Andrus Kaarelson: Sooner or later, cuts are inevitable

Andrus Kaarelson: Sooner or later, cuts are inevitable Over the past two weeks, we have seen that it is not the politicians of parliamentary parties — whose job it is — who are worried about a looming collapse in state finances, but rather civil servants from Eesti Pank and the Ministry of Finance, who are debating the sustainability of Estonia's public finances in the media. Something is very wrong with this picture, says Andrus Kaarelson. Tax increases have not solved a lack of money in any country. Not even in countries richer than Estonia, where there is also constantly a shortage of funds to cover state expenditures. This is demonstrated by the "tax festival" carried out by the government over the past three years, during which new taxes were introduced and nearly 30 taxes and charges were raised. Has this reduced state spending or the budget deficit? Clearly not, as we are facing the deepest structural deficit in history in both this year's and next year's state budget. At a recent meeting of party leaders, it became clear that parliamentary parties are not ready to make painful cuts that would put Estonia's crisis‑stricken public finances on a path to improvement. Unfortunately, several party chairs were still talking about lowering taxes while simultaneously increasing benefits. This is nonsense that will actually lead to even higher taxes. Prime Minister Kristen Michal did not even find time to attend the meeting of party leaders. This shows that Michal's talk of wanting to reduce the budget deficit is not credible — especially given that his government had sent to the Riigikogu a supplementary budget that increased state spending, a budget not supported even by former Reform Party finance ministers. Deep concern over the unsustainable state of Estonia's public finances has been expressed by delegations from the OECD and IMF, the president of Eesti Pank, the Fiscal Council, and conscientious civil servants. The reason is that Estonia's national debt has grown very rapidly over the past seven years — from 9 percent of GDP in 2019 to 25.9 percent this year. Regrettably, we are on a trajectory where Estonia's national debt could double by 2030 and exceed 20 billion euros. That would be an alarming 39 percent of GDP. Estonia is on course to lose its independent fiscal policy In early June, two international organizations — the OECD and IMF — told us quite directly that Estonia's public finances are unsustainable. Yet we still have a chance to turn away from this path of decline and move toward a balanced state budget. Regrettably, Estonia's public finances have turned toward ruin, and our former success story is fading into the annals of history. We have seen how sound public finances can be ruined in just a couple of election cycles. For the first quarter‑century after restoring of independence, Estonia was considered a model of fiscal discipline, following budget balance and maintaining very low national debt. Parempoolsed have for years pointed out that Estonia's public finances have been let go and that public‑sector spending is expanding without limits. The biggest symptom is the uncontrolled growth of national debt — the government now borrows one out of every ten euros it spends. Estonia's warning example is not only Greece but also our close neighbor Finland. Finland's once strong fiscal position became the most problematic among Nordic countries in just a couple of decades. Finland can cut, but Estonia cannot Finland's rapid debt growth is a clear warning sign for Estonia: Finnish debt has risen from 33 percent of GDP before the 2008 financial crisis to nearly 89 percent today — expenditures grew faster than revenues, and covering deficits with borrowing became routine. The biggest problem is not only the high debt level but especially the covering of fixed costs with loans. Finland failed to make tough cuts 20 years ago and let state spending grow unchecked, but we can still learn from their mistakes. The Nordic welfare‑state model has proven too costly even for Finland, with rapidly rising social protection and healthcare expenditures driving spending growth. Finland's current right‑wing government has understood the seriousness of the situation and begun rescuing public finances by implementing a debt brake. Prime Minister Petteri Orpo's government is carrying out extensive cuts aimed at stabilizing national debt by 2027. The state budget will be cut by around 10 billion euros, focusing on the largest spending areas: reducing social benefits and healthcare costs. The reason is the rapid growth of national debt and its interest payments. According to Finance Minister Riikka Purra, interest payments on national debt will rise from 3.2 billion euros in 2026 to 6.3 billion euros by 2030. By then, total national debt is expected to reach 264 billion euros. Finland's government has proven that when there is political will, cuts and savings in the state budget are possible and achievable. Estonia's government simply lacks that will. The Reform Party has misled the public nine times already In spring, Kristen Michal and Jürgen Ligi spent months talking — unbelievably at first — about a positive supplementary budget. Unfortunately, that is exactly what happened, and the Riigikogu has now regrettably approved it. This is despite official forecasts from the Ministry of Finance showing next year's deficit at nearly 5 percent of GDP. Estonia's public finances have been driven onto a path of ruin, and fixing them is being deliberately left to the new government that will take office in 2027. Recently, Prime Minister Michal said on an ERR broadcast that he does not rule out preparing another supplementary budget this year: "It could also be a positive supplementary budget. Call it what you want — a supplementary budget is a supplementary budget. And next year we must definitely push expenditures into the 4.5 percent framework." It could not be clearer: there will be no cuts either before or during the election year, and instead — contrary to common sense — this year's expenditures will be increased. An annual deficit of nearly 2 billion euros — more than 10 percent of state revenues — has simply become the new normal for the Reform Party. Before the 2023 elections, the same thing happened. Balanced budgets were promised, the tax burden was promised to be frozen, and Prime Minister Kaja Kallas explicitly promised that "taxes will not rise." The result: the deficit continues to grow, and the tax burden has risen from 33.7 percent of GDP to nearly 36 percent. Tax hikes and new taxes were piled on during an economic downturn, when Estonia's economy was already shrinking. This led to rapid price increases and a larger‑than‑expected GDP decline. Since the last elections, our inflation has totaled more than 20 percent — the highest in the euro area. So much for keeping election promises. The Reform Party has emptied the state treasury In five years, the Reform Party has increased state budget expenditures from 13.63 billion euros to 19.5 billion euros — nearly by half, during a period when the economy was contracting. The biggest jump came in 2023, right before the elections, when spending was increased by 3.16 billion euros, essentially buying votes with pre‑election money distribution. There was money for election promises, but cuts are still nowhere to be seen. True, inflation has played a role in the growth of total expenditures, but it is still significantly below the growth of state spending. While prices have risen just over 20 percent since 2023, expenditures have risen more than 40 percent. The Reform Party likely knows well that they will not hold the prime minister's seat in the next government. This underlies a strategy that is not spoken about publicly: the next government must not be left a single cent. The state treasury is already empty, but now the deficit is being pushed to the last permitted limit — 4.5 percent of GDP, temporarily allowed by the EU's defense‑spending exemption. When the next government begins cutting, the Reform Party — then in opposition — will be able to claim that the rulers do not care about the people. Politically convenient, but costly for the country. We should be talking about cut plans instead While the current government under Michal was preparing an unjustified, spending‑increasing supplementary budget, the Fiscal Council warned of serious consequences. At a spring seminar, it was pointed out that simply stabilizing the debt burden would require reducing the deficit fivefold — to below 1 percent of GDP. Instead, we are moving in the opposite direction. In 2022, interest payments on national debt amounted to less than 30 million euros. By 2030, that number will be around 650 million euros — 1.4 percent of GDP. This is money that goes to lenders, not to education, healthcare or national defense. In addition, the defense‑spending exemption ends in 2029. If the budget is not corrected now, this will mean yet another round of tax increases by 2029. Three years is a short time. You don't need to look to Greece for comparison. Hungary, located in the middle of Central Europe's major markets, spends 5 percent of GDP solely on interest payments on national debt. That is the result of 16 years. We are only at the beginning of that path — but firmly heading toward it. Michal said ministers should not submit additional requests during the budget process. The same logic should apply in reverse. The prime minister should have set an example and rejected from the outset this year's supplementary budget, which entrenches 27 million euros in new permanent expenditures. Parempoolsed have repeatedly asked — and I ask again now: what are the Reform Party's specific cut targets? Not general slogans, but specific budget lines, specific amounts. I expect a concrete cut plan from Michal and Ligi to restore Estonia's public finances. Estonia's rapidly growing debt burden means less room to maneuver in the next crisis and greater dependence on the mood of financial markets. Given Estonia's small size, reliable public finances are one of the few cards we can keep on the table. It is time not to throw that card away for good. The solution lies in cutting back the state expenditures that have ballooned like yeast in recent years. -- Editor: Argo Ideon