Caution is needed about growth in debt says Ülo Kaasik



Although Estonia’s state debt remains small in international comparison, it is growing remarkably fast, causing the costs of servicing the debt to grow fast as well. This means the state will have fewer funds available to cover other needs, and will weaken its capacity to support the economy in times of need, warned Deputy Governor of Eesti Pank Ülo Kaasik, who also called for an agreement within society on how to stop the growth in debt.

He was addressing a discussion at the Riigikogu that focused on the level of the Estonian state debt as a question of national importance, where he explained that it is particularly important for the state finances to be strong in a crisis. “Yes, we are in the euro area and we are a member of NATO, but the larger our debt is, the harder it may be for us to borrow in a crisis”, he said, noting that it is always hard for a small and open economy like Estonia’s to borrow from the market given the geographical location. He observed that although the current situation is not exactly the same, it should be remembered that one reason why budget cuts had to be made in 2009 was that the Estonian state could not borrow from the markets at reasonable rates.

The larger our debt is, the harder it may be for us to borrow in a crisis.

The recent forecast from the Ministry of Finance shows that the interest payments the Estonian state has to make to its creditors will grow to as much as 0.9% of GDP in four years. This is comparable in size to the 1% of GDP that the state spends on funding research. “The level of 0.9% of GDP this year would mean every working person in Estonia having to pay 500 euros towards the interest on the state debt, and that is before we start to think about repaying the principal of the loans”, said Mr Kaasik.

He commented that it is important to realise that the general rate of growth in the Estonian economy is slowing and that this will make it harder to repay loans. It is not impossible that in a climate of weak growth, the interest rates on Estonia’s loans could be higher than the rate of growth in the economy measured in euros. “This means that the debt burden would not shrink of its own accord over time”, he emphasised. The evidence of the countries in the European Union over the past 25 years equally shows no sign that countries that have borrowed more have larger levels of state investment. “Rather the opposite”, he observed.

The rating agencies that assess the creditworthiness of states are already starting to ask what Estonia’s plans are for stopping the rapid growth in debt. “If questions arise about how sustainable the state debt is, the risk assessments could change for the whole economy. In that case people and businesses in Estonia that want to take a loan will suffer because it will become more expensive for them to do so”, warned Mr Kaasik.

The solution is to keep the revenues and expenditures of the general government in balance or close to it across the economic cycle. Taking the wider view from where we stand today, stopping the growth in debt means either raising taxes or cutting spending. “These are unfortunately always very difficult decisions”, said Mr Kaasik. “They need to be taken for the sake of society as a whole, but there are always some parts of society that will get less support from the state or will have to contribute more to the state coffers”. The message from the Deputy Governor of Eesti Pank was that Estonia needs to reach a common understanding about how to produce a state budget that would stop the debt growing too far. “The Estonian budget rules could include requirements that would stop the state debt growing too fast”, he proposed, adding that a step in the right direction along that path had already been taken last year.

Additional information:
Hanna Jürgenson
Eesti Pank
Communications Specialist
Tel: 56920 930
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