Filling the 800 million gap

TALLINN - The Finance Ministry last week asked the Bank of Estonia for a share of its profits to fill the budget gap caused by the government's decision to abolish corporate income tax.

Finance Minister Siim Kallas and the central bank's president, Vahur Kraft, have discussed the option of transferring 130 million kroons ($9.3 million) to next year's state budget, but bank officials oppose the requested transfer. The bank cannot afford to give that much money, said Andrus Kuusmann, the central bank's head of information.

Last year, the Bank of Estonia yielded a profit of 542 million kroons, but Kuusmann regarded that as an "exceptional" sum that will probably not be repeated this year.

"The profit will be less this year because the situation in international markets has changed," he said.

Normally the central bank does donate a portion of its profits - approximately 35 million kroons - to the state budget, but only when the bank makes a profit, Kuusmann emphasized. He added that a few years ago, the bank could not give any money to the government.

Daniel Vaarik, a Finance Ministry adviser, said the bank's status as an individual institution makes it impossible for the government to force it to transfer the requested funds, so the government is relying on the bank's "goodwill." Vaarik also said the amount of money to be given is negotiable.

Bank officials have said no decision on the transfer will be made until the central bank's profit is known.

Although the Finance Ministry seems to have pinned its hopes on the central bank's cooperation, Vaarik said increased economic activity fueled by the corporate income tax abolition should also help produce the needed revenue.

The Finance Ministry has also estimated customs tariffs will account for 350 million kroons and changes in value-added-tax will bring in 150 million kroons.

Eesti Paevaleht reported that the Finance Ministry has plans to impose a 5 percent sales tax on periodical subscriptions, theater tickets and medical and funeral services and supplies to make up some of the money.

In the case that the central bank refuses to transfer the funds, Vaarik said the ministry will go back to the other ministries to ask that they cut their budgets by an additional 1.5 percent. "That would be the last resort," he said.

Kuusmann said, "The Bank of Estonia still firmly believes that the state's fiscal policy must be based on a balanced and conservative approach to be achieved through making expenses meet the real revenues."

The announcement last week by Finance Minister Siim Kallas to abolish corporate income tax as of Jan. 1, 2000 was praised by the foreign press as an ambitious policy in line with Estonia's record of liberal fiscal management.

The Wall Street Journal commented that Estonia has been making smart and brave policy decisions, stating the move could be copied in the rest of Europe. The article also argued the abolition would accelerate business and yield extra revenues to the state.

But despite the foreign praise, some analysts still doubt the government's sensibility to scrap the tax during an economic decline.

"When your costs start to exceed your income, you do not usually remedy it by giving the remaining income away," said Hardo Pajula, an analyst with PriceWater-houseCoopers. "Nothing scares investors away as effectively as the political instability manifested in a sharply worsening situation."