Two weeks ago, the leadership of the Reform Party backed the Bank of Estonia’s proposal to reach an agreement on responsible fiscal policy, proposing to reduce the budget deficit by 0.5 percentage points each year while setting a public debt target of 30 percent.
The party said in a statement that, because Estonia is living through a period when national security and defense capabilities are of existential importance, spending cuts would not come at the expense of defense.
Education and Research Minister Kristina Kallas (Eesti 200) told ERR Monday that it is not possible to reduce the budget deficit at an accelerated pace while the war in Ukraine continues because doing so would mean cutting defense spending. However, she said priorities could be reassessed once the war ends.
“Of course I would like to leave office with a budget in which we’ve already planned a path toward improvement. But as long as there is war in Europe, it is difficult to ensure defense capabilities while also making major investments elsewhere. Everything cannot be a priority,” Kallas said.
“If defense is the priority, then nothing else can be at the same time. I’m pessimistic about this, even though I don’t fundamentally disagree that our government should work to reduce the budget deficit,” she added.
“As long as we have to focus on defending Estonia, defending Europe and supporting Ukraine in this war, I don’t see any possibility of reducing the budget deficit at an accelerated pace,” Kallas said.
“Raising defense spending from 2 percent to 5 percent over five years has meant a very large increase in expenditures and has not been matched by corresponding increases in taxes or other revenue. Inevitably, we have had to rely more on borrowing than before, which increases the deficit,” she added.
Stoicescu: No guarantee end of war would allow defense spending to be slashed
Kallas’ party colleague Kalev Stoicescu, chair of the Riigikogu National Defense Committee, told ERR that any review of defense spending would depend primarily on how the war ends.
“Every war eventually ends. But the question is how it ends, because that will determine whether defense spending needs to remain high. The war could end with Russia collapsing, for example. It could also end in a way that requires defense spending to increase even further. So you can’t simply say that once the war ends, that’s it. We don’t know how it will end,” Stoicescu said.
“We cannot make decisions or assume we can reduce defense spending until we have more certainty. Right now, there are no signs that the security situation is improving for us or for our region. Previous decisions can always be revisited, but there has to be a very specific reason for doing so and that reason does not yet exist,” he added.
Stoicescu stressed that reducing the budget deficit is also essential.
“International institutions have also said that a government debt level of around 30 percent of GDP is still reasonable and we are approaching that level. But we must not exceed it by very much. On the one hand, it is positive that the European Union adopted decisions allowing countries to exceed a 3 percent budget deficit in order to finance defense needs. But ultimately we still have to strive to bring the deficit back toward minus 3 percent and improve the situation,” he said.
However, Stoicescu said defense spending is far from the main reason government debt has increased.
“If we look at the growth in government debt over the past five or six years, then yes, defense spending has been an important factor and has contributed to that increase. But in reality, various forms of social spending have been the main drivers of debt growth. So we shouldn’t blame everything on defense spending,” Stoicescu said.
Mihkelson: We’d best get used to high defense spending
Marko Mihkelson, chair of the Riigikogu Foreign Affairs Committee and a member of the Reform Party, told ERR that there are still no signs that either the threat of war or the war itself is coming to an end.
“As long as Russia has not been defeated in this war in a way that changes its strategic objectives — that is, the destruction of the Ukrainian state and NATO — there is absolutely no reason to believe that Russia will cease to pose an existential threat to us. That provides no basis for making significant changes to defense spending. The investments we are making today, the weapons we are purchasing and the costs of operating and maintaining them all have long life cycles. I do not see anything in the foreseeable future that would allow us to say we have reached a point where defense spending should begin to decline. I don’t see that possibility. We have to get used to living with high defense spending for a prolonged period,” Mihkelson said.
“All parties have agreed in the national security strategy that, for the foreseeable future, as long as the security environment remains unstable, we must devote at least 5 percent to defense. It is clear that this requires a flexible approach to financing those expenditures, but it certainly does not mean we should ignore our financial security,” he added.
According to Mihkelson, the question of how to ensure Estonia’s long-term financial security will be an important part of the debate ahead of the next Riigikogu elections.
He also said reducing the budget deficit and maintaining high defense spending are not necessarily incompatible.
“I don’t believe those goals are mutually exclusive. It requires making political choices. If the political will and the objective are there… We all understand that a debt spiral is extremely dangerous. Estonia’s public debt remains among the lowest in Europe, but the upward trend could still become rapid and self-reinforcing. That would undermine our security and our long-term sovereign sustainability from both an economic and financial security perspective. There is definitely a serious need to examine what steps would allow us, even in this security environment and with persistently high defense spending, to move closer to a balanced budget rather than farther away from it,” Mihkelson said.
Mihkelson also stressed that if the war ends on Russia’s terms, it would undoubtedly increase the threat facing Estonia and the other Baltic states.
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