Stenbock House, 24 September 2019 – The government approved the draft state budget for 2020, with expenditures of 11.6 billion euros and revenues of 11.8 billion euros. Expenditures will increase by approximately 240 million euros and revenues by 760 million euros over 2019.
According to Prime Minister Jüri Ratas, the summer economic forecast of the Ministry of Finance put a difficult task before the government. ‘The Estonian economy is doing well thanks to our good entrepreneurs and working people. But we still had to find savings and postpone planned activities in the budget. We based our decisions on the government’s five priorities – family-friendly Estonia, a cohesive society, a knowledge-based economy, efficient governance, and a free and protected state,’ said Ratas.
‘The goal of our country’s fiscal policy must be ensuring Estonia’s continued development and reducing social inequality. Therefore, the government has decided to invest in education, medicine, internal security, social security, and other core areas. The important decisions, both substantially and in terms of significance, include increasing defence funding and providing additional resources to research and development. The significant increase of the revenues of local governments is also important, as they provide many of the services critical to our people,’ the prime minister emphasised.
The Minister of Finance Martin Helme said that the budget negotiations have been constructive. ‘I would like to thank our good partners in government. Our efficient cooperation shows the strength of the coalition.’ According to Helme, the Estonian economy is currently in a good shape. ‘This means that both wages and pensions are on the rise. The state will also receive more labour and consumption taxes due to the growing economy,’ said Helme.
Minister of Foreign Affairs Urmas Reinsalu said that the government has drafted the budget for 2020 in a way to allow directing additional funds to areas that most need it. ‘Meanwhile, state spending is under control and the budget takes the possibilities of today’s economic environment into account. The continued increase in defence spending is undoubtedly important and essential for ensuring Estonia’s security. Additional resources made available for teaching the Estonian language are also worth highlighting. The biggest positive impact on future state budgets from 2021 onward will be from the reform of the second pension pillar.
Pensions, funding for science and health care, salaries, and defence spending will increase
Next year, the average old-age pension will increase by 45 euros, which is the largest increase in the last 12 years. The government has allocated 20.8 million euros for an extraordinary pension increase. From 1 April, the average old-age pension for a person with 44 years of service is forecast to increase to 528 euros per month from 483 euros. The government’s total pension expenditure will be 1.98 billion euros in 2020.
The budget of the Estonian Health Insurance Fund will increase by nearly 140 million euros in 2020, of which about 115 million will be accounted for by the increased receipt of the social tax health insurance funds. The state budget allocation for non-working old-age pensioners will increase by nearly 25 million euros.
Funding for research and development in the state budget will increase by almost 16 million euros compared to this year. The base funding for research grants and science will increase by 5.3 million euros. The state budget is planned to contribute 216 million euros to research and development. The share of science funding in the state budget will increase to 0.74 per cent of GDP from 0.71 per cent this year.
Defence spending will increase to 615 million euros and will exceed 2 per cent of GDP. This includes the cost of hosting the presence of NATO allies in Estonia, which will be around 10 million euros in 2020. Defence spending will be supplemented by defence investments in the amount of 20 million euros. The country is strengthening its military capabilities through large-scale procurements of equipment.
The government decided to allocate additional funds to increase the salary funds for teachers and state-paid social workers, as well as people working in cultural, sports, and internal security fields. An increase of 7 million euros is planned for the salary funds of internal security employees, 2.3 million euros for employees in the fields of culture and sports, and 1 million euros for social workers. The state will also continue to support local governments with 15 million euros to keep the average wage of kindergarten teachers at the same level with the minimum wage of schoolteachers.
Local government revenues will grow by more than 2.3 billion euros in 2020, nearly doubling since 2010. Rapid revenue growth has been driven by an increase in tax revenue as well as the government’s decision to increase the share of personal income tax received by local governments and the equalisation fund by an additional 185 million euros in 2018–2021.
The budget is moving towards balance and the debt and tax burden is decreasing
The draft budget for 2020 is in nominal balance and moving structurally towards a balance, with a structural deficit of 0.7 per cent of GDP. In 2021, the structural deficit will decline to 0.2 per cent and the budget is forecast to be in a nominal surplus.
General government debt will also decrease, both in euros and as a share of GDP. General government debt will decrease to 8 per cent of GDP in 2020 from 8.8 per cent in 2019. In absolute terms, government debt will decrease to 2.3 billion euros in 2020 from 2.4 billion euros this year.
The tax burden will remain stable at 33.2 per cent of the GDP over the next two years and is projected to fall to 32.7 per cent of the GDP in 2022.