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Estonia passes negative budget

Feb 25, 2009
Staff and wire reports

TALLINN - The Estonian president has signed off on a negative budget that allows for a loan of up to 9 billion kroons (575 million euros) to help stabilize the worsening economic crisis in the country.
The new budget came on the heels of a revised economic forecast from the central bank and the Finance Ministry. The forecast predicted a fall by up to 9 percent of GDP this year.

The budget passed through Parliament on Feb. 20, with 61 votes in favor and 35 against in the 101-seat body. Amendments to 20 other legal acts will be necessary in order to carry out the austerity package.
Estonian Finance Minister Ivari Padar said the government took into consideration a budget loan of the highest permitted amount.

The Finance Minister said that the final loan amount would depend on negotiations. He said that if the conditions were favorable, as is the case with a possible 400 million euro loan from the European Investment Bank, the country would try to secure as much as possible.
The minister said the talks with EIB and preparations to taking the loan were underway.
Padar said that the government was planning to make as little use of reserves as possible. He added that it would only be clear in a year how much reserves were actually needed.

The supplementary budget lowers predicted revenues by 9.63 billion kroons and expenditures by 6.57 billion kroons. According to the supplementary budget, the revenues of the state budget for this year total 88.20 billion kroons and expenditures 91.89 billion kroons.
The supplementary budget allows the use of up to 3.5 billion kroons of stabilization reserve funds and up to nine billion kroons of loan money.

THE EFFECT OF CUTS

The biggest slashes were in the running costs of public institutions and operating subsidies given from the state budget, which amounted to about 1.5 billion kroons.
Instead of 14 percent as earlier planned, there will be a rise in pensions by 5 percent. Also the cost-sharing for days on sick leave will be extended to three days while the costs of the following five sick-leave days will be for the employees to finance.

The share of an individual's income tax allocated to local governments will fall from 11.93 percent to 11.4 percent from April 1, 2009. Simultaneously obligations of the local governments will be revised.
Padar wrote in the daily Eesti Paevaleht on Feb. 19 that the government was also planning changes in taxation.

"The dramatic developments of the past half a year have graphically shown that we will not manage with the effective taxation system. The new taxation policy will mean that a stop must be put to all kind of lowering of the income tax. According to a law now in force, the individual's income tax rate will fall to 20 percent next year," Padar said.

In another bid to reduce spending, the Estonian Justice Ministry has drafted amendments providing the legal basis for lowering salaries at government financed institutions by 7 percent from March 1 this year.
The bill also calls for the addition of a provision into the new labor contracts law slated to come into effect in July that would allow private businesses to unilaterally change the terms of labor contracts by cutting up to 7 percent off the wages of employees.

Moreover, the Estonian defense forces have completely halted the recruitment of new professional military as a result of the budget cuts.
The budget cuts will also bring about a reduction in income for many members of the defense forces, depending on position and rank. Since Jan. 1, 49 people have been made redundant in the defense forces.
"It cannot be ruled out that the defense forces will make a proposal to cancel certain tasks, since it is no longer possible to perform all tasks with the existing personnel and resources," Muhling said.
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