National Audit Office: the forecasting of state revenues and expenditures is imprecise and the monitoring of expenditures is inconsistent

Priit Simson | 5/13/2020 | 11:00 AM

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TALLINN, 13 May 2020 – The National Audit Office compared the budgetary forecasts of the Ministry of Finance with the actual state revenues and expenditures in its overview and showed that in 2018 under stable economic conditions, the deficit was more than 200 million euros higher than planned. This despite the repeated warnings of the fiscal council.

There have been difficulties particularly with assessing the excise duties accrued in the State Treasury and the use of the European Union subsidies. In addition, the National Audit Office found in its overview that supervision of expenditures throughout the financial year is deficient, which gives rise to the risk that the budget deficit is noticed only after it has already grown large. Reality-based forecasts and the continuous monitoring of state budget expenditures and revenues play an important role in making rational budgetary choices that have a long-term effect on the well-being of the state, the residents, and companies.

“The present time gives an assessment of the attitude that “reserves burn fuel to no avail” and that they should be used up or that Estonia has a lot of room to borrow and this should be done immediately that was widespread for a while,” the Auditor General Janar Holm commented on the results of the overview. “Today, we can be happy that the central government still had some reserves left at the beginning of the crisis caused by the coronavirus despite the rapid decline in funds in recent years,” the Auditor General added, pointing out that disciplined fiscal policy is needed even more urgently in the coming years.  

According to Holm, the current crisis shows how important it is to keep the public finances in order and how rapidly buffers and reserves that might be enough to last for many years in normal situations could decrease.

In the course of the overview, the National Audit Office detected the conscious departure of governments from the financially balanced fiscal policy even before the crisis. Both in 2018 and 2019, the central government spent hundreds of millions of euros more than planned, respectively 208 and 220 million euros. During the years of rapid economic growth when tax revenues grew by an average of 9% per year, this was still not enough to cover the costs. The budget deficit widened, the reserves dwindled, and the state often postponed the decision on whether to contain or not to contain the increase in expenditures.

The National Audit Office finds that the fiscal council should be given a greater role in monitoring compliance with the budgetary rules that would enable drawing the government’s attention to the risks associated with planning state revenues and expenditures with greater effect. So far, the criticisms made by the council have not been pointed enough or it has simply not been clear enough how the government should respond to the fiscal council. It is necessary to agree on the role of the fiscal council and the internal requirements for the opinion of the fiscal council and when and how the Government of the Republic should respond to the opinion of the fiscal council.

The National Audit Office can see that it is necessary to obtain information about the accrual of the revenues of the State Treasury and the actual state budget expenditures more operatively. Among others, it is necessary to assess more realistically how much European Union subsidies are used during the financial year and monitor which expenses and to what extent are made from the state budget throughout the year. It should also be ensured that data from other ministries for forecasting and monitoring the revenues and expenditures are relevant and sufficient.

In order to mitigate risks upon preparing the financial forecast of the state, the Ministry of Finance needs to enter into agreements with other ministries on how to ensure reliable information from various areas of life. The reasons why the state has systematically overestimated its ability to use European Union subsidies by a quarter in recent years should also be determined and a decision should be taken on what to do to resolve the issue.

Considering the uninformative structure of the annual budget, the Ministry of Finance in cooperation with other ministries has to introduce a substantive and analytical continuous monitoring of state budget expenditures throughout the financial year. In addition, it is necessary to find a solution to how the forecasting of non-taxable state revenues could be improved and the arrival of information on the state’s economic transactions into the state’s accounting could be accelerated.

The National Audit Office considers it important to regularly obtain opinions and proposals on monitoring and the organisation of preparing a forecast of state budget revenues and expenditures from the Riigikogu, the Government of the Republic, the fiscal council and the Bank of Estonia, and an overview of the submitted proposals and the potential implementation thereof is published.

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The most important questions to which the overview provides more detailed answers:

How have the economy, state revenues and expenditures changed in the period 2018–2019? 
The economy has grown beyond its potential, state expenditures have exceeded revenues, and the government has planned the budget at a structural deficit in recent years.

Do the Riigikogu and the Government of the Republic adhere to the principle of a balanced budget? 
Upon preparing the budget strategy for 2020–2023, the government failed to comply with all the so-called balance requirements provided for in the State Budget Act and postponed the decision on whether to manage or not manage the increase in budgetary expenditures.             

How does the fiscal council established by the Bank of Estonia assess the government’s fiscal policy?
In 2017–2019, the fiscal council repeatedly presented assessments that, given the economic circumstances, the fiscal policy is not appropriate and the necessary crisis buffers are diminishing.           

To what extent has the Ministry of Finance given a relevant forecast on the economic growth to the government to prepare a budget?         
The assessment of the Ministry of Finance of the situation of Estonian economy has been realistic and rather conservative over the years.      

How should the forecast of revenues that the Ministry of Finance has given to the government to prepare a budget be assessed?
The forecast of state budget revenues of the Ministry of Finance has turned out to be more optimistic than the reality foremost due to the systematic overestimation of the use of European Union subsidies and the underestimation of the impact of border trade.

Why did we experience one of the biggest budget deficits in the last decade and discrepancy from the forecast in 2018?
The higher-than-forecast budget deficit in 2018 was foremost caused by the incorrect assessment of the accrual of excise duties and state budget expenditures.

When did the Ministry of Finance learn that the budget deficit of 2018 is going to be bigger?
According to the Ministry of Finance, the first signs that the budgetary position of 2018 was worse than forecast emerged in January 2019. In the opinion of the National Audit Office, the signs that the deficit would be considerably higher than anticipated were already present in July/August 2018.

When and to whom was the information on the budget deficit of 2018 communicated?
According to the Ministry of Finance, information on the budgetary position of 2018 was communicated to the Minister of Finance and the Prime Minister in February 2019.

Which proposals did the officials of the Ministry of Finance make to the Minister?
According to the officials of the Ministry of Finance, no specific proposals were made to the Minister or the government when communicating information on the budgetary position of 2018, as this is not required by the so-called format of presenting data.

Which proposals did the officials of the Government Office make to the Prime Minister/government in the situation that had emerged?
According to the representatives of the Government Office, they did not make any proposals to the government in connection with the formation of the budgetary position of 2018.

If and when did the government discuss matters associated with the budgetary position of 2018 and what did it decide?
The National Audit Office does not have evidence that the government has discussed the reasons for the formation of a budgetary position that was significantly worse than forecast for 2018. 

What are the risks in preparing the forecast that could lead to the recurrence of the situation of 2018?             
Risk 1: The financial forecast could turn out to be incorrect in the event of significant tax changes.
Risk 2: The financial forecast could turn out to be incorrect due to significant changes concerning the budgeting principles and the audits of Statistics Estonia.
Risk 3: The external assessment of the appropriateness of the financial forecast is limited in comparison with the macroeconomic forecast.
Risk 4: The quality control of source data necessary for preparing the financial forecast may not be sufficient.
Risk 5: Less attention has been paid to the accuracy of the forecast of using foreign support because this does not directly affect the budgetary position.

What are the risks in monitoring the state budget that could lead to the recurrence of the situation of 2018?
Risk 6: Alongside the consolidated accrual of state budget tax revenue, not enough attention is paid to accruals by type of tax.
Risk 7: The ongoing use of state budget funds, i.e. making expenditures, is essentially not monitored or analysed.
Risk 8: Internal audit units of the ministries do not adequately assess the planning of the state budget and the organisation of using thereof in state authorities.
Risk 9: Less attention has been paid to improving the monitoring of state budget revenues and expenditures than to improving forecasting.

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Background:
In order to prepare the state budget, the Government of the Republic and the Riigikogu require the best opinion of the officials on which revenues can be taken into account when preparing the expenditure plan. To this end, the Ministry of Finance is preparing a forecast each spring and end of summer, giving an assessment of the state’s economic and financial situation in the current year and in the next four years. The forecast is used as a basis for preparing the state’s budgetary strategy and state budget.

In addition to a relevant forecast, the conscious management of state revenues and expenditures also requires the monitoring of the actual situation: are state revenues being accrued and are state budget expenditures made at the planned pace and volume? Considered and balanced fiscal policy based on the best available data is necessary in order to ensure the state’s financial viability and capacity also in the event of deteriorating economic conditions.

In 2018, state budget revenues were significantly lower and expenditures significantly higher than anticipated when preparing the state budget. The objective of the overview of the National Audit Office was to determine whether and which risks in preparing the state’s economic and financial forecast and monitoring state budget revenues and expenditures could affect the considered decisions of the government and the Riigikogu. The National Audit Office also examined the fiscal policy of the national leaders and whether the principles formulated by the State Budget Act have been complied with. In the overview, the National Audit Office foremost addressed the year 2018, and the data are primarily submitted as at 10 March 2020.

 

Priit Simson 
Head of Communications of the National Audit Office of Estonia
Phone +372 640 0777 
+372 5615 0280
Priit.Simson@riigikontroll.ee
press@riigikontroll.ee
www.riigikontroll.ee

  • Posted: 5/13/2020 11:00 AM
  • Last Update: 5/13/2020 10:35 AM
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Nominal and structural budgetary position in 2018

Artur Kuus / Makett

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