The recent review by the National Audit Office (Riigikontroll) of last year's annual state accounting report has drawn significant attention for its findings regarding the Ministry of Defense's use of funds.

However, that's not the only area where deficiencies were identified. The report highlights that in 2024, ministries allocated €4.4 billion in grants and subsidies — excluding an additional €4 billion in social benefits. Of that €4.4 billion, three-quarters — €3.3 billion — consisted of domestic support measures.

The report states that as early as the 2023 audit, the National Audit Office had raised concerns about the lack of transparency in the distribution of domestic support. It found that subsidies were not always allocated in a way that ensured equal access and that clear objectives and reporting requirements were often lacking.

When the National Audit Office compared the 2023 state budget explanatory memorandum with that of the previous year, it found that the structure remained largely unchanged.

"This means that the explanatory memorandum still lacks a comprehensive overview of how much and on what basis ministries distribute domestic subsidies," the report states.

Chief Auditor Ines Metsalu-Nurminen told ERR that this does not necessarily mean €3.3 billion was spent without any clarity on what the funds were used for.

"In the view of the National Audit Office, the information in the explanatory memorandum is not sufficiently transparent, but that does not mean the subsidies were paid out without objectives or reporting requirements," said Metsalu-Nurminen. She added that, in most cases, subsidy payments are governed by legislation or administrative agreements, which typically outline the purpose and terms of use for the funds.

For instance, the Health Insurance Fund receives operating support for providing health insurance to non-working pensioners under the Health Services Organization Act, while universities receive operating grants through administrative agreements.

"The problematic cases we've seen involve operating grants where the principles for allocating support are unregulated and the subsidies are awarded through so-called individual decisions," the chief auditor explained.

Supervision shortcomings

In its audit, the National Audit Office found that domestic subsidies were in some cases distributed without setting clear objectives or requiring proper reporting. Grants with characteristics of project-based funding were sometimes misclassified as operating support.

For example, the report cites how the Ministry of Finance recorded as operating support what was essentially a project-based grant to an organization that had won a public competition on financial literacy. Similarly, the Ministry of Culture treated as operating support a project-based grant intended for teaching the Estonian language.

Oversight of project-based grants was also found lacking. If a grant agreement designates funds for a specific purpose but the related reporting is superficial, then the audit concludes that the reporting fails to fulfill its intended purpose and proper monitoring of the grant's use is inadequate.

According to the report, the explanatory memorandum for last year's state budget has not undergone significant changes compared with that of 2023. As a result, it still lacks a comprehensive overview of how much domestic support ministries allocate and on what basis. While the 2024 memorandum includes an improved annex with an added column explaining the legal basis for each subsidy, the quality of the information provided in that annex is inconsistent.

The National Audit Office recommends that the Ministry of Finance standardize the content and scope of the information presented in the subsidies annex. This would help provide a clear overview of which sectors and programs will receive domestic support during the fiscal year, how much funding is planned and under what conditions it will be distributed.

The report also notes that the purpose of allocating state budget operating support often remains unclear.

Since 2020, Estonia has used a performance-based budgeting system, meaning all expenditures are classified by activity and cannot be distinguished by economic type.

The National Audit Office points out that, under this system, even the total volume of planned subsidies cannot be easily identified.

In response, the Ministry of Finance has informed the National Audit Office that it will review the principles for distributing domestic support.

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