Bearing in mind this smaller economic growth, the budget deficit should instead be larger, by €400 million, Neivelt, former chair of Hansabank, now Swedbank Eesti, goes on.

The government flew the "cheerful" news up the media space flagpole on Tuesday that the planned income tax rate hike may be scrapped, with the budgetary situation much better than forecast, to the tune of as much as €800 million.

Prime Minister Kristen Michal announced that in addition to the cancellation of the income tax hike, pay raises for teachers and cultural workers also need to be taken into consideration. Minister of Finance Jürgen Ligi announced that the fixing of finances had gone faster than they thought. And only then did the real fireworks start: Abolishing the car tax was proposed.

At the same time, it could be read that economic growth will still be more modest than forecast when coming up with the budget a year ago. When compiling the state budget, this year's economic growth was set at 3.3 percent, with only 0.8 percent of this remaining according to the finance ministry's summer forecast.
The difference, in other words, is a 2.5 percent, or a billion euros smaller economy than predicted in the autumn of last year when coming up with the state budget for this year. And this is before inflation.

However, inflation was forecast with great precision. The inflation forecast made a year ago was 5 percent, while according to the latest forecast, it stands at 5.4 percent. Let us call to mind here that in the eurozone, the predicted inflation for this year is two percent.

Since economic growth is significantly smaller than planned and inflation is practically the same as predicted, then there should be no reason for rejoicing. Considering the smaller economic growth, the deficit should instead be larger by €400 million. Not smaller. Where then does this leftover money actually come from?

The prime minister claimed to ERR that: "This shows that spending is under control, we have timed investments, slightly reduced operating expenses, and it should also be stressed that wage growth has boosted tax revenues, both from corporate income tax and personal income tax,"

It would have been logical, then, that from the Ministry of Finance's slides there would have been one slide showing where this €800-million difference comes from. Which tax revenues are larger than planned and which smaller? Which larger planned expenditures have been dropped and which postponed, and so on?

The finance minister is, apart from that, a very straightforward and direct man, but that was not evident from those slides. It seemed to me that the attempt was to show the whole economic situation as pleasantly as possible. At times, the slide titles and what was written in the graph on said slide were nothing to do with each other.

Reason behind larger budget revenues is departing foreign investors

I will not go into detail about this €800 million. That should be done by the relevant officials. They should also explain how sustainable a rate of inflation is, given it is significantly more rapid than the eurozone average at our current price level.

I would point out one component: Corporate income tax has come into the budget over €200 million more than planned. Probably one of the reasons is that, in connection with the tax rate hike, many companies' shareholders decided to pay out more dividends, but still at the lower tax rate. Or the felt need was, for example, to withdraw profits before selling the company. Either way, this is not revenue which can be counted on for a long period.

Also overlooked is the fact that last year foreign investments fell by €3.2 billion. That is nearly a tenth of our GDP. Last year was the first year since 2015 when there was no inward foreign investment, and these instead came out of the country. The reason back in 2015 was restructuring within banking groups and larger dividend payments, and the sum was only €600 million. Last year's figure was €3.2 billion...

The trend for an exodus of foreign investors has continued into this year too. According to Bank of Estonia statistics, foreign investors took 1.2 billion away from us in the first quarter alone; it promises to be once again a record year.

This is certainly not a trend to rejoice over, though in the short term, it actually improves the budgetary situation, just as a much lower-than-planned birth rate diminishes social expenses. To achieve "fixed finances" in this way is a very short-sighted thing.

Honest communication wouldn't hurt

So what do you do in this situation? To start with, honest communication would help. For instance, a quarter of a century ago, Hansabank was well known among Eastern European investors for its honest and straightforward communication. We demonstrated our strengths and also our weaknesses, and investors found us credible.

This always comes to my mind when I read the announcements of several present-day listed companies who are talking about "negative gross profit" or "negative profit margins." Everyone knows that "negative profit" just means a loss. Just as negative economic growth is a recession. But current PR specialists have been busy updating terminology.

This history came to my mind also when I looked at the Ministry of Finance slides. In my opinion, it would be much more effective if the finance minister were to say that taxes have come in better than they were planned for this year, but that is not sustainable.

Why is this unsustainable? Growth has taken place mostly buoyed along by price rises, and considering the European average inflation rate, our price levels have already become too high. Price rises on this scale cannot go on. Neither are foreign investors leaving sustainable, paying taxes on profits amassed here as an "exit tax."

I would like honest messages. Short-term gains are a mirage, and do not last long. And the experience of previous elections is still fresh in our memories.

--

Follow ERR News on Facebook and X and never miss an update!