It is in Estonia’s interest to bring the growth in government debt under control says Ülo Kaasik

Postitatud:

29.03.2023

The state budget deficit is expected to be 1.5 billion euros this year, and if it continues like that, the Estonian debt burden will grow fast. Deputy Governor of Eesti Pank Ülo Kaasik said that strong growth in the debt would make the state less able to help the economy if it faced a new crisis, and would add further domestic price pressure onto inflation that is already high.

“The Estonian debt is not large, but the revenues and expenditures of the state are systemically out of balance. Fiscal discipline must be restored in order to slow the growth in the state debt”, he told a discussion panel on state finances as the foundation of financial security today at the FinanceEstonia Financial Security Forum.

The Estonian debt is not large, but the revenues and expenditures of the state are systemically out of balance.

The general government budget deficit is forecast to be almost 1.5 billion euros or around 4% of GDP in the coming years. Mr Kaasik said this would cause two kinds of problem. The short-term problem is that a state budget deficit of that size will increase domestic price pressures at a time when inflation is already very high. The second problem is that maintaining such large deficits will cause the state debt to increase. “The Estonian debt burden is currently 18% of GDP, but if such deficits are allowed to persist, they would increase debt to over 40% in a decade”, warned Mr Kaasik.

The capacity to borrow is one of the most important buffers that the state finances have if they are to be ready to face any crisis. “It is always harder for small countries to borrow in an emergency, and having a high level of debt makes it even harder”, said Mr Kaasik. It is also vital for the state finances to build up reserves.

Mr Kaasik noted that the budget deficit from 2024 onwards will depend on the decisions about state expenditures and revenues taken by the government coalition currently being formed.

He noted the ongoing review of the European Union common fiscal rules, and said that Estonia could anyway set its own fiscal rules with the aim of reducing growth in debt. This could be done even if the common European fiscal rules should in future become more relaxed for countries with lower debt levels.

Estonia would benefit in the longer term if the financing of the economy become less bank-centric and more diversified, like it is in many other countries, he added. This would require rapid development in the non-bank financial sector, and increase in the share of financing by bond markets. “The current plans would require the Estonian state to borrow substantially, so we could consider promoting a local bond market where Estonian sovereign bonds could be issued on the Estonian market”, he said, noting that this would also incentivise the development of the private sector bond market. He further said that competition between banks has increased in Estonia in recent years, though there remained room for improvement.

Photos: Kristi Sits

Additional information:
Hanna Jürgenson
Eesti Pank
Communications Specialist
Tel: 56920 930
Press enquiries: [email protected]