Kallas explained Palts should increase the country's gross domestic product by means other than borrowing, but the mayor responded by sending Kallas a mirror and blaming Kallas himself for the municipality's predicament.
The deficit projected in the municipality's draft budget for 2002 is 1.54 billion kroons ($88 million). At 5.17 billion kroons, total spending would be 23 percent higher than the budget for this year. The planned state budget for 2002 is about 33 billion kroons.
Daniel Vaarik, adviser to the Ministry of Finance, said Kallas' gesture was the most effective way to draw attention to the financial suicide Tallinn municipality was committing.
"If the city of Tallinn takes such huge loans, we are sure it will not be able to return the money and the city will degenerate," said Vaarik. "Deficits have always harmed the economies of developing countries and the state has to cover any deficit the city runs up. This is a joint problem and the minister had to interfere."
Legally the city is entitled to double its borrowing, but such a course would not be wise, added Vaarik.
"The city promises to do good things with the money, but history shows money has been used inefficiently, and there is a lot of wastage. I believe that they will have to borrow again in 2003 and increase taxes," he said.
In a letter accompanying the crowbar Kallas accused the former entrepreneur Palts of committing himself to too high a level of spending. Productivity in the public sector is low and borrowing might lead to tax hikes, he warned.
The "huge" leap in borrowing would also require a long-term, secure and stable strategy, which is not possible due to frequent changes in the city's administration, wrote Kallas.
Palts responded that the intention was to invest in areas which would boost jobs and productivity. The city wants to support the development of enterprises, create infrastructure and build schools, he said.
The poor design of the state budget has necessitated spending increases, added Palts. The city of Tallinn spends 50 million kroons on repairing roads near Tallinn Harbor, which pays dividends to the state budget, he added.
Media tycoon Hans Luik, weighed in to the debate on his radio show, saying that building houses and roads was not the kind of investment that would bring big profits.
Estonia's central bank also warned that due to the global economy's uncertain outlook future spending must be kept under control and overly optimistic budget forecasts should be avoided.
Janno Toots, spokesman for the Bank of Estonia, said that investments made by the local municipalities this year, which were financed by loans, were bigger than had been forecast.
Kallas has already suggested decreasing next year's revenue forecast by 538.1 million kroons to 32.91 billion kroons and the economic growth estimate from 5 percent to 4 percent.
Vaarik said savings could be made by ministries decreasing administrative costs and by defense expenditure also decreasing. With the shrinkage of GDP defense spending would remain at the target of 2 percent of GDP recommended by NATO, which Estonia hopes to join.