Estonia ups budget, raises IMF ire

The Estonian government plans to add 788 million kroons (52.5 million euros) to this year's state budget despite warnings from the International Monetary Fund and the Bank of Estonia to save, rather than spend, extra revenue.

"We can't say who is wrong or not," said Andrus Saalik, head of the economic analysis department at the Ministry of Finance. "But we have got the money, so there is no reason to hold back."

If the proposed spending plan passes the Parliament, it will be the country's second supplementary budget this year. In June the government added 400 million kroons (26.6 million euros) to the existing 34 billion kroon state budget. These additional funds make up only 3 percent of the whole budget, Saalik said.

Estonia has extra money to spend because its tax revenues were higher than expected.

"This is because there is a better situation in the labor markerhigher employment and wages," Saalik said.

The Ministry of Social Affairs will receive 177 million kroons , the biggest chunk of the supplementary budget, to cover the rising cost of care for the sick and disabled. This department requires more money because the prices of prescription drugs continue to rise, said Sigrid Tappo, a spokeswoman for the Ministry of Social Affairs.

Last year the average price of drugs rose by 40 percent in Estonia, said Andrus Sonnenberg, who was recently appointed head of a new committee in the ministry to deal with the rising costs of medicine. The government also needs to spend more on medicine because there are more types of prescription drugs to treat more illnesses, Sonnenberg said.

Estonian pharmacies are selling 10 percent to 15 percent more medicine than they were last year, said Tarvo Vaasa, the managing director of Tamro Estonia, a pharmaceutical distributor.

The Ministry of Internal Affairs will get 33 million kroons (2.2 million euros), which it will spend to improve the border guard unit in Narva.

The government will spend the remaining funds to buy an embassy building in Brussels and to pay off debts, Saalik said.

The Ministry of Education will receive 23 million kroons of the supplementary budget, and will spend 15.2 million kroons of this on reforming vocational education, Saalik said.

In June the IMF recommended that the government not enact a second supplementary budget.

"Conservative fiscal policy is particularly important in countries with a currency board that are subject to large external imbalances," said Olga Stankova, a spokeswoman for the IMF in the United States. The IMF approves of Estonia's plan to use the supplementary money to pay off debts but is concerned that the country is also using it for social programs.

"Another concern is that the expenditures in the supplementary budget not spill over into the 2003 budget," Stankova said.

The Bank of Estonia also warned the government about spending more money. Citing Estonia's small size and dependency on foreign trade, a bank spokesman said the country should not spend money while foreign demand for exports drops.

"In view of the deterioration of the current account balance in the first quarter and the temporary nature of the tax revenue improvements, all the sums received in addition to the planned revenue should be used to strengthen the income structure of the state budget," said Janno Toots, a spokesman for the Bank of Estonia.

But Saalik, the government's financial analyst said the supplementary money will be used for "investments."

"I agree that we need to have some reserves, but we have reserves that are more than 2 percent of GDP," Saalik said. "That's pretty high so it's a wise decision to spend it."