In his speech before the Riigikogu on Tuesday, Eesti Pank Governor Andres Lipstok praised the fiscal policy pursued by the state so far, which has helped Estonia to successfully cope with the crisis. The Governor still suggested that the state get a better grip on budget spending at times of growth.

Presenting Eesti Pank's Annual Report to the parliament, the governor of the central bank gave an overview of the contribution of Eesti Pank, as a part of the Eurosystem comprising the euro area central banks and the European Central Bank, to the alleviation of the impact of the crisis.

Euro area central banks took extraordinary measures to alleviate the significant deterioration of the crisis in the second half of 2011. Among other things, the Eurosystem gave commercial banks two sets of three-year loans in the total amount of nearly a trillion euros. "The liquidity injection prevented the spill-over of the crisis into real economy. This would have put corporate financing and job creation in jeopardy," Lipstok said.

At the same time, the Governor of Eesti Pank reminded the parliament that extensive crisis management had also abruptly increased the risks inherent in the central bank's balance sheets. "I am glad to see that the Executive Board and Supervisory Board agree on the long-term plan to raise the capital buffers three times to roughly 1.31 billion euros. This would bring us to the average level for euro area central banks," Lipstok added.

The Governor of Eesti Pank pointed out that a successful exit from the euro area sovereign debt crisis would depend, above all, on the governments and parliaments. "This requires two things: implementation of structural reforms to create a solid basis for economic growth, and balancing of the budgets to restore confidence in public finance."

Lipstok emphasised that a strong and sustainable fiscal policy would enhance the reliability of the state's economic policy, lower interest rates, facilitate investments and smooth the progress of job creation. "A strong fiscal policy contributes to the general well-being in Estonia. The crisis taught us the importance of reserves, which ensure financing even at the most difficult of times."

According to Lipstok, the Estonian public finance stands strong, compared to Europe. "At times of crisis, we demonstrated our ability to respond quickly. We now need to contemplate how to keep things in check at times of growth."

Lipstok is worried about the coalition's plan to postpone the achievement of a budget surplus beyond 2013 and deems it a sign of relaxation of the fiscal policy. "The current framework enables to change long-term goals too easily. The budget revenue forecast for 2013 has not deteriorated, compared to previous periods, and would allow to keep the promises made in 2011," Lipstok said.

According to the State Budget Strategy approved by the government at the end of April, the government is expecting public revenues in the amount of 6.42 billion euros in 2013. Last year's budget strategy estimated the revenue base for 2013 to amount to 6.32 billion euros.

Another fiscal policy problem pointed out by Lipstok is the lack of consensus on how to control public spending at times of growth. "We should thus consider the establishment of rules designed for restricting expenditure to reduce volatility and prevent unjustified expectations."

The Governor of Eesti Pank added that, considering the ageing of the population and other factors contributing to the growth in public spending, Estonia must set its sights on ensuring a budget surplus over the cycle.

The Eesti Pank Governor's speech is also available on the central bank's website. The written text may differ from the actual speech.