Debate over further cuts in state budget for 2009

On 20 February 2009, the Estonian parliament approved an EEK 8 billion (about €511 million) cut in the state budget. Cuts of 7% in government operational expenditure – including public sector wages – and changes in the system of sickness cash benefits have received a critical response from the social partners. While trade unions are not satisfied with the cuts in public sector wages, employers oppose the large burden of sickness benefits put on them.

2009 state budget

Intense discussions over the 2009 state budget ended in late December 2008 with the adoption of the 2009 State Budget Act. As the tax accrual to the state budget was expected to decrease, government expenditure was reduced compared with 2008. This is the second time in the last two years that the government cut the expenses in the state budget (EE0804019I). For this purpose, several policy measures and planned policy actions were cancelled or delayed. For example, full-paid paternal benefit and school allowance were abolished. The reduction of income tax and an increase in the basic exemption or tax free allowance were delayed for one year. Furthermore, compared with 2008, government operational expenditure was reduced by 8%. To increase budgetary revenues, value-added tax (VAT) and state fees were raised.

Supplementary state budget

In January 2009, it was clear that the tax accrual to the state budget had been smaller than expected. For instance, income from VAT declined by 30% in December 2008 compared with the situation one year previously. As a result, the 2008 state budget was in deficit by EEK 5.2 billion (about €332.3 million as at 26 February 2009).

In order to fulfil the Maastricht criteria towards convergence with the eurozone, the government decided to adopt a negative supplementary state budget for 2009, making a cut of EEK 8 billion (€511 million) in expenditure. This cut was based on the assumption that the economic decline will not exceed 8.9% in 2009. However, according to the Minister of Finance, Ivari Padar, even with this cut the 2009 budget will probably run into deficit of about another EEK 8 billion. It is planned to cover this amount with loans and reserves. During the period of economic growth, Estonia accumulated reserves of around EEK 19–20 billion (€1.2–€1.3 billion).

Planned budget cuts

The main source of reduced expenses is in government operational expenditure, which the government chose to cut by 7% based on a solidarity principle in all domains and occupational groups. However, an exemption was given to teachers, whose wage fund was cut by 4%. This still provides teachers with a 4% wage increase according to a collective agreement that took effect from 1 January 2009 (EE0902019I).

The system of sickness benefits is also subject to change. Currently, the first day of illness is not covered by the sickness benefit scheme; from the second day of illness, sickness benefits are paid by the Estonian Health Insurance Fund (Eesti Haigekassa) at a rate of 80% of the employee’s average wage. From 1 July 2009, the period not covered by sickness benefits will be increased to three days. For the subsequent five days of illness, sickness benefits are paid by the employer at a rate of 80% of the average wage of the employee. The Health Insurance Fund will start paying sickness benefits only from the ninth day of illness. As there is currently no responsibility on the employer in terms of covering sickness days, this change to the sickness benefit scheme will considerably shift the responsibility and expenses from the state to employees and employers.

Other cuts in expenditure include the reduction of funds allocated to local governments, the environment, agriculture and road construction. Pension indexation was also changed to make the system of pension insurance more adaptable to the rapid economic changes. As a result, old-age pensions will increase by 5% from April 2009 instead of the 14% initially planned.

Social partner reactions

The Estonian Trade Union Confederation (Eesti Ametiühingute Keskliit, EAKL) has opposed the wage cuts in the public sector. According to EAKL, wage reductions do not stimulate structural changes in the economy or motivate employers to increase productivity. EAKL proposed to increase state revenues by equalising the tax free allowance with the national minimum wage and by raising the income tax rate. In order to increase finances in the health insurance scheme, EAKL proposed a 13% health insurance tax on dividends. This would bring an additional EEK 2 billion (€128 million) into health insurance.

The Estonian Employers’ Confederation (Eesti Tööandjate Keskliit, ETK) has strongly opposed the changes in financing sickness benefits as these would mean an increase in expenses for employers. According to ETK estimates, these changes will require an additional EEK 500 million (€32 million) in employers’ expenses. To ease the effects of the new obligations on employers, several proposals have been made, such as lowering the rate of sickness benefits to 50% of the average wage, giving tax exemption on benefits and creating a monitoring system to check the correct use of sick leave certificates. It was also proposed that pensioners should contribute an additional EEK 200–300 (€12–€19) for health insurance as they represent the most active category of users of health services.

Kirsti Nurmela, PRAXIS Centre for Policy Studies

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