Auditor General Mihkel Oviir speaks to the Riigikogu about the problems in Estonia’s economy and finance on 27 October 2010

Mihkel Oviir | 10/27/2010 | 10:35 AM

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Distinguished President and dear members of the Riigikogu,

As I take to the rostrum today, I am not representing those who are shedding tears in depression and seeing life in Estonia as a never-ending funeral, but neither am I speaking on behalf of those who live in the midst of illusions and think that everything is hunky-dory.

Between these two extremes is the ordinary life, the real life, and denying its problems may lead to serious consequences.

The task of the National Audit Office is to help decision-makers to understand the real situation, to look at the things going on in the state and its development from a distance, to offer a different angle without using black or rose-tinted glasses.

This angle may disperse many illusions. However, there are times when we have to think about the words of the monk from the cult movie 'The Last Relic' when we take a look at life in Estonia: “Praise the Lord for letting the truth sound like this again!”

The National Audit Office does not take its words as an absolute truth carved in stone, but these words should also not be regarded as some random anonymous comments floating around the Internet.

Our opinions are based on internationally recognised methods of analysis and auditing.

As you all know, the National Audit Office looks into the past only if the past can teach us something for the future. And the members of this as well as the next Riigikogu have a thing or two to learn from 2009.

Ladies and Gentlemen,

Numerous bulky documents have to be studied in order to understand the current situation and trends in public finance, such as the state budget and the explanatory notes; the action plan or what the Government of the Republic hopes to achieve with budgetary funds; all other materials that specify the budget; and the economic forecast that is the basis of the budget.

That is at least 800 pages of material. And its structure is constantly being changed and data are also corrected.

The government’s position of advantage in informing the public is rather unshakable in a situation like this. Checking the government's claims is extremely time-consuming even for experienced finance specialists.

The majority of citizens and Riigikogu members are probably unable to assess the situation in public finance without the help of specialists.

I would like to assure you the National Audit Office does not have the capacity or strength to analyse all this down to the minutest detail either. However, we are able to focus on the main problems, especially as we have been monitoring the development of certain subjects for years.

We all know that the rest of the world has admired public finance in Estonia due to three indicators: small public debt, small budget deficit and the existence of reserves.

This admiration is deserved, as we really have been successful in making budget cuts, which shows the determination of our government and the Riigikogu.

But I would like to emphasise that these three indicators do not reveal the whole truth when the sustainability of the state budget is assessed. Things are more complicated than that.

In order to assess how strong and sustainable public finance in Estonia is today and will be in the future, we have to analyse the revenue that the state earns, the way it spends its money and the opportunities of the private sector to re-launch stable economic growth.

The government insists that state budget revenue has increased since 1997, it increased during the recession and will continue to increase this year. I can confirm that the government is telling the truth. But we often forget to put this fact in the correct context: the increase in revenue is not a result of an in increase in tax revenue.

Tax revenue, which speaks about the actual health of a state’s economy and the welfare of its people, has decreased significantly irrespective of tax increases.

In 2008 tax revenue comprised 83 percent of the state budget, but its share in the budget had dropped to 74 percent in 2009. This year the share of tax revenue in total state budget revenue will drop to 72.8 percent.

The question we have to ask is what has maintained this level of revenue? Where did the increase come from?

The suddenly increased dividends from state-owned companies, increased support from the European Union and other such sources have kept the revenue level high.

The increase in the profits of several state-owned companies and withdrawal of increasing amounts of dividends at the time when the revenue of private companies has decreased makes you wonder whether we are dealing with hidden taxation of people or whether the economic activities of companies are being damaged, if we consider their need to invest.

However, we cannot rely on the amount of this non-tax revenue remaining high in the long term. The Ministry of Finance has already forecast that the amount of state budget revenue will remain the same for the period from 2011 to 2014.

This means that there will be no extra money for the development of various areas.

Again, we have to ask whether the talk about the exceptionally large investments the state is going to make is a lie?

No, it is not. The government is telling the truth again. But once again, we have to put this truth in the right context. We have to admit that we depend largely on the support granted by the European Union.

The state will make two-thirds of investments with the help of foreign funds in 2010.

The most important ministries from the viewpoint of supporting our economy's competitiveness are the Ministry of Economic Affairs and the Ministry of Education, whose total budgets this year contain 50 and 34 percent of foreign support, respectively.

The Ministry of Environment is the one that carries out major investments and as much as 80 percent of its expenditure in 2011 is covered by European Union taxpayers and sales of pollution quota.

European Union support, however, is periodic and we cannot rely on it continuing or its amount remaining the same. It is likely that a pause of a couple of years will occur in financing between budget periods.

The audits carried out by the National Audit Office have also shown that when funds are distributed, most of the steam is spent on sticking to rules instead of the lasting benefits these funds should create.

I said it last year and I will say it again: the opportunity to use European Union funds has changed the way we think and feel about money.

Suddenly, there is all this money that we did not have to earn, all this easy money.

What we should be thinking about is whether we would be spending money on certain things if it were money collected from our own taxpayers? I think that the answer in many cases would be no.

I would also like to remind you that the things we create with European Union funds have to be maintained with our own tax funds in the future. Do we have enough money for this?

Dear audience,

We just spoke about revenue, but we should also take a look at the state's spending. The government’s claim that state budget expenditure is increasing is once again true.

As you know, state budget expenditure can be roughly divided in two:
firstly, fixed expenditure, i.e. expenditure, which arises from law and is used to finance a certain social package, the cost of maintaining the public sector and other similar expenditure whose impact is generally not one that develops the state's economy.

The other part of the state’s expenditure consists of development expenses or financing new activities and priorities.

However, when we take a closer look at things, we see that the state’s expenditure is growing due to the increase in fixed expenditure. The increase in social welfare expenditure is putting particular pressure on the budget.

The state’s so-called available funds, which can be flexibly used to support economic growth and new initiatives, will remain on the level of 11 to 12 billion kroons at least until 2014.

I would like to remind you that the state earned 63.7 billion kroons of tax revenue in 2009 and 63.2 billion kroons of this was used to cover fixed expenditure.

As you can see, almost all of our tax revenue is actually used to cover fixed expenditure. This means that money for development has to be found elsewhere.

This fact means that keeping the state budget in balance will become more difficult in the long term, as demographic developments increase social welfare expenditure.

They consume most of the revenue and there is hardly anything left for new investments and economic growth.

So what can we expect to see in the long run? Several case scenarios and predictions have been offered here.

International rating agency Standard & Poor’s published its evaluation of the demographic situation in Estonia about a week ago. It shows that the share of working-age people will decrease to 58% of total population by 2050, whilst the current indicator according to the study is almost 68 percent.

The agency believes that this will cause the share of expenditure relating to aging to increase from the current 2 percent to 13.5 percent of GDP. The state will be facing a significant budget deficit and a huge debt.

We can of course convince ourselves that something like this will never happen. Maybe not. We have to wait and see.

Dear audience,

The forecasts of the Ministry of Finance show that from 2010 to 2014, state budget expenditure will exceed revenue by 19.5 billion kroons. The budget expenditure has to be financed one way or another.

The state has decided not to touch its reserves in the nearest future and to borrow instead.

This is why central government debt is increasing. It amounted to 7.7 billion kroons in 2009 and in the opinion of the Ministry of Finance, will amount to 42 billion kroons by 2014. This means that the debt will increase by more than fivefold.

We also have to add the debt of local authorities to this, which is expected to increase from 8.6 billion to 11.1 billion kroons.

Respected Riigikogu member Mart Laar recently said that he broke out in a cold sweat when he read in the annual overview prepared by the National Audit Office that the state is planning to increase its loan burden by five times in years to come.

I, on the other hand, broke out in a cold sweat when I realised that Mart Laar only found out about this by reading the National Audit Office’s overview.

Some people have characterised the information given in the National Audit Office’s overview with the words ‘half-truth’ and ‘skewed’, and added that at least half of the claims made in the overview can easily be disproven.

The Minister of Finance also announced that yes, the claim of the National Audit Office about the significant increase in the loan burden is misleading and he would never sign it.

The chairman of the parliamentary fraction of the party to which the Minister of Finance belongs was even more blunt: “The fivefold increase in the loan burden predicted by the National Audit Office can certainly not be seen anywhere.”

I must admit, however, that the data they considered suspicious are not a prediction or fantasy of the National Audit Office.

The Minister of Finance himself gave these data two months ago in his economic forecast – page 59, table 22.

And no changes were made in this assessment of the debt burden in the explanatory notes to the draft of the next year's state budget, which was only prepared in September and which also introduces the development of the years following the next.

The information can be found on pages 19 and 20, figures 5 and 6. The debt burden of central government in 2014 according to the forecast is 15% of GDP. Which is almost 42 billion kroons.

The economic forecast of the Ministry of Finance is supposed to be a serious document on the basis of which state budgets are prepared. I would like to remind you that the state budget for 2011, which is currently being discussed, was also prepared on the basis of this forecast.

If the forecast capacity is poor and there is no point in taking the government’s forecast seriously, then the Minister of Finance should say so. And he should let us know what other parts of the forecast are not reliable.

It is certainly not a normal situation where the public does not have a single long-term plan that they can believe and members of the government just tell them what their view of things is when they feel like it.

I sincerely hope that the officials who prepared the report will not be asked to make the forecast comply with political statements.

Let me emphasise that if the state is unable to write reliable forecasts, its budget strategy will never be a development plan that is taken seriously and state agencies will find themselves in a situation where the amount of money they can use for the provision of services can change in days.

Saving money on officials who are actually able to prepare forecasts and analyses will cost us all dear in the end. Cuts in the Tax and Customs Board and other similar agencies will also hurt us.

Coming back to the current low debt burden of the state of Estonia, which we are so proud of and justifiably so, we should not forget that the debt burden of our private sector is one of the largest among the new members of the European Union.

It is approximately 101 percent of GDP or 221 billion kroons. This is an extremely important circumstance, which has a serious impact on domestic consumption, without which we cannot launch our economic development in the long term.

Companies struggle with their loans as their revenue has decreased. There is not enough money to support economic growth, companies have been paying banks more money in loan repayments than they have received in loans for a couple of years now, there is no steam left for development and the continuing insecurity on the markets does not promise anything good.

Estonia did not use the money that flowed into the country during the economic boom for increasing labour productivity, but invested it in property and construction instead. These, however, are not export sectors with high added value.

The high loan burden of the private sectors in Denmark, Germany and Sweden is probably not a problem for them, as their productivity and income are considerably higher than in Estonia.

My goal is not to wear Estonian society out with unpleasant problems, but we have to admit that they exist in order to resolve them.

The current revenue and expenditure structure of our state budget is unfortunately not sustainable in the long term.

Dear members of the Riigikogu,

I am not going to start a discussion about who missed the start of the economic crisis and why, as it would not help us much.

It is a fact that our economy was in a substantial crisis long before trust started to go missing on the international financial market.

It expressed itself in our poor skills and stimuli of producing something that would help us to keep bread and butter on the table even in hard times.

The question is, would the state have been able to influence the economic structure in some way, or is it doing it today?

I think that the state needs to use all the levers at its disposal smartly in order to support the competitiveness of our economy.

An economy that generates money is a prerequisite to the functioning of a state and the ability of states to support the development of the competitive ability of their companies better is therefore important.

This may mean financial support, but also tax policy measures, negotiations in taking over the requirements of the European Union and using public aid, an accurate legal environment that is not too much of a burden, clever education policy or something else.

All these measures must be analysed from the viewpoint of the problems of different entrepreneurs, because development obstacles in various economic sectors are not the same. I can assure you: not everybody needs money, some still lack qualified workforce, others are held back by certain legislation.

In an audit completed this year the National Audit Office found that the state does not have an enterprise policy, which would cover all the above components as a whole.

Because of this audit, we were accused of claiming that Estonia has no enterprise policy on the basis of just one component of the enterprise policy – enterprise support.

We have not claimed anything like that and anyone who says otherwise is lying. We are talking about a system that is fully comprehensive and considers various elements in their confluence.

The state can develop only if its revenue increases and the only thing that can generate revenue for us is real economy, which means that we have to create an environment for our entrepreneurs that promotes producing maximum revenue and development.

I find stories about quick recovery hard to believe if people's purchase power does not increase for the next year due to the current and maybe even increasing pace of inflation.

Unemployment will also remain high in the nearest future. I see no significant changes in our economic structure when forecasts show that in 2014, the labour of the Estonian people will still be worth just two-thirds of the EU average. This is the forecast of the Ministry of Economic Affairs.


Dear audience,

Although our failure to recognise the crisis made cost-cutting even more difficult, we cannot deny that such a small budget deficit in Estonia in 2009 was unique in Europe. The heads of our state had the courage to strive for the euro and people had the patience to tolerate their decisions.

But do we know what the price of this effort is?

Look, taxpayers’ money is not handed over to the government just like that. At least theoretically not. The Government of the Republic approves an action plan at the start of every year where all ministers explain what they plan to do with the money they get from the state budget. At the end of the year, ministers have to report how they did.

Actually, the action plan is changed during the year often and without explanation, and ministers do not speak about approved goals when reporting.

Let me give you an example: the Ministry of Economic Affairs and Communications adjusted the expected labour productivity rate without any explanation from 68 percent to 60 percent immediately before the end of the year and a couple of months later, it declared in its report that they have achieved their goal brilliantly – productivity was 60.3 percent or 0.3 percent more than planned.

I am once again telling you about the quality of the government's management report and its connection to money, as it is an extremely serious matter.

The government has to assess the impact of its activities. It should do all it can to prevent the emergence of a situation where goals are forgotten or seemingly always achieved.

Of course, we should not be creating artificial activity criteria, which we can then heroically achieve. Only certain things can be measured. We also need preliminary and follow-up analyses of the impact of laws and action plans.

I urge you to demand an action plan from the government that is comprehensive and accompanied by explanations.

We could then see how the 10 billion kroons saved in the state budget have affected the functioning of the state and people.

Dear audience,

The information offered by the National Audit Office cannot come as a surprise to anyone, because we send all of our reports to the parliament, where the state budget control committee and all others should discuss them thoroughly. The reports are also available to everyone on our website.


Although our Riigikogu has sat together for 18 years after the restoration of Estonia’s independence, I get the feeling that the nature of the National Audit Office and its relationship with the parliament has remained unclear for many members of the Riigikogu.

I still get the feeling that many members of the parliament look at me with reproach, believing that the National Audit Office should fix one thing or another. This is wrong, wrong, wrong.

The National Audit Office is an independent analyser and collector of information, which works for you and in a broader sense for the state and the taxpayers, but you as the representatives elected by the taxpayers are responsible for acting on the information we give you.

Of course, our respected representatives have the right to do nothing at all. It is your right, but also your responsibility to the taxpayers.

The National Audit Office is one of the information channels of the parliament. We have tried to perform this role for almost two decades now.

My predecessors and myself have received sincere praise as well as constructive criticism for our work in the National Audit Office at the time of different governments and parliament compositions. We are very grateful for this.

As far as I am concerned, this constructive feedback outweighs by a hundred times the cases where some politician announces that a report by the National Audit Office makes them sick or that all we do is drag people through the dirt.

However, there is a certain concern that I simply have to mention – I must admit that in my seven years in this position, I have never experienced such a defensive stance taken by the executive power no matter what the problem that the National Audit Office highlights.

One by one the conclusions drawn from various audits have been declared unusable. And this is done without giving any credible explanations.

Many officials have admitted to us off the record that when asked to prepare a response to an audit conducted by the National Audit Office, they have been given clear politically motivated instructions – deny everything, do not agree with anything.

However, I do not believe that all this comes from some evil plans plotted against the National Audit Office or the fact that politicians are always anxious before impending elections.

It seems to me that it is just a reflection of the broader trends of society and politics on the agencies that I have taken a good look at.

It makes me sad that the prevailing trend in society and political circles is to subconsciously fend off any expressions of thought that are not in line with certain dogmas.

It makes no difference whether they are social, political or something else.

If you dare to say anything that contradicts the slogans of political parties or the comprehension of people who have no analytical skills, you may end up facing the question: so you don’t like the Republic of Estonia, do you? Unfortunately, this is a very common level of discussion.

It is extremely regrettable that we keep encountering people whose attitude is to dismiss everything, claiming it’s not worthy of discussion. Smash it up and throw it in the bin.

I believe this to be a cul-de-sac.
The society of Estonia cannot base its future development on those who tell people what to think or the dogmas of political parties.

Ideas must be analysed and decisions on them should be based on comprehensive and rational analyses of their impact and our possibilities. The attitude that we have no intention of discussing one thing or another is not going to help us progress.

We should discuss education, medicine, taxes, immigration, social welfare, the organisation of state and many other issues calmly, without any hysterics.

We have to lose the legacy of old and inflexible standpoints and free our minds.

However, we should not get carried away with endless discussions, as there always comes a moment when we have to make a decision.

Reforms which are essential for the development of Estonia are currently on hold as people lack the courage to act. You can read more about this in our overview, which was sent to you all two weeks ago. It also gives you information about the situation of local authorities.

In conclusion, I have to say that although our expectations of the development of the state and society of Estonia have been much higher than the results we have seen in actual life, we still have reason to be content.

Our Prime Minister recently said that in comparison to countries that have shared our fate, Estonia has done better than anyone else. I can assure you that this is not an illusion of the Prime Minister. This is the truth. But this knowledge alone is not going to help us go further. Thinking that the state is to blame for everything is also not going to help. Everyone has to take some responsibility. We have to be realistic about what the state of Estonia can do.

I hope we all have enough objectivity and common sense to make Estonia a success. You will be meeting the voters soon.

I thank the present Riigikogu for its cooperation. Thank you!
 

  • Posted: 10/27/2010 10:35 AM
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