Estonian ex-minister Sõerd: rapid growth of state debt poses major risk

Aivar Sõerd, a Reform Party MP and former finance minister of Estonia, told public broadcaster ERR that the government must work to keep next year's budget deficit within four percent, and that spending cuts are inevitable given the rapid growth of state debt and interest costs.

On Thursday, Estonia's Ministry of Finance released a new economic forecast projecting next year's budget deficit at 4.5 percent. Sõerd noted the forecast brought no major changes compared to spring — tax revenue projections actually fell by 45 million euros, whereas autumn forecasts in previous years often brought extra revenue.

Deficit improvement comes from spending, not revenue

According to Sõerd, the nominal deficit was forecast at 4.9 percent in spring and is now 4.5 percent. Since the revenue side has not improved, the change stems from postponing investments and reducing the Health Insurance Fund's deficit. He noted that simply pushing back investment timelines already has a significant effect on the budget balance, but this alone is not enough to bring the deficit down to four percent — actual spending cuts are also needed.

Sõerd recalled that, together with fellow party member and former finance minister Mart Võrklaev, he had earlier proposed spending cuts worth around 100 million euros, but the ideas received a rather cold reception. A party working group on financial issues has also made little visible progress on the matter.

Warning about risk to the state

The MP stressed that even if the deficit is brought down to 4 percent, state debt will keep growing, albeit more slowly, while interest payments will keep rising rapidly. The EU exemption allowing the deficit to exceed the three-percent treaty limit will only remain in place for a few more years, after which the deficit will again need to fall below three percent.

Sõerd warned that without decisive action, Estonia could end up in a situation similar to Finland's current one, where major efforts are now needed to address accumulated problems. He also emphasized the need for budget reserves for unforeseen circumstances such as pandemics, since crises tend to recur periodically.