Estonia Government Spending Outlook

Estonia will increase spending by ``about'' 3 billion krooni ($270 million) next year after reaping higher-than-forecast tax revenue, according to Prime Minister Andrus Ansip at a news conference in Tallinn this morning.

Next year's expenditures will rise to about 93 billion krooni, compared with 89.7 billion krooni in a four-year budget forecast prepared in May. Ansip declined to specify the amount of extra spending which was involved this year, saying only that one of the ``additional items'' will be 284 million krooni to purchase embassy buildings abroad. The government is due to complete its budget proposals on Sept. 17.

According to Ansip:

``Next year's government sector budget surplus will definitely be 1.3 percent of gross domestic product......We promised this level to the European Union in our last convergence program.''

Estonia's central bank argued last month that the government must avoid additional spending to help keep economic growth, which was running at an annual at 7.6 percent in the second quarter, under control. Managing government spending is among the few tools available to Estonia to curb price increases because the local currency, the kroon, is pegged to the euro in the EU's exchange-rate mechanism.

Central bank spokeswoman Livia Kulm is quoted today as saying the bank would give a detailed comment when the budget proposals are completed.

``The Bank of Estonia is still of the opinion that the budget surplus in 2007 must remain on a comparable level with last year and expenditure should not be boosted through a supplementary budget,''.

Standard & Poor's in July lowered Estonia's ratings outlook to negative from stable, citing a wide current-account deficit and accelerating inflation. The planned loosening of fiscal policy would ``likely compound the pressures on the creditworthiness'' of Estonia, it added. Moody's Investors Service also lowered its outlook for Estonia and Latvia to stable from positive only yesterday, citing similar reasons.

The Estonian Finance Ministry last month raised its forecast for surpluses in 2008-2011 to between 1.8 percent and 2.2 percent of GDP due to higher tax revenue expectations. It said the surplus would reach 3.4 percent of GDP this year, compared with 3.8 percent last year and the previous forecast of 1.9 percent.