Frequent changes to the fiscal rules harm the credibility of Estonian fiscal policy and the economy June 20, 2019

The fiscal position of the Estonian general government proved to be weaker than expected in 2018. The estimate of the Ministry of Finance from spring 2019 put the structural deficit last year at 1.4% of GDP. The State Budget Act states that such a large deficit requires the fiscal policy goal of a return to structural balance to be set.

The state budget strategy 2020-2023 sets targets for the structural fiscal position for the next four years. The government aims to achieve structural balance in 2021. While moving towards balance, the fiscal position will be in structural deficit this year and next year as well. The Fiscal Council finds however that budget deficits in 2019 and 2020 are not justified and recommends that the government return to structural balance this year.

The Fiscal Council finds that the targets set for the structural fiscal position in 2020-2021 comply with the State Budget Act. The government proposes several revenue and expenditure measures in the budget strategy in order to achieve these targets. The Fiscal Council considers that the measures proposed may not ensure the required amount of additional revenues for structural balance to be achieved.

The government aims to maintain structural balance in the final years of the budget strategy. However, the State Budget Act requires that structural surpluses be planned after structural balance has been achieved to compensate for the earlier deficits. For this reason the Fiscal Council does not believe that the targets for the fiscal position for 2022-2023 are in line with the requirements of the budget rules.

To remedy this, the government plans to change the State Budget Act by abandoning the requirement for surpluses. This would mean easing the fiscal rules for the second time in recent years. The Fiscal Council considers that it is not good policy to change the fiscal rules so frequently, as this can harm the credibility of Estonian fiscal policy and the fiscal rules. A reliable and stable fiscal policy is necessary for companies and households to be able to make long-term decisions that will support growth in the economy.

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

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