TALLINN - The government on Sept. 20 approved a draft state budget for 2008 that one analyst has described as overly "optimistic."
Overall the budget next year is expected to grow 25 percent, and revenues are projected to reach 96.3 billion kroons (6.2 billion euros) and expenditures 93.6 billion kroons. As is tradition, the budget provides for a surplus of 1.3 percent of gross domestic product. For years now Estonia has boasted one the largest budget surplusses in the European Union.
Priorities have been identified as domestic security, education, social affairs and infrastructure development, the government's press service reported.
The largest expenses are pensions (17.7 billion kroons) and health insurance (13 billion), while some 4.3 billion kroons has been earmarked for farming subsidies and 3.6 billion for the maintenance of state roads.
Crucially, the 2008 budget calls for considerable pay increases. Cultural workers with a higher education, police officers, rescue officials and teachers are to receive a pay raise.
Hansabank Markets analyst Maris Lauri has criticized the budget for being based on optimistic economic forecasts and for the increases in public sector wages. Next year's budget should be more cautious, the analyst said.
"The Finance Ministry's summer forecast obviously could not take into account a significant economic slowdown that became apparent in August and September. Further-more, the outside environment has lately become more problematic," Lauri told the Baltic News Service.
As she explained, the question remains open whether the government has given serious thought to what should be done if the economy does not meet its expectations. "It would be good to see genuine risk scenarios 's for instance, if tax revenues fell short of expectations during two months the budget would instantly be reviewed," she said.
Lauri said her concerns about the public sector wage growth were more due to the large number of people employed in the sector rather than the actual pay increases.
"It would be important to reduce public sector employment 's this would curb the general wage growth and also raise the efficiency of the economy. Furthermore, pressure to raise budget expenditure would diminish," Lauri said.
Simply increasing existing salaries by 10, 20 or 30 percent is not a responsible policy, the analyst stressed. Instead, the necessity of all those jobs should be seriously evaluated. "I very much hope the government will also seriously address questions of organizing work," she added.
Meanwhile, Danske Bank said in a report that Estonia's GDP will drop to 4.5 percent in 2008 after a 7.6 percent increase this year. The Danish bank said that inflation is expected to increase despite a slight drop in demand, mainly due to rising energy and food prices. Bank analysts predict that the consumer price index will rise 6.5 percent this year and 7.6 percent in 2008. They also do not rule out an exacerbation of Estonia's macroeconomic situation if the Latvian economy, which has overheated, were to undergo a hard-landing.