Andrus Alber                                                                                                                                                                                       Vice-Chairman of the Fiscal Council

Asset purchases by the central banks of the euro area have pushed interest rates on sovereign bonds to exceptionally low levels, and entirely understandably this has raised a discussion in Estonia about whether the country should take advantage of these particularly good borrowing conditions to finance vital investment. A point that has been overlooked in this discussion though is that any increase in the debt to finance government spending, including spending on investment, will generally create a budget deficit, and running a budget deficit under current economic circumstances would be a breach of the budget rules in the State Budget Act.

The risk of overheating

In essence the budget rules require the government to build up a surplus during the good times, while allowing it to run a budget deficit during harder times. Experience in the euro area has shown that it is in countries like Estonia, where growth is somewhat faster, that the economy can easily overheat. Recent forecasts predict real growth in Estonian private consumption of 4-5% a year and wage growth of 5-7% a year, with unemployment at 6% and falling. These figures mean the Estonian economic climate is moderately good at the least, and so the government should be able to maintain a balanced budget. This is what the Fiscal Council has advised the government for the next year.

It should also be remembered that Estonia receives hundreds of millions of euros every year from European funds and so there should not be any shortage of money coming to the state coffers from Europe. It is interesting to note that both Estonian government investment and total investment in proportion to the economy are the highest in the European Union. However, the same cannot be said about the growth in the economy, and so attention should be focused more on raising the effectiveness of investment than on raising the absolute volume of investment through additional government borrowing.

Less European money

Issuing sovereign bonds is not a bad thing in itself, and could even be good for the development of local capital markets in preference to direct loan agreements. Henrik Igasta of Superia just recently described in these pages the problems caused by the absence of sovereign bonds.

However, it is even more important to remember that the amount of money that comes from the European Structural Funds will start to decline after a while. The budget for next year allows the government to spend around one billion euros more than in 2014, and if we think that we cannot manage to boost our investment with the money we have now without borrowing more, how do we imagine we will be able to cope in four or five years time?

Published: 06.05.2015
Published in: Äripäev