Praise for Estonia but work remains

  • 2011-04-21
  • From wire reports

TALLINN - Estonia came out of the economic crisis well and the situation with the state budget is much better than for most countries, Organization for Economic Cooperation and Development (OECD) economy department state reports unit deputy head Robert Ford said, commenting upon the OECD report on Estonia coping with economic recession, reports news agency LETA. Ford said on national television ETV’s morning program on April 18 that they evaluated the public sector, fiscal politics, tax politics, public sector efficiency and different spheres of life including business environment, for example.

OECD publishes reports on all member states around every two years. Ford said that although Estonia is small, it does not mean that it does not have anything that other states could use. He said that Estonia is doing well, and that economic growth focused on exports is rather good. He considered domestic investment strong and said that the recovery of the economy is quite wide-based. Nonetheless, Estonia should establish spending ceilings and create a fiscal watchdog to help moderate the effects of the economic cycle, the Organization for Economic Cooperation and Development continued. Multiyear expenditure limits should be adjusted to account for the strength of the economy, helping generate surpluses in times of growth to cover deficits when times are bad, the OECD said in the report published on April 18 on its Web site. An independent “fiscal watchdog” would help enforce this discipline, it said. “A public expenditure rule is likely to be helpful by restraining expenditure growth during an upswing,” according to the Paris-based OECD, a coalition of 34 countries that promotes economic development.

Estonia’s central government spending doubled from 2004 to 2008 as the country went through a property-driven boom. The Baltic country adopted austerity measures totaling more than nine percent of gross domestic product in 2009 to meet the deficit goal for joining the euro, as it was mired in its worst recession since gaining independence from the Soviet Union.
“There is little doubt that this pro-cyclical policy aggravated the downturn,” the OECD said. The nation’s economic production shrank almost 20 percent from its peak in 2008 until growth resumed last year.
Estonia still had the best public finances among the 17 members of the currency bloc last year, according to the European Commission. The country had a 2010 surplus of 0.1 percent of GDP and public debt of 6.6 percent, the national statistics office said last month.

After increasing its majority last month, Estonia’s ruling coalition made achieving a structural budget surplus, which assumes the economy is growing at its full potential, by 2014 its key goal. The ruling parties reiterated a pledge to make budget deficits illegal unless the economy is contracting.
Deficit targets are “a useful benchmark for fiscal policy in the medium-term, but the difficulties of accurately assessing the cyclical position of the economy and, therefore, estimating the structural balance, limit the effectiveness of such a target for guiding fiscal policy,” the OECD said.

The OECD also recommended Estonia increase job training to prevent high levels of unemployment from becoming entrenched. Estonia’s unemployment rate dropped to 10.2 percent last month from a high of 14.6 percent in March 2010. It was 1.4 percent in December 2006. In addition, the government should set up a special court to handle corporate bankruptcies and reduce the number of municipalities to improve efficiency, the OECD said.