Publication: Monitor Volume: 7 Issue: 226

Estonia’s central government has worked hard to establish a reputation for fiscal probity. But the largest of the country’s local governments, Tallinn, believes that significant investments in the near term will in the long run more than compensate for the cost of borrowing the funds necessary to invest. In early fall, the IMF warned that achieving central budgetary goals for the year may require reductions in spending by the state government to compensate for a possible deficit in Tallinn’s municipal budget. The general government’s 1,160 million kroons surplus through September covered a shortfall of 52 million kroons on the part of local governments. Next year, unless Tallinn can be reined in, the shortfall will be notably larger. Assuredly, a high level of investment is necessary if Estonia is to raise the quality of its infrastructure to EU levels. However, Estonia’s fiscal policy is central in its bid to control external imbalances, and if a balance is not reached between investment and fiscal tightness, it could come back to haunt both Tallinn and the central government in the form of a balance-of-payments crisis and lowered credit ratings.

Through October, Tallinn’s budget was 585 million kroons in the black. However, that includes extraordinary revenues of 605 million kroons from the one-off sale of the Tallinn Water Company. Excluding this revenue, the municipal budget had received only 65 percent of its annual revenue target through October, while expenditures were 73 percent of the target. Since the city has nearly completed the sale of its assets, privatization revenues are projected to drop to 58 million kroons in 2002, from this year’s forecasted 1 billion kroons. Nonetheless, Tallinn’s city government chose to increase the draft 2002 budget by 23 percent, to 5,168 million kroons (US$297 million). In large part, the size of the budget is due to planned investment–29 percent of the draft budget, or 1,476 million kroons, is allotted for investment. With a budgeted deficit of 1,540 billion kroons, the city plans to borrow 1,469 million kroons, which would raise the city’s loan burden to 1,992 million kroons by the end of next year. Already, the city has had to budget 401 million kroons for repayment of loans next year. Finance Minister Siim Kallas and the Bank of Estonia were unswayed by the investment argument, saying that this budget could put the entire country’s financial balance at risk. Tallinn Mayor Tonis Palts was quoted as retorting that the budgetary deficit had been “invented as a scare tactic and is only an accounting term,” an answer that does little to refute charges of fiscal irresponsibility (BNS, November 5-7, 15, December 3; for Estonian Finance Ministry, see www.fin.ee).

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