Minister of Justice: EU funding could lead to overheating in 2024-2025 | Economy
What should Estonia’s fiscal position be in 2025?
The objective is to achieve a structural equilibrium, that is to say a situation where the income and expenditure of the State are equal. In doing so, the current economic situation is also taken into account. If the economic situation in 2025 is good, state revenues should exceed expenditure. If the economy is worse off, spending should be higher than income so we can be close to zero. Structural balance aims to achieve a so-called zero.
We will therefore slowly begin to cover the expenses that we made during the first and second governments of Jüri Ratas and also those who [Prime Minister] Does the current government of Kaja Kallas do it?
First of all, there is the pressure of previous years. We are under additional pressure due to the extraordinary conditions of the coronavirus crisis, but the main problem comes from previous years. Our reserves are running out. Too much was spent during the good times and we were actually in structural deficit. In previous years, they imagined that life would only be fine and now it inevitably has to be corrected.
The Estonian state budget accounts for 18% of gross domestic product (GDP), the absolute lowest in the entire EU. Italy’s debts represent 155%, Finland’s 70% and Greece’s 205% of their GDP. Should we have to balance our budgets during this time of massive printing and depreciation of money?
As in any decent household, government income and expenditure must be reasonably balanced. There are certainly times when it is wise and reasonable to be in the so-called negative. But the income has to be offset later. We cannot be negative forever. The debt burden is not the only parameter, they also look at the rate at which the debt increases and what are the capacities of repayment of this debt.
Apart from a few concessions, the Estonian state has always been responsible for managing its finances in recent years. It also means that we get a better loan in terms of repayment than those with the heavier debt burden.
When servicing a loan, you have to pay interest. Yes, interest rates are negative right now, but they won’t stay that way forever. And imagine that we have a debt burden and high interest rates, which can end up being very onerous for the country. Fortunately, we are not threatened by this now, but there is potential to achieve it. It is reasonable to react before things get worse.
Greece’s debt level is still light years away from Estonia’s. Due to the coronavirus crisis, Estonia’s debt level fell from 9% of GDP to 18%. We are currently in an extraordinary situation, perhaps the spending made during the coronavirus crisis can be excluded from the discussions on structural balance?
Well, there is no such rulebook. The European states have agreed on common rules for structural budgetary balancing. The setbacks resulting from the coronavirus will partly add to the structural budget. Fortunately, some health expenses will not be taken into account. If the economy is fully recovered by next year or the year after, we need to start paying off the extra expenses during the coronavirus crisis.
Of course, it would have been easier for us if we had more reserves. You must have a reserve for the rainier days, you must also be prepared to face extraordinary expenses as an individual – whether it is a visit to the dentist or the replacement of a broken refrigerator.
The European Commission would probably not say a single critical word if Estonian parties generally agreed not to include coronavirus-related spending in the structural budget. It was and is almost like a natural disaster and luckily we had very little debt and more money is printed in the world. Now let’s look at the much higher debt levels of others …
We can certainly discuss the duration and the ability to factor the effects of the coronavirus into monetary policy. It’s not like we’re rushing to get the budget balanced next year, even though economic analysts are predicting we will restore our pre-crisis economy next year. We are thinking of several years here and there is a little bit of clearance. But I will also come back to the fact that it is always reasonable in the long run to balance income and expenditure.
Looking over the ocean, the US administration has announced it will allocate $ 2 trillion for roads, bridges, power lines and other infrastructure items. But at the ERR, we have received notifications from the Estonian government opting instead to withdraw to the highways in 2024-2025. We are reducing investments to find a balance, but the Americans continue to print money and will use it?
Our problem is that Estonia is ready to receive very large remittances from the new EU budget period. If we use this wisely, there are many investments we can make with just this money. What can realistically happen instead is that the flow is so large that we can create additional inflation for ourselves. We might not have the construction capabilities and the workers; we could end up overheating.
We could also come to a situation where contractors cannot improve their production because construction prices have gone up. The state also has a responsibility to allocate these expenses in a reasonable manner. I really wouldn’t want to go back to 2005-2006, where every man went to work on construction, figuratively speaking. And then there was someone else to fix it.
A similar thing is possible in 2024-2025 thanks to EU funding. Let’s not forget Rail Baltic, which means high volumes of construction and so-called deprivation of people. We will use EU funding in 2024-2025 and then keep pace in 2026-2027 with public funding, so this process would be spread over a longer period. It’s always better for the economy.
We have really reached a phenomenal period for the Estonian state where we have nothing to spend ourselves and can make these investments with EU money? In principle, is this the model of behavior on which the government has agreed?
We will use EU funding to the extent that we can use it. But there are some places where we can’t use EU devices. And this is where we will use Estonian taxpayers’ money. I cannot indicate the exact rate of taxpayer money in these investments, but we also need co-financing. The Minister of Finance has these tables.
The construction of four-lane highways will therefore be suspended? It would take 400 million euros per year by 2030 to complete them and, given that EU funding cannot in principle be used for major highways, we will wait until the budget is balanced?
It is a subject for the Minister of Finance (Keit Pentus-Rosimannus – ed) and the Minister of Economic Affairs (Taavi Aas – ed) and I do not put my nose in this area. Each minister is responsible for his own affairs.
Can we not exclude so-called future investments from the discussion on structural balance? Even the construction of these highways? They will bring in more money in the future and are they important for life to continue outside the capital?
Highways are undoubtedly future investments. But if we were to start developing three main highways and Rail Baltic simultaneously, the construction volume would be enough to exceed the capacity of Estonian companies. We could of course bring in workers from outside.
This means that if we do all of these things at the same time it could be beyond our capabilities. We have had real estate developers who took on too many projects and exceeded their capacities. These are all good projects on their own, but failure comes when there are too many of them. And that’s the danger, that we start doing everything at the same time. Therefore, it is reasonable to see when something can be done and where it could be placed on the schedule.
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