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![Page 1: Examples of Public Expenditure Cuts and Rationale for Savings – Case of Estonia Jürgen Ligi Minister.](https://reader035.fdocuments.us/reader035/viewer/2022062421/56649ddb5503460f94ad2e1b/html5/thumbnails/1.jpg)
Examples of Public Expenditure Cuts and Rationale for Savings – Case of
EstoniaJürgen Ligi
Minister
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Structure of the Presentation
I. Principles of economic policies
II. Consolidation effort 2008+
III. Conclusions: policy implications, political economy lessons
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I. Principles of economic policies
Hypothesis:
Natural emphasis on long-term supply side policies has minimized sizable governmental intervention in the demand side, including fiscal
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Key Indicators
• Population:• Area:• GDP• GDP per capita:• GDP vs EU-27(PPS):• Average monthly wage• CPI•Total government expenditures
• 1.34 million• 45 226 km²• 14,5 bln EUR• 10821 EUR• 64%• 784 EUR• 3,0%• 42% of GDP
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1. Culture of prudence – enables to switch on the autopilot
• Small and efficient government sector
• Early, rapid and extensive privatization, mostly to strategic investors
• Relatively low level of corruption (26th in Transparency International CPI in 2010)
• Stakeholder accountability (by state, by tax-payer, as a member of eurozone, NATO)
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2. Robust and simple monetary and fiscal framework – stability as a merit and trust builder
• Currency board-backed fixed exchange rate 1992-2011; euro 2011+
• Sound fiscal management since transition - natural preference of conservative fiscal policy
• Mid-term budgetary objective “balanced or in surplus” well rooted informally for a long time. New MTO – structural surplus
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Estonia` s budget fairly balanced over the last decade. Surplus restored in 2013
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Very low debt enables to keep the tax burden relatively light to back economic
growthPublic debt 2001 and 2011 (% of GDP)
0
10
20
30
40
50
60
70
80
90
EU (27) EE SK
2001
2011
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3. Simple and transparent tax system
• Income tax has one bracket and one rate for households and distributed corporate earnings alike
• Most of the goods and services are subject to a single VAT rate with only a very few items taxed at a lower rate
• Relatively low level of capital taxation
• Baseline: no punishment on success - business stimulates the economy, generating sufficient resources also for social safety nets
• Relatively low tax burden
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4. Pension and health care systems reformed at an early stage - low risk compared to EU in
terms of sustainability
• Fundamental change of public expectations on the role of state and of state budget
• Reforms have put a ceiling on the future liabilities of the state
• II pension pillar introduced in 2002• State Health Insurance Fund established in 2001,
buying health services from service providers (general practitioners and hospitals)
• Estonia’s long term fiscal sustainability is the best in the EU. However, it is likely that future reforms are needed
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5. Open and business-friendly trade, investment and labor policies
• Continually substantial flows of FDI (cumulatively ca 76% of GDP as of end-2010)
• Quick and easy business establishment and registration
• Strong and competitive telecommunications and banking sector, integrated with Scandinavian and European markets
• Flexible labour market – easy hiring and firing, low level of wage indexation, low degree of unionization
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Labour market has served as a good substitute for the exchange rate channel, allowing the economy to cope well in recession
.
Source: Estonian Tax and Customs Board, Statistics Estonia
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II. Consolidation Effort 2008+
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Although rough times of consolidation are behind, the mentality of saving lasts - majority of measures are
long-term; operational expenditures freezed
Improvement of the budget position 2008-2010
0
2
4
6
8
10
12
14
16
18
2008 2009 2010 Cumulative 2008-2010
Scale of the improvement of budget position (% of GDP)
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Principles of Fiscal Adjustments 2008+
• Count on the internal adjustment of the economy and buffers collected pre-crisis
• Euro - better confidence builder than fiscal loosening
• Co-financing of EU structural funds protected
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Decisiveness of the government to consolidate did not lag behind fall of GDP
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Consolidation at Glance
• Cumulative tightening in 2008-2010 amounted to ca 16% of GDP in nominal terms, compared to the baseline
• 2/3 of measures on the expenditures side• 1/3 of measures on the revenues side
• Ca 70 % long-term measures• Ca 30 % one-offs (incl. 1+ years)
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Cuts covered most of the agents. Some examples:
• Cut of operational expenditures of the public sector (20% compared to pre-crisis level)
• Lower increase of pensions from 2009 onwards (5% increase in 2009 instead of ca 14%, no increase in 2010 and 2011)
• Major cuts of road maintenance, local gov. funding, defence budget• Reform of the compensation scheme for sick days and reduction of
health insurance costs by 8%• Suspending govt. co-payments to the II pillar pension funds for
2009 and 2010, gradual resumption of payments thereafter• Borrowing of local government curbed by a law (2009-2010) –
same measure for public foundations• Etc
• Changes in employment contract act and related acts: marked increase in market flexibility
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Operating expenditures have fallen remarkably and are freezed below pre-
crisis level
6,60 8,30 9,87 8,94 8,50 8,25
4,66
5,48
6,274,88 5,05 4,78
10,1
22,3
17,1
-14,3-1,9
-4,0
-20
-15
-10
-5
0
5
10
15
20
25
0
2
4
6
8
10
12
14
16
18
2006 2007 2008 2009 2010* 2011**
staff costs management costs change in operating costs (%)
* available resources (budget, with funds transferred from the previous year)** state budget
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The slowdown of the economy counterbalanced the effect of the
indirect tax rises on prices
• Rise of unemployment insurance tax
• Rise of alcohol, fuel and tobacco excise
• Rise of VAT from 18% to 20%
• Dividends from the state owned companies
• Sale of land
• Temporary stop of the step-by-step lowering of the income tax rate
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The euro objective made it easier to consolidate, but was no way the cause
for action• New law on strict financial management and control for LG-s since
2011
• In order to counterbalance the suspension of the II pillar pension system the contributions would be higher 2014-2017
• Health expenditures - efficiency gains planned by fine-tuning the hospital network and putting emphasize on prevention
• Retirement age increased gradually
Estonia is now in a completely different fiscal position as most other developed nations
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Summary of consolidation 2008+
• Pre-crisis fiscal management allowed for automatic stabilizers to play their cushioning role
• Deficit 2.8% of GDP in 2008 (3% surplus in 2007)• No need to borrow, as financial assets at 10% of GDP
• Credibility of state finances and fiscal position within the Maastricht limits ensured
• Deficit 1,7% of GDP in 2009• Lower spending, structural measures, revenue increases
(sales, dividends, tax) and temporary measures
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Summary 2008+: real economy
• Flexible labour markets and transparent business environment facilitated rapid adjustment on company level
• Nominal average wage decline 7% by end-2009, 15% in the public administration
• Increased flexibility of labour legislation, active labour market policies
• Strong banking system• Capital and liquidity management in regional groups• High domestic buffers – Tier 1 capital 15%, required reserve
ratio 15%• Not a single cent of taxpayer money spent to prop up banks
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III. Conclusions: policy implications and political economy lessons
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Policy implications• Consolidation pays off even in a relatively short term, at least in
a small, open and flexible economy
• Buffers give a breathing space when it is most needed and the market conditions for lending are in the heights
• Timing is crucial - never put off fiscal consolidation until tomorrow
• Balanced approach in terms of sectors, and positioning of public administration as a frontrunner helps to legitimate the decisions
• Fundamentals need to be in place:• strong public and private balance sheets• general culture of flexible markets and readiness to
adjust
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Political economy lessons for the eurozone
• Member States have to be ready for internal adjustments - need a change in mentality
• EU policy coordination frameworks are growth-enhancing and consolidation-fostering, if rigorously implemented:• Reformed SGP and new Excessive
Imbalances Procedure• financial market integration• structural reforms agenda (EU2020)
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Thank you!