Transcript Fiscal policy and consolidation in Estonia Structure of the Presentation

Fiscal policy and consolidation in
Estonia
Structure of the Presentation
I.
II.
III.
IV.
V.
VI.
Fiscal policy and framework
Rules and regulations
Consolidation process
Consolidation effort 2008+
Recent developments
Conclusions
I. Fiscal policy and framework
Culture of prudence – enables to switch
on the autopilot
• Sound fiscal management since transition natural preference of conservative fiscal policy
• Small and efficient government sector
• Total government expenditures 40% of GDP
• Central government 75% of general government
• Stakeholder accountability (by state, by taxpayer, as a member of eurozone, NATO)
• Mid-term budgetary objective “balanced or in
surplus” well rooted informally for a long time
Estonia`s budget fairly balanced
over the last decade
15.0
10.0
5.0
0.0
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
-5.0
-10.0
-15.0
-20.0
GDP real growth (%)
Budget surplus/deficit (%)
2007
2008
2009
2010
Economic growth
10
6
2
-2
-6
-10
-14
-18
2001
2003
Eesti
2005
2007
2009
Euroala (13)
2011
General government budget (EU,
2010)
II. Rules and regulations
Robust and simple monetary and fiscal
framework – stability as a merit and trust
builder
• Currency board-backed fixed exchange rate
1992-2011; euro 2011+
• Sound fiscal management since transition natural preference of conservative fiscal
policy
• Mid-term budgetary objective “balanced or in
surplus” well rooted informally for a long
time.
Fiscal rules and regulations
• Constitution has helped:
• Parliament can´t increase deficit
• Extraordinary elections if the budget has
not been approved by end of February
• Parliament can´t decrease exp., that are
prescribed by other laws
• Legal discussions in consolidation
process – what expenditures can be
cut?
Fiscal rules and regulations
•
•
•
•
•
•
•
Rules for maintaining the legal reserve levels:
The size of the state Cash Reserve Fund.
Requirements for the use of the reserves of the Estonian Health Insurance
Fund.
Legal reserve requirement for the Unemployment Insurance Fund.
•
Restrictions for the regulation of credit burden:
State authorities are prohibited from taking loans.
Annual restrictions on the balance of budget loans and cash loans, on the
balance of loans granted by the Government for the performance of public
duties, and on the volume of bridge financing.
The Unemployment Insurance Fund and The Health Insurance Fund are
prohibited from granting loans and securing obligations of other persons.
Rules for local governments and for foundations with state participation.
•
Limits for the undertaking of obligations on account of future years.
•
Local municipalities – new law
• Compulsory medium term financial planning
• Primary expenditures must not exceed primary
revenues
• Maximum limit of net debt between 60% and 100%
• Financial discipline measures
• incl units governed and mostly financed by
municipalities
• sanctions (plan + commission interference)
• Rules for investing liquid assets.
III. Consolidation process
Consolidation need internally driven
 Very strong political commitment
 Fiscal issues were the priority:
 the cabinet discussed budget 2009 37 times
 almost the length of an entire working month
 Prerequisite for strong budget cuts:
 flexibility within the system and the administration
 no budget line is fixed – almost each and every
budget item can be cut
 laws can be amended, eg: 29 laws were modified,
attached to negative supplementary budget 2009
 Good legal discussions: which expenditures
can be cut?
IV. Consolidation Effort 2008+
Consolidation at Glance
• 2008: 4,1% of GDP
• 2009: more than 9% of GDP
• 2010: 2,8% of GDP
• 2/3 of measures on the expenditures side
• 1/3 of measures on the revenues side
• Ca 70 % long-term measures
• Ca 30 % one-offs (incl. 1+ years)
Cuts covered most of the agents. Some
examples:
• Cut of operational expenditures of the public sector (20%
compared to pre-crisis level)
• Lower increase of pensions from 2009 onwards (5% increase in
2009 instead of ca 14%, no increase in 2010 and 2011)
• Major cuts of road maintenance, local gov. funding, defence budget
• Reform of the compensation scheme for sick days and reduction of
health insurance costs by 8%
• Suspending govt. co-payments to the II pillar pension funds for
2009 and 2010, gradual resumption of payments thereafter
• Borrowing of local government curbed by a law (2009-2010) –
same measure for public foundations
• Etc
Positioning of public administration as a
frontrunner helped to legitimate
budget cuts
* available resources (budget, with funds transferred from the previous year)
The slowdown of the economy
counterbalanced the effect of the
indirect tax rises on prices
•
•
•
•
Rise of unemployment insurance tax
Rise of alcohol, fuel and tobacco excise
Rise of VAT from 18% to 20%
Dividends from the state owned
companies
• Sale of land
• Temporary stop of the step-by-step
lowering of the income tax rate
V. Recent developments: Fiscal
goals
Fiscal goals
• Structural surplus
• Nominal surplus from 2013
• Debt burden will not increase
• From 2015 start to increase reserves
• No positive supplementary budgets
• Tax burden to pre-crisis level
VI. Conclusions
What has changed after
consolidations?
•
Increased control over other general
government players
•
Better capability to assess general
government budget position
•
Stronger tools and techniques for planning
and monitoring
•
Much better knowledge on budgetary issues
– politicians, general public, public administr.
•
Different thinking
Lessons learned
•
Consolidation pays off even in a relatively
short term, at least in a small, open and
flexible economy
•
Buffers are needed for the future: that gave a
breathing space when it was most needed
and the market conditions for lending were in
the heights
•
EU money helped – the level of expenditures
did not fall during the crisis
Thank You!