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Cablegate: Estonia's Proposed 2010 Budget Spurs Little Debate

VZCZCXYZ0000
RR RUEHWEB

DE RUEHTL #0350/01 3031402
ZNR UUUUU ZZH
R 301402Z OCT 09
FM AMEMBASSY TALLINN
TO RUEHC/SECSTATE WASHDC 0198
INFO EU INTEREST COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHTL/AMEMBASSY TALLINN

UNCLAS TALLINN 000350

SENSITIVE
SIPDIS
DEPARTMENT FOR EEB/CBA, EUR/ERA AND EUR/NB
TREASURY FOR DAVID WRIGHT
COMMERCE FOR ITA

E.O. 12958: N/A
TAGS: ECON PGOV EFIN EINV EN
SUBJECT: ESTONIA'S PROPOSED 2010 BUDGET SPURS LITTLE DEBATE

1. (SBU) SUMMARY: Estonia's 2010 budget quietly sailed through the
first reading in the parliament - a surprising development given
the 14 percent drop in GDP this year and the contentious budget
debates of previous years. This might be a calm before the storm
as the opposition parties are starting to recover from the local
elections on October 18 and pay increasingly more attention to
state budget issues. The GOE's primary political-economic goal
remains to join the Euro zone in 2011. Therefore, all effort has
been put to meeting the Maastricht criteria of a budget deficit
less than three percent of GDP. To achieve this, the 2009 budget
was trimmed twice this year (and will likely need to be cut again),
and 2010 spending is set to remain at 2009 levels. Additionally,
the GOE has searched for methods to boost revenue in both budget
years. END SUMMARY.

Trimming Expenses And Trying to raise revenue

---------------------------------------------

2. (U) The 2010 budget, which had its first reading in the
Parliament on October 21, reflects Estonia's difficult economic
situation. When planning the 2010 budget, the Ministry of Finance
used GDP growth forecasts of -14.5 percent in 2009 and -0.1 percent
in 2010. Accordingly, planned expenditures for next year total EEK
89.6 billion (USD 8.5 billion) which is almost the same level as in
2009 (EEK 89.3 billion). State revenues are not expected to exceed
EEK 84 billion, so this proposal would meet the Maastricht budget
criteria with a budget deficit of 2.95 percent of GDP. However on
October 26, a visiting IMF delegation suggested the GOE should cut
an additional one percent of GDP from the 2010 budget to ensure it
remained on course for Euro accession. The IMF also recommended
Estonia carry out additional structural reforms to its tax and
social benefits systems since the impact of short-term measures to
improve the 2009 budget will evaporate by 2011 and revenues will
not reach pre-crisis levels in the near future.

3. (SBU) The GOE has cut the 2009 budget twice since it was passed
and many analysts expect a third round of cuts before the end of
the year. The first cut was in February, when expected state
revenues were lowered by 9.8 percent from EEK 97.8 billion to EEK
88.2 billion (USD 9.26 billion to 8.35 billion) and state
expenditures by 6.8 percent from EEK 98.5 billion to EEK 91.8
billion (USD 9.33 billion to 8.69 billion). The main savings came
from a reduced increase in pension payments (5 percent instead of
14 percent) and from cutting all state salaries by eight percent.

4. (SBU) Although it was apparent in March-April that further
budget cuts were needed, the GOE waited until after the June EU
Parliament elections to make a decision on the second round of
cuts. In June the GOE decided to make another 3.5 percent cut in
expected revenues and 2.8 percent cut in expenditures. This time
the primary changes included increasing the VAT from 18 percent to
20 percent and decreasing the responsibilities of the Estonian
Health Insurance Fund.

5. (U) Although nominal defense spending decreased in 2009, the GOE
is committed to holding defense spending at 1.86 percent of GDP
(septel) in 2010, close to the NATO target of 2 percent.
Additionally, the GOE has so far kept its pledge to not cut
pensions (although they will not rise in 2010) or change the
generous system of benefits to new parents. The GOE will continue
to cut operating expenses in 2010, to a level lower than in 2007.
The GOE started layoffs and the elimination of unfilled positions
early in 2009 (the MFA, for example, laid-off 18 diplomats October
23). More than half of the ministries have said that they are
planning to continue cutting jobs in 2010, and reducing salaries by
an additional 4.7, for total wage cuts of 12.7 percent.

6. (U) Increasing tax debts is a growing concern for the Estonian
Tax Board. At the end of September, taxpayers in Estonia owed EEK
6.1 billion (USD 577 million) in unpaid taxes, over half a billion

EEK more than at the end of the second quarter. To make up for
some of the lost revenue, the GOE will continue selling government
property, primarily land owned by the Ministry of Interior and
Ministry of Environment, and will increase the alcohol excise duty
by 10 percent as of 1 January 2010. The tobacco excise duty will
also increase, by 20 percent, but not until 1 January 2011.

EU STRUCTURAL FUNDS

-------------------

7. (U) The GOE budget will be buoyed in 2010 by a 15 percent
increase in EU structural funds. The total EU support in the
budget bill is EEK 14.5 billion (USD 1.37 billion, or 16 percent of
the budget). The government's priority is to use EU support to
stimulate the economy, increase employment and make investments in
education and the environment.

Impact on state-owned enterprises

---------------------------------

8. (U) The GOE decided at the end of August to take EEK 1.7 billion
(USD 161 million) in additional dividends from the state-owned
companies Eesti Energia (Estonian Energy) and the Port of Tallinn
to help reduce the budget deficit. Eesti Energia did not object to
the extra dividends, but officials from the Port of Tallinn
complained publicly about the effect it would have on planned port
expansions. The Port of Tallinn paid a dividend of EEK 30 million
(USD 2.8 million) earlier this year, and was instructed to pay
another EEK 386.6 million (USD 36.6 million) by the end of
November. However, on October 29 the GOE approved a 15-year, EUR
50 million (USD 74.15 million) loan to fund the port's expansion
plans. The GOE is planning to take dividends of similar size from
the port and Eesti Energia in 2010. Additionally, the GOE is
considering privatizing part of Eesti Energia to raise money for
clean energy investments.

Surprisingly Calm Budgeting

---------------------------

9. (SBU) Given the severe economic picture and two sets of
elections (EU and local) in 2009, there has been a surprising lack
of criticism and debate so far since the proposed budget was
unveiled in September. During the recent economic boom and more
recent series of budget cuts, there was significant debate and
criticism over the GOE's budget decisions as soon as the budget
figures were made public. However, the 2010 budget was not a
prominent issue in the October 18 municipal elections. Opposition
parties publicly said they would support the proposed budget, even
while complaining about it privately to Emboffs.

10. (SBU) Almost two weeks after the local elections, the
opposition parties are starting to make demands. On October 29,
these parties presented a list of amendments to the budget, such
as: to decrease the VAT on heat from 20 percent to 9 percent,
increase the percentage of income tax going to local governments,
increase support to agriculture, and increase the living allowances
for the underinsured. The Green Party asked for more financing for
energy efficiency projects and the Social Democrats suggested
equating defense and cultural spending. All proposed changes have
to be submitted to the Parliament by November 4, but so far this
round of budgeting has been surprisingly quiet.

11. (SBU) The GOE continues to make painful cuts in the hopes of
keeping the 2009 budget deficit below three percent of GDP, in

order to maintain Euro eligibility. Despite these measures, it is
unlikely we will learn whether or not they were successful until
well into 2010 and the margin of success or failure will be very
slim. Any downward revision of growth will cause further painful
cuts.

DECKER
DECKER

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