TALLINN – In the opinion of the Ministry of Finance, fears that Estonia might need to increase its public debt in 2023 significantly more than estimated are unfounded at least for now.
MP and former minister of finance Aivar Soerd told BNS last week that the government's borrowing needs may turn out to be significantly higher than the 1.2 billion euros set forth in the 2023 budget, as the latest economic forecast published by the central bank shows that the budget deficit in 2023 will be significantly larger than estimated in the summer forecast of the Ministry of Finance, on which the budget is based.
Raoul Lattemae, head of the fiscal policy department at the Ministry of Finance, admitted that the difference between the estimates could raise questions.
"The main question concerning the size of next year's deficit relates to developments in the labor market, on which the central bank is rather pessimistic. If the situation on the labor market deteriorates significantly more next year than we anticipated when preparing the state budget, there is a risk indeed that this could lead to additional spending pressure," Lattemae told BNS.
The state budget, submitted to the Riigikogu at the end of September, shows fiscal deficit in 2023 to be 3.9 percent of GDP, whereas according to the latest forecast of the central bank, this ratio will be as high as 4.6 percent. According to Soerd, it may turn out to be necessary to borrow more than planned in order to bridge the gap, which, under conditions of rapidly rising interest rates, would further boost interest expenses.
Lattemae pointed out that in terms of total tax receipts, the forecasts of the central bank and the ministry are largely similar.
Tax receipts, which are crucial for public finances, are most affected by developments in the nominal volume of the economy, and therefore the combination of lower economic growth and faster inflation in the forecast by the central bank is quite equivalent to the combination of slightly faster economic growth and lower inflation, which was the basis for the budget, the official explained.
According to the data of the central bank, in the last few months, especially in terms of social tax and VAT, growth has slowed down in tax revenue receipts, which had been brisk earlier in 2022. Total public revenue performance largely depends on these taxes, however.
Lattemae said there is no reason for panic at least for now, as the budget has been drafted using a conservative approach and possible risks have been taken into account.
"At the moment, the indicators of the labor market are still quite good and there is still room in the budget to cope with the costs related to a deterioration of the labor market. Therefore, according to the Ministry of Finance, there is currently no reason to revise the estimated need for borrowings," the official said.
"The ministry's spring forecast will be ready in April 2023. If it turns out then that there is a risk of a deeper deficit than the 3.9 percent of GDP set forth in the state budget, further decisions will have to be taken on the deficit and, if necessary, the borrowing forecast will have to be revised," he added.
The 2023 state budget bill with a total volume of revenues of 15.6 billion euros and expenditures amounting to 16.8 billion euros was passed by the parliament on Dec. 7.