The government may be overestimating the structural fiscal surplus. Calculations by the Fiscal Council show a serious risk that the structural budget position for 2014–2015 has been overestimated. For this reason the Fiscal Council recommends that the government draft its budget for 2015 so that the structural surplus in the general government budget is not less than the 0.8% of GDP noted in the summer forecast. http://eelarvenoukogu.ee/news/the-government-may-be-overestimating-the-structural-fiscal-surplus

1. Fiscal Council Opinion on the Summer Forecast
2014 of the Ministry of Finance
Raul Eamets
Chairman of Fiscal Council
Tallinn, 15 September 2014

2. This presentation
1) about the Fiscal Council
2) definition of terms
3) the summer forecast of the Ministry of Finance in brief
4) the opinion of the Fiscal Council
5) questions and interviews

3. The Fiscal Council
• set up in 2014 as an independent advisory body charged with assessing
Estonian fiscal policy
• issues opinions on the forecasts for the macro and fiscal forecasts and on
the budget strategy and how the goals of the structural budget position of
the general government are being achieved
• meets whenever necessary, but at least five times a year
• the opinions of the Fiscal Council are published on its website
www.eelarvenoukogu.ee
• members: Raul Eamets, Andrus Alber, Ülo Kaasik, Martti Randveer, Urmas
Varblane and Andres Võrk

4. Definitions
• output gap – the difference between actual and potential GDP
• cyclical budget component – the impact of the business cycle on the budget
balance
• cyclically adjusted budget balance – the nominal general government budget
balance adjusted with the cyclical component
• one-off factors – revenues or expenditure that are clearly temporary in nature
and that do not affect the long-term sustainability of the general government
budget, such as income from CO2 quota sales
• structural budget balance – the cyclically adjusted budget balance of the
general government with the effect of one-off factors removed

5. Output gap
GDP
time
negative gap
potential GDP
positive gap
actual GDP
-
+
-
+
?

6. Key Figures for the Economic Forecast for Summer 2014
• the changes from the spring are reasonable and are mainly due to weak external demand
• the forecast is an appropriate base for setting fiscal policy but it should be remembered
that the external environment may remain volatile for some time yet
MACRO FORECAST summer forecast spring forecast
KEY FIGURES 2014 2015 2014 2015
Real GDP growth (%) 0.5 2.5 2.0 3.5
Nominal GDP growth (%) 3.0 5.8 4.9 6.9
Change in employment (%) 0.1 0.0 0.2 0.3
Nominal wage growth (%) 6.0 6.1 6.2 6.3
Domestic demand growth (%) 2.2 3.3 2.8 3.7
Real growth in exports of goods
2.0 3.5 2.4 6.0
and services (%)

7. • the forecast of the Ministry of Finance is quite conservative compared to others
• it should be assessed using information that was available at the time (data were
adjusted after the forecast was published)
Forecasts for real GDP growth in Estonia (%)
Sources: Consensus Forecasts, Eesti Pank, European Commission, OECD, Ministry
of Finance, International Monetary Fund, Swedbank
0 1 2 3 4
OECD (May)
European Commission (May)
International Monetary Fund (May)
Eesti Pank (June)
Swedbank (August)
Consensus Forecasts (August)
Ministry of Finance (September)
2015
2014

8. Forecasts of Estonia’s economic growth for 2014
Source: Ministry of Finance
5
4
3
2
1
0
y-o-y %
MofF EP
EC IMF
OECD Swed
SEB Nordea
Consensus Forecast
2011 4 7 10 2012 4 7 10 2013 4 7 10 2014 4 7

9. • nominal GDP growth and GDP structure should be considered as well as real
GDP growth
• wages are increasing strongly
Nominal wage growth (%) Nominal GDP growth (%)
2014 2015 2014 2015
Ministry of Finance
summer forecast
6.0 6.1 3.0 5.8
IMF 7.4 7.2 6.6 8.1
Eesti Pank 6.0 6.2 4.1 6.6
European Commission 6.0 6.7 4.7 6.6
OECD 3.2 5.3

10. • the government has made tax collection from direct taxes significantly more
efficient
The nominal budget position for 2014-2015 has
changed little since the spring
MAKE-UP OF THE GENERAL
GOVERNMENT POSITION Summer forecast
State Budget Strategy
2015–2018
2014 2015 2014 2015
General government total
(million euros)
-38 -90 -135 -111
state budget 1 -47 -82 -56
other central government -45 -42 -52 -48
social security funds 35 37 35 28
local government -29 -38 -36 -35

11. The nominal position of the general government is improving faster
than was forecast in spring
• the effect of tax policy is clear in the forecast
• but it is not clear whether the improvement assumes changes in spending policy
FISCAL POSITION FORECAST 2014 2015 2016 2017 2018
Nominal position (million euros)
summer forecast -38 -90 9 77 204
state budget strategy 2015–2018 -135 -111 -78 13 136
Nominal position (% of GDP)
summer forecast -0.2 -0.5 0.0 0.3 0.8
state budget strategy 2015–2018 -0.7 -0.5 -0.4 0.1 0.5

12. • estimating the structural budget position (including the output gap and the cyclical
component) is methodologically complex and can lead to debate
• most methods used overlook the impact on tax revenues of changes in GDP structure
Estimates of the output gap for Estonia (% of potential GDP)
Sources: European Commission, OECD, IMF, Ministry of Finance
2
1
0
-1
-2
-3
-4
European Commission
OECD
IMF
Ministry of Finance
2013 2014 2015 2016 2017 2018

13. • the output gap will probably be negative for 2014-2015 but the main tax bases, including private
consumption and the payroll may be higher than their potential and have a positive gap
• separate assessment of the tax bases gives important additional information about the structural
position of the budget, while estimates are also affected by revisions of GDP data
Estimates of the cyclical component of the budget (% of GDP)
Sources: Ministry of Finance, Fiscal Council
0.4
0.2
0.0
-0.2
-0.4
-0.6
-0.8
-1.0
2013 2014 2015
Ministry of Finance estimate using
output gap (summer forecast)
Fiscal Council estimate using output
gap (old time series)
Fiscal Council estimate using output
gap (new time series)
Fiscal Council estimate using
disaggregated approach

14. The forecast structural fiscal position is strong, but…
• there is a serious risk that the structural fiscal position is estimated higher than it actually is
• the Fiscal Council recommends that the planned structural surplus for 2015 should be no
smaller than the 0.8% of GDP put forward in the summer forecast
MAKE-UP OF THE
STRUCTURAL POSITION
Summer forecast
State Budget
Strategy 2015–2018
2014 2015 2014 2015
nominal position (% of GDP) -0.2 -0.5 -0.7 -0.5
cyclical component (% of GDP) -0.9 -0.7 -0.5 -0.2
cyclically adjusted position (% of GDP) 0.7 0.3 -0.2 -0.3
one-off factors (% of GDP) -0.2 -0.5 -0.3 -0.5
structural position (% of GDP) 0.9 0.8 0.1 0.2

15. Main message from the Fiscal Council
• the new macro forecast is an appropriate basis to use for drafting the state budget
• the Fiscal Council finds that the summer fiscal forecast by the Ministry of Finance
contains too little information on spending
• various factors such as the changing structure of GDP or revisions to the GDP time
series mean that the risks in measuring the structural fiscal position are larger than
usual
• the output gap will probably be negative for 2014-2015 but the main tax bases
may be higher than their potential
• the structural fiscal position for 2014-2015 may have been overestimated
• the structural surplus for the general government budget should not be smaller
than the 0.8% of GDP noted in the summer forecast

16. Contacts for the Fiscal Council
Chairman Raul Eamets
raul.eamets@ut.ee
514 0082
Secretary to the Fiscal Council
info@eelarvenoukogu.ee
www.eelarvenoukogu.ee