details of the methodology used by the Commission are unfortunately not disclosed sufficiently for anybody else to be able to reproduce their results. It is only clear that the Commission’s assessment of the potential output of the Estonian economy is smaller than that of the Ministry of Finance, and for that reason the planned spending in the budget should also be smaller for structural balance to be achieved.

However it is important to emphasise that using a complex indicator like the structural budget position in an everyday context requires a continuous assessment of the economic cycle. This can be very challenging and can lead to disputes, and so excessively dramatic conclusions should not be drawn from it.

Should the planned state budget be substantially redrafted in the light of new information? The State Budget Act requires the general government structural position to be maintained at least in balance, but the same law does not actually specify the method to be used to assess the structural position of the budget.

As there are so many alternative estimates, the Fiscal Council recommended this September that multiple different methods should be used for calculating the structural position. Using those different methods shows it is not impossible that the surplus on the general government budget in 2015 will be smaller than currently planned, or that there will be a small structural deficit in 2015. For this reason the Fiscal Council recommended that the government should aim for its structural position to be not less than 0.8% of GDP in surplus, as this would cover any measurement risks. The government has accepted this recommendation.

In forecasting revenues and spending, it is necessary to observe what is happening both in Estonia and in the global economy. That the European Commission uses a different methodology for calculating the budget balance does not affect the accuracy of the forecasts for tax revenues or for expenses. The Fiscal Council believes that the economic forecasts used as the basis for the budget are realistic.

We do not find that there is any benefit in raising the projection of income and we remain clear that any increase in one expenditure item should be offset by a reduction in another so that the total spending in the budget does not rise.

Published: 14.11.2014
Published in: Postimees