Sõerd warns rapid debt growth makes cuts unavoidable

Estonia must take steps to reduce its budget deficit to around 4 percent, and spending cuts are unavoidable because rapidly rising debt and interest costs pose a serious risk to the state, former Finance Minister Aivar Sõerd told ERR.

The Finance Ministry’s latest economic forecast, presented on Thursday, puts next year’s budget deficit at 4.5 percent.

Sõerd said the forecast brought no major changes compared with the spring outlook. The tax revenue forecast, which is important for preparing the state budget, did not improve and was instead reduced by 45 million euros.

Nominal revenue growth is forecast at 5.2 percent, the same as in the spring forecast. Sõerd said this would make budget negotiations difficult, particularly as wage pressures and ministers’ additional funding requests were likely to continue.

Because the autumn forecast provided no additional revenue, there is little room to meet those requests, he said.

Sõerd said the projected nominal deficit had improved from the 4.9 percent forecast in spring to 4.5 percent in the latest forecast. He attributed the change to the spending side, including the postponement of investments and a reduction in the health insurance fund deficit.

Postponing investments can have a significant effect on the budget balance, Sõerd said. He expects this option to be used further, given the scale of defence procurement, Rail Baltic-related railway procurement and road construction.

However, postponing investments alone will not be enough to bring the deficit down to 4 percent, he said. Since the revenue forecast does not provide additional income for next year, spending cuts will be necessary.

Sõerd said it was not yet known what form the cuts would take. He and fellow Reform Party member Mart Võrklaev, who has also served as finance minister, had previously proposed several cuts, but the proposals received what he called a very cold reception.

The Reform Party’s finance working group has discussed the proposals several times and added some new ones, but Sõerd said there had been little progress.

He said he did not consider it possible for the government to avoid painful cuts because parliamentary elections are approaching. Even if next year’s deficit is reduced from the forecast 4.5 percent to 4 percent, debt will continue to grow and interest costs will keep rising rapidly, he said.

Sõerd added that an EU exception allowing the budget deficit to exceed the three percent limit would remain in force for only a few more years. After that, the deficit would again have to be kept within three percent.

Rapid growth in debt and interest costs poses a serious risk to the state and could eventually lead to an excessive deficit procedure, Sõerd said. He therefore sees no alternative to addressing the overly rapid growth in spending.