Heated debate on cuts in state budget due to fall in economic growth

As a result of Estonia’s rapidly declining economic growth, the government is being forced to reassess the state budget and reduce public sector expenditure to the extent of EEK 3.1 billion (about €198 million). This has generated intense debate over the possibility of reducing the social partners’ expenditure, a discussion which has revolved around public sector wages and a possible wage freeze.

Economic growth developments

In recent years, Estonia has experienced rapid economic growth. According to Eurostat findings, the country’s real gross domestic product (GDP) growth rate was 11.4% in 2006, compared with an overall average of 3.1% in the 27 EU Member States (EU27). Even though a decline in economic growth was already predicted in 2007, the prognoses were still more favourable than the actual developments. In the summer of 2007, the Ministry of Finance (Rahandusministeerium) predicted economic growth rates of 8.1% for 2007 and 7.3% for 2008, which was also the basis for the 2008 state budget. However, in 2007, economic growth only stood at 7.1% and, following a reassessment in the spring of 2008, real GDP growth is expected to reach a mere 3.7% in 2008. Meanwhile, the Bank of Estonia (Eesti Pank) issued an even more pessimistic economic forecast, predicting a real GDP growth rate of only 2% in 2008.

Concerns over rising budgetary deficit

According to the Ministry of Finance, the government has decided to focus its efforts on cutting the state budget expenditure, in light of the rapid change in economic growth indicators, which are set to result in a loss in tax revenue – in particular, with regard to value-added tax (VAT). Concerns have arisen that if the government fails to react to the changing economic situation, the country’s budgetary deficit may rise to EEK 3.1 billion in 2008 (about €198 million as at 25 April 2008). As a result, all government ministries are being urged to look at ways to reduce their budgets, except for the Ministry of Defence (Kaitseministeerium) for which expenditure is not to be reduced in accordance with a government decision. For example, the Ministry of Education and Research (Haridus- ja Teadusministeerium) has announced that it aims to cut its expenditure by EEK 118 million (€7.5 million), the Ministry of Finance by EEK 90 million (€5.8 million) and the Ministry of Economic Affairs and Communications (Majandus- ja Kommunikatsiooniministeerium) by EEK 400 million (€25.6 million).

Employer proposals

Following government discussions over reducing the state budget expenditure, the Estonian Employers’ Confederation (Eesti Tööandjate Keskliit, ETTK) and the Estonian Chamber of Commerce and Industry (Eesti Kaubandus-Tööstuskoda, EKT) presented a joint application to the country’s Prime Minister, Andrus Ansip, which underlined the need to devise an action plan to cut state expenditure. On the one hand, they proposed a reassessment of the need for certain planned investments and only the continuation of those projects which have a positive effect on restoring higher economic growth – such as investments to introduce and develop new electronic solutions; other, less essential projects should be postponed until 2010. At the same time, the employers proposed a reform of the public sector to increase the effectiveness of public administration and reduce administrative expenses.

To this end, several proposals were made, including a wage freeze in the public sector for two years, primarily in ministries and among other central government staff. Other recommendations included: reducing the number of positions available in the public sector that are no longer necessary and which have not been filled; abolishing the numerous additional payments available in the public sector, for example for language training and educational qualifications; and relating performance-related pay in the public sector directly to the achievement of strategic goals.

Trade union response

For its part, the Confederation of Estonian Trade Unions (Eesti Ametiühingute Keskliit, EAKL) rejected outright the idea of a wage freeze in the public sector. It pointed to the fact that some public sector domains have already been characterised by relatively low wage levels and difficult negotiations over increasing the budget – as seen, for example, in healthcare (EE0702059I, EE0608019I), civil defence (EE0605029I) and among educational workers. In addition, the Chair of EAKL, Harri Taliga, outlined that employees would be willing to suspend work in protest against any planned wage freeze. This would lead to serious difficulties in the provision of public services, such as education, healthcare, and public order and safety services. EAKL recommended that, instead of a wage freeze, the wage system in the public sector should be revised and the wage gap between those in lower and higher positions be reduced. Nonetheless, the trade union confederation agreed with the employers’ proposal that the public sector wage system should be made more transparent and that the additional payments system be revised.

Kirsti Nurmela, PRAXIS Centre for Policy Studies