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OECD Economic Surveys: Estonia 2009

image of OECD Economic Surveys: Estonia 2009

Estonia grew faster than most emerging market economies during 2000-07, but it is now in a severe recession. This first edition of OECD's periodic review of Estonia's economy includes chapters covering getting back to a sustainable growth path, fiscal policy, labour market reform, housing policy, and the business environment.

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Removing the pro-cyclical bias of fiscal policy

The severe economic downturn and high output volatility, in the context of the currency board, underscore the importance of well-designed fiscal policies to help mitigate shocks. Since Estonia’s fiscal policy now exercises a pro-cyclical bias, the key challenge is to develop gradually its counter-cyclical role without jeopardising sustainability. The government could achieve this objective by modifying the rule of annually balanced budgets and balance the budget over the business cycle while letting the automatic stabilizers respond freely to short-term fluctuations. The deficit target accompanied by an expenditure rule incorporated in the medium term budgetary framework would facilitate sustainability and efficiency of public spending. To enhance credibility of the modified framework discretionary measures should be used for longer-term structural issues. The uncertainty of estimating the structural surplus could be addressed through a mechanism that claws back expenditure or debt overruns. An important consequence of such changes would be the development of a government bond market, which could also play a benchmark role for financial markets. 

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