Budget cuts in the financial crisis

Estonia
University of Tartu
 
The dominant theme of the past six months is clearly the economic crisis. The Estonian economy has been in recession since mid-2008 and the Bank of Estonia predicts a 5.5 percent decline of GDP in 2009. The gravity of the situation became evident only in December 2008 when it turned out that the accrual of budget revenues had been very low due to a very fast cool-down of both the global and Estonian economies. While the government has reserves worth about 15 billion Kroons (and has not yet had to turn to the International Monetary Fund (IMF) for help, like the neighbouring Latvia), it decided to drastically cut the 2009 budget. After long debates between the coalition partners, an agreement was reached to cut the budget by eight billion Kroons, the equivalent of eight percent of 2009 spending. The cuts involve painful measures such as across-the-board reduction of 10 percent in public sector wages. The cuts will be formalised in a bill to be presented to the Estonian Parliament in February 2009. These measures are designed to help Estonia meet the Maastricht convergence criteria (now that inflation rates are down) but more importantly, to avoid bankruptcy of the Estonian state.
 
Estonia has watched with concern the recent anti-government riots in the Latvian and Lithuanian capitals. It is not clear whether similar violent demonstrations could occur in Estonia. Until recently, Estonians have been quite satisfied with their government. According to the most recent Eurobarometer survey (fall 2008), 48 percent of the Estonian public trusted the national government. This figure is significantly above the EU average (34 percent) and dramatically different from government support rates in Latvia and Lithuania (16 percent in both cases). However, it is possible that the dramatic budget cuts will take a toll on the government’s popularity in the near future. At the same time, loyalists of the governing parties are likely to regard the budget cuts as a major achievement and an example of responsible behaviour in difficult times.