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Government approves new state budget strategy, budget discussions set to continue in the autumn

31. May 2019 - 21:44

The government has approved the state budget strategy for the period 2020–2023. The combined volume of the state budgets is planned to be slightly more than EUR 48.5 billion over the next four years. In 2020, the volume of expenditure will be around EUR 11.7 billion. This is approximately EUR 500 million more than planned for 2019.

The government also approved an initial version of next year's draft state budget that does not yet reflect all the decisions made by the government in the budget strategy process. The government will discuss the draft 2020 budget in detail during the autumn, prior to submitting it to the parliament.

Prime Minister Jüri Ratas said that it is crucial to keep in mind the long-term interests of the state and the good condition of the economy when planning the budget for the next four years. According to him, the budget is growing sustainably. ‘In the autumn, as well as next year, the needs and opportunities of the state budget will definitely be reviewed. I understand that expectations for the budget are loftier than available resources,’ the Prime Minister said. ‘At the same time, I am convinced that the government must stick to a budget policy with decisions that fit our resources at its heart.’

‘In light of the forecasts, the government has clearly expressed its wishes by allocating more than EUR 150 million to research over the next four years. If possible, we would like to make even bigger contributions during state budget discussions in the autumn. We will also be increasing the tax-free income of pensioners by EUR 50 to keep the average old-age pension income tax-free. It is important to note that the proportion of defence expenditure will continue to be more than two per cent of gross domestic product. Naturally we will continue with important investments to strengthen our defensive capabilities and security,’ Ratas noted.

According to Minister of Finance Martin Helme, the government's goal is an efficient state. ‘We must be able to do more with the same and, occasionally, with less money. We are looking for savings and opportunities to make the work of state institutions more efficient,’ said the Minister of Finance. ‘In order to support the continuous strong development of the Estonian economy, we prefer investments that increase the potential of our economy. This includes infrastructure that better links different parts of Estonia. Also, investments in research and development that will help our people to do smarter and more profitable work in the future.’

According to the Minister of Finance, it is also important to rein in the border trade on the southern border of Estonia. ‘I am pleased that the government has decided to lower the alcohol excise duty,’ Helme said. ‘This will allow retail traders to lower prices, which will help reduce border trade.’

Foreign Minister Urmas Reinsalu considers it very important that, together with the budget for next year, which will be discussed again in the autumn, the reform of the second pension pillar will enter into force next year. ‘I believe that people should have the right to decide when it comes to their pension money – either by continuing with the second pillar of the pension in the same way as before, or by investing their money elsewhere.’

Reinsalu added that when drafting the state budget, the most important principle is that the Estonian government keeps its spending within its means. ‘This is why our aim is to bring the budget into balance and to limit what have thus far been rapid increases in public expenditures. Clear exceptions are defence expenditures of strategic importance and public funding for research and development.’

Growing pensions, defence expenditures and research and development funding

The government considered it important to keep up its contribution to defence ensuring that the proportion of defence expenditure remains above two per cent of Estonia’s GDP. This will be complemented by additional resources to host the presence of NATO allies in Estonia as well as additional defence investments in the amount of EUR 20 million.

An agreement was also reached to raise the monthly tax-free income of pensioners by EUR 50, so that the average pension would remain tax-free. The government will further discuss the issue of an additional pension increase in the autumn.

In order to curb border trade, the government decided to lower the excise duty rates on beer, cider and strong alcohol by 25 per cent. The planned 10 per cent increase in the excise duty rates for tobacco will be replaced by an increase of 5 per cent per year for the next four years.

The construction of the Tallinn–Tartu highway continues at the planned pace. A total of approximately EUR 100 million has been planned for the construction of the Kose–Mäo section over a period of three years. The four-lane Kose–Mäo section of the highway being constructed will allow the whole country to save around EUR 10 million per year in time, traffic accidents, and vehicle costs.

Research and development funding will grow over the next four years. The additional money will ensure that the share of research spending remains at the level of 0.71 per cent of GDP. The government will discuss the topic further in the autumn.

In order to step up the fight against money laundering, the government plans to contribute nearly EUR 6.4 million to increase investigative capacity over the next four years, and EUR 1.3 million to improve pre-trial criminal proceeding capabilities.

The ferry link between the mainland and the major islands will receive additional funding in order to improve the service. On the Saaremaa route, an additional ship will continue to be chartered during the summer peak. To that end, the government plans to contribute more than EUR 7.5 million over the next four years.

Budget policy will remain sustainable

The government will continue with a sustainable budgetary policy focused on structural budget. The budget policy supports a balanced economic growth and a reduction in the government debt.

Last year’s, general government structural deficit was 1.4 per cent of GDP. The government is committed to cutting this to 0.9 per cent of GDP in 2019. Next year, the structural deficit will shrink to 0.4 per cent of GDP. According to the budget strategy, the general government budget will be in structural balance in 2021 as well as in 2022 and 2023.

The government will change the current restrictive requirement that currently mandates the compensation of past deficits with surpluses of the same amount in the future. The government will introduce an amendment of the State Budget Act to this effect. The planned amendment will restore the requirement that the general government budget has to be planned in a structural budget every year. The adopted budgetary strategy is premised on passing the planned amendment.

In addition, the government will make every effort to commence implementing funds from of the next European Union budget period already in 2021.

Expenditure growth slows

The budget will increase in the coming years, but this increase has already been covered by planned expenditures. In order to balance the budget, the government, in addition to finding additional revenue, has decided that ministries will also have to find savings in their spending plans for the coming years.

All ministries have been tasked with reducing their existing plans regarding operating costs and investments from 2020–2023. The precise breakdown of savings between the areas of governance of ministries will be decided in the autumn during the state budget negotiations in the cabinet. The government will then review both the budget for 2020 and other decisions made in the state budget strategy process, and will seek to find additional funds to fund priorities.

Government debt is set to decrease and the tax burden is below the EU average

General government debt will remain at 8 per cent of GDP in 2019 and 2020. This figure is the lowest in the European Union, however, a further decrease in general government debt burden is forecast. The tax burden will remain close to 33 per cent of GDP in the coming years, a level well below the European Union average.

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