Budget cuts in the financial crisis

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.