## 1estea2021003

## Source details

**Canonical URL:** [1estea2021003](https://www.imf.org/-/media/files/publications/cr/2021/english/1estea2021003.pdf)

## Other formats

- [Markdown version](/-/media/files/publications/cr/2021/english/1estea2021003.pdf.md)
- [Structured JSON version](/-/media/files/publications/cr/2021/english/1estea2021003.pdf.json)

---

### Preface and Executive summary
- Mission: Fiscal Transparency Evaluation (FTE) conducted remotely during November 18 to December 9, 2020, at the request of Mr. Martin Helme, Minister of Finance.
- Scope: Assessed Estonia’s fiscal transparency institutions and practices against the first three pillars of the IMF’s Fiscal Transparency Code.
- Participants: Meetings with Ministry of Finance units (Accounting Department; Budget Development Department; Fiscal Policy Department; Local Governments Financial Management Department; Public Governance Department; State Asset Department; State Budget Department; State Shared Service Center; State Treasury Department), Ministry of Economy and Communication, Ministry of Environment, Ministry of Interior, Bank of Estonia, Statistics Estonia, Tallinn City financial management and treasury team, Fiscal Council, State Budget Control Select Committee, and Finance Committee of Parliament.
- Overall assessment:
  - Meets good or advanced practices on 27 out of the 36 principles of the Fiscal Transparency Code.
  - Basic practice on 6 principles.
  - Three principles are not met.
- Strengths:
  - Compliance with EU reporting framework and IMF SDDS.
  - Public sector accounting applies equally to public corporations.
  - Public Sector Financial Statements enabled IMF staff estimates of comprehensive public sector wealth.
  - Fiscal statistics produced by independent Statistics Estonia.
  - Regular reconciliations published; audit opinions largely clean from National Audit Office (NAO).
- Areas for improvement:
  - Fiscal Forecasting and Budgeting.
  - Fiscal Risk Analysis and Management.
  - Specific improvements feasible with existing systems, knowledge, and capacity.
- Key quantitative estimates for 2019 (IMF mission team estimates):
  - Revenue: 46.3 percent of GDP.
  - Expense: 44.6 percent of GDP.
  - Asset holdings: 143.5 percent of GDP.
  - Liabilities: 63.1 percent of GDP.
  - Net worth: 80.4 percent of GDP.
- Caveats on valuation:
  - Net worth is underestimated due to historical cost valuations for fixed assets and exclusion of subsoil assets; recognizing fair value and including subsoil assets would change estimates and facilitate disclosure of other economic flows.

_Italic: Source: PREFACE and EXECUTIVE SUMMARY from the IMF Fiscal Transparency Evaluation (Estonia), mission conducted November 18–December 9, 2020._

### Fiscal reporting — coverage, timeliness, quality, integrity
- Reporting framework and main reports:
  - Standards: ESA 2010 for fiscal statistics; national accounting standards broadly following IPSASs for government financial statements.
  - Data flow: State Shared Service Centre (SSSC) collects monthly, quarterly and annual data into the Public Sector Financial Statements (PSFS) database; SSSC and Statistics Estonia (SE) compile reports.
  - Main reports and timeliness (selected):
    - Monthly State Budget Execution (MoF): Accrual; Monthly; Timeliness: 25d
    - Monthly revenue/expense (MoF): Accrual; Monthly; Timeliness: 1m
    - Quarterly non-financial national accounts (SE): Accrual; Quarterly; Timeliness: 3m
    - Quarterly financial accounts and financial balance sheet (SE): Accrual; Quarterly; Timeliness: 3m
    - Annual Financial Statements of the Public Sector (MoF): Accrual; Annual; Timeliness: 6m
    - State Ownership Report (MoF): Accrual; Annual; Timeliness: 10m
    - Biannual EDP Notification (SE): Accrual ESA 2010; Annual; Timeliness: 3m, 9m (biannual)
- Coverage of institutions (2019 figures):
  - Public sector: Number of entities 2 719; Revenue 46.3; Expenditure 47.1; Net lending -0.8; Percent of total 100.0
  - General Government: Number of entities 2 484; Revenue 38.3; Expenditure 38.2; Net lending 0.1; End-Point Expenditure 37.8; Percent of total 80.2
  - Central Government: Number of entities 268; Revenue 32.7; Expenditure 32.8; Net lending -0.1; Percent of total 50.2
  - Local Government: Number of entities 2 214; Revenue 9.8; Expenditure 9.9; Net lending -0.1; End-Point Expenditure 9.9; Percent of total 21.1
  - Nonfinancial public corporations: Number of entities 233; Revenue 8.4; Expenditure 9.5; Net lending -1.1; End-Point Expenditure 8.9; Percent of total 18.9
  - Financial public corporations: Number of entities 2; Revenue 0.6; Expenditure 0.4; Net lending 0.2; End-Point Expenditure 0.4; Percent of total 0.9
- Coverage of stocks and valuation gaps (findings and magnitudes):
  - PSFS contains balance sheets of consolidated general government and public sector; SE publishes general government balance sheet quarterly (does not include non-financial assets).
  - SE compiles annual data on stocks of fixed assets and inventories at market prices (ESA 2010 Table 26) published two years after reporting year; excludes mineral resources and other non-produced assets.
  - Completeness and valuation gaps contribute to underestimation of public sector stocks by at least 69 percent of GDP on an unconsolidated basis, or almost 40 percent on a consolidated basis (2019).
  - Specific gaps and estimates:
    - Subsoil assets: Shale oil reserves discounted cashflow valuation by Eesti Energia at least EUR 392 million, equivalent to 1.4 percent of GDP in 2019.
    - Other non-financial assets: Difference between reported value and estimated market value of public sector fixed assets is 32.5 percent of GDP in 2019.
    - Unreported equity (unconsolidated basis): estimated 35.5 percent of GDP in 2019.
    - Social security pension entitlements (accrued): 244.6 percent of GDP (memo).
- Coverage of flows:
  - Fiscal reports cover cash flows, accrual-based revenue/expenditure and partial information on other economic flows.
  - SE publishes only total other economic flows in financial assets and liabilities; other economic flows in non-financial assets: n.a.
  - Other economic flows in financial assets (Percent of GDP): 2015: 0.1; 2016: 0.7; 2017: 1.5; 2018: 0.4; 2019: -1.3
  - Other economic flows in liabilities (Percent of GDP): 2015: 0.0; 2016: 0.4; 2017: 0.0; 2018: 0.0; 2019: -0.2
- Tax expenditure:
  - Estimated revenue loss from tax expenditure: 0.9 per cent of GDP (first-round effects, excluding behavioral changes).
  - Tax expenditure estimates around 3.2 percent of total revenue.
- Frequency, timeliness and integrity:
  - Monthly fiscal data published within a month after period end.
  - Annual financial statements prepared by end-May and published within six months after year-end; publication dates: 2019: June 30, 2020; 2018: July 2, 2019; 2017: June 29, 2018; 2016: July 3, 2017.
  - Statistical integrity: SE is professionally independent under the Statistics Act and EU regulations; part of ESS; compliance with ESA 2010 scrutinized by Eurostat.
  - External audit: Consolidated annual financial statements audited by NAO; NAO appointment term: 5 years; MoF submission deadline to NAO: June 30 each year; NAO completes audit report by August 31; MoF submits reports to Riigikogu within seven working days of receiving NAO report.
- Shortcomings:
  - In-year budget execution reporting lacks sufficient detail on expenditure to assess fiscal aggregates against budgeted amounts; monthly budget implementation report presents only five expense categories.
  - Underrecognition and undervaluation of non-financial assets.

### Priority recommendations on fiscal reporting (selected)
- Recommendation 1.1 (MoF and SE, medium term):
  - Improve integrated fiscal reporting in the consolidated PSFS and fiscal statistics by including stocks of mineral resources; using fair/market valuation of assets and liabilities; reporting on holding gains/losses and other changes in the volume of assets and liabilities.
- Recommendation 1.2 (MoF, for the 2022 State Budget Strategy):
  - Improve disclosure and management of revenue loss due to tax expenditure by requiring line ministries to prepare rationales and performance indicators; include tax expenditure outturns alongside estimates; include a section on tax expenditure in annual budget documentation.
- Recommendation 1.3 (MoF and SE, medium term):
  - Consolidate fragmented information into user-friendly reports on debt holders by ESA 2010 sectors; detailed monthly and quarterly comparable budget execution reports; a statement reconciling above- and below-the-line operations; a bridge table for major revisions; monthly spending from contingency reserve.

### Key fiscal statistics and PSFS aggregates (preserved exactly)
- Public Sector Financial Overview, 2019 (selected figures from Table 0.2):
  - Revenue: 46.3 percent of GDP (consolidated general government).
  - Expenditure: 47.1 percent of GDP (consolidated general government).
  - Expense: 44.6 percent of GDP (consolidated general government).
  - Investment in Non-financial assets: 2.4 percent of GDP (consolidated general government).
  - Gross operating balance: 5.8 percent of GDP (consolidated general government).
  - Net lending/borrowing: -0.8 percent of GDP (consolidated general government).
  - Assets (total): 143.5 percent of GDP (consolidated general government).
    - Nonfinancial assets: 93.6 percent of GDP (consolidated general government).
    - o/w Mineral resources: 1.4 percent of GDP.
    - Financial assets: 49.9 percent of GDP (consolidated general government).
  - Liabilities (total): 63.1 percent of GDP (consolidated general government).
    - Liabilities other than equity: 61.6 percent of GDP (consolidated general government).
    - o/w civil servants pension entitlements: 10.1 percent of GDP.
  - Equity (public corporations memorandum): 1.5 percent of GDP (consolidated general government context).
  - Net worth: 80.4 percent of GDP (consolidated general government).
  - Net financial worth: -13.2 percent of GDP (consolidated general government).
  - Memorandum items:
    - Social security pension entitlements: 244.6 percent of GDP.
    - Net worth including social security pension entitlements: -191.1 percent of GDP.
- Public sector balance sheet composition (2019):
  - Nonfinancial assets: 93.6 percent of GDP.
  - Financial assets: 49.9 percent of GDP.
  - Liabilities other than equity: 61.6 percent of GDP.
    - Central Bank deposits: 30.9 percent of GDP (banknotes in circulation 12 percent of GDP; liabilities to euro area credit institutions related to monetary policy operations 17 percent of GDP).
    - Loan debt of general government: 7.5 percent of GDP.
    - Loan debt of non-financial corporations: 7.1 percent of GDP.
    - Civil servants pension liabilities: 10.1 percent of GDP.
  - Public sector net worth: 80.4 percent of GDP.
  - Consolidated general government assets estimated at 103.8 percent of GDP, of which 51.7 percent of GDP represents nonfinancial assets.
  - General government liabilities (including only civil servants pension liabilities): 23.4 percent of GDP.

### Fiscal forecasting and budgeting — processes, performance, and reforms
- Forecasting practice:
  - MoF publishes Spring Economic Forecast (March/April) and Summer Economic Forecast (August/early September); Fiscal Council provides opinions on both.
  - Spring forecast underpins State Budget Strategy (four-year projections); summer forecast informs draft annual State Budget.
  - Forecast accuracy:
    - Summer forecast for real GDP growth exhibited an average error of 1.5 percentage points between 2012-2019; optimism bias historically, reversed recently.
    - Revenue forecasts are unbiased and have smaller than average error compared to EU peers.
  - State Budget Strategy (MTBF) provides four-year fiscal projections; serves as Stability Programme submitted to EU by end of April.
  - Two-stage budget formulation: medium-term projections set ceilings for annual budget preparation.
- Budget documentation and timing:
  - Budget submitted to Riigikogu in September and adopted in December in last six years; timetable respected.
  - Constitutional and legal framework sets key dates; State Budget Act (2014) details processes, fiscal rules, MTBF timeline, performance areas and programs.
  - In-year reporting weakness: in-year budget execution reports lack comparable expenditure breakdowns; carryovers average around 5 percent of total expenditure.
- Investment planning and PIMA:
  - General government investment averaged 5.2 percent of GDP over last decade (range 4.5–6.5 percent).
  - Investment documentation lacks total project costs for multi-annual projects; appraisal practices not standardized; ex-post evaluation weak.
  - PIMA recommendations: standardize appraisal methodology; central monitoring; present total costs for major multi-year projects; strengthen PPP oversight; establish pipeline of prepared projects.
- Performance budgeting:
  - Piloted in 2019; 2020 budget programs: 21 performance areas and 45 lower-level programs; 2021 consolidated into 17 performance areas.
  - Full performance outcome reporting expected in 2021.
- Public participation:
  - Assessment: Not Met — no accessible citizen summary or formal citizen participation mechanism; local governments provide consultation processes.
- Supplementary budget and contingency:
  - Legal rules on supplementary budgets well regulated; 2020 Supplementary Budget Act projected an 11.6 percent shortfall of revenue (EUR 1.4 billion) and a 6 percent increase in spending (EUR 0.7 billion); additional financing needs of EUR 2 billion.
- Forecast reconciliation:
  - Vintage changes reported for core macro variables but reconciliation is partial; recommendation to include comprehensive forecast reconciliation with explanations.
- Selected forecast vintage differences (example table excerpt):
  - Real GDP growth difference (previous vs current): -0.1 -0.1 -0.3 -0.2 -0.3 -
  - Nominal budgetary position of general government (percent of GDP) difference: -0.7 -0.9 -0.3 0.2 0.2 -
  - General government debt (percent of GDP) difference: -0.6 0.5 0.8 0.9 1.2 -
- Priority recommendations on forecasting and budgeting:
  - Recommendation 2.1: Strengthen budget unity by including extrabudgetary funds and social security funds’ financial plans in budget annex and introduce regulatory cap on carryovers. (MoF, for 2022 budget)
  - Recommendation 2.2: Improve transparency and effectiveness of investment decisions by implementing PIMA recommendations; publish total project costs and standardize appraisals. (MoF and LMs, medium term)
  - Recommendation 2.3: Facilitate citizen understanding and involvement by developing a ‘Citizens Guide’ and formal participation process. (MoF, 2022–2023)
  - Recommendation 2.4: Include comprehensive forecast reconciliation table with explanations. (MoF, for 2023-2026 budget strategy)

### Selected numerical highlights from budget and fiscal tables (preserved exactly)
- Carryovers averaged just over 5 percent of total expenditure over the last 6 years.
- Outturns averaged around 97 percent of initial budget (6 years up to 2019).
- Social security contributions (EUR millions): 2015: 1,110; 2016: 1,179; 2017: 1,282; 2018: 1,407; 2019: 1,541.
- Own-source revenue (percent of GDP): 2015: 15.2; 2016: 15.0; 2017: 15.1; 2018: 15.2; 2019: 15.6.
- Transfers to extrabudgetary funds (EUR millions): 2015: 796; 2016: 743; 2017: 810; 2018: 867; 2019: 849.

### Fiscal risks — disclosure, specific risks, and management
- Disclosure practices:
  - Risk-related information exists across MoF forecasts, Consolidated Annual Report, SOE Ownership Report, Bank of Estonia Financial Stability Review, Stability Programme, National Risk Assessment, Pensions sustainability review, Local government financial capability radar.
  - No consolidated, published fiscal risk statement covering full range of risks.
- Macroeconomic risks:
  - Estonia exhibits relatively high macroeconomic volatility; risk scenarios included in forecasts but lack probabilistic likelihoods and full sensitivity analysis.
  - Summer 2019 risk scenario example (Percent of GDP): General government budgetary position: -0,3% (2019), -0,4% (2020), -0,8% (2021); differences from base: 0,0% (2019), -0,5% (2020), -0,8% (2021).
- Maximum total exposure to selected fiscal risks: 110.3 percent of GDP (Table 3.3 main elements):
  - Explicit contingent liabilities: €5 199 million — 18.5 percent of 2019 GDP.
    - Ownership interest in international institutions: €1 538 million — 5.5 percent of 2019 GDP.
    - Guarantees given: €386 million — 1.4 percent of 2019 GDP.
    - EFSF: €1 543 million — 5.5 percent of 2019 GDP.
    - Grant award and pass through liabilities: €437 million — 1.6 percent of 2019 GDP.
  - Public sector total liabilities (excluding equity) of financial and non-financial public corporations: €11 622 million — 41.3 percent of 2019 GDP.
  - Financial sector maximum extent of deposit insurance guarantee (net of assets): €14 017 million — 50.0 percent of 2019 GDP.
  - Contingent events — Natural disasters: €130 million — 0.5 percent of 2019 GDP.
  - Long-term risks:
    - NPV of health spending change (2019-2050): €6 266 million — 22.3 percent of 2019 GDP (IMF Fiscal Monitor).
    - Social security pension liabilities: €68 772 million — 244.6 percent of 2019 GDP.
  - Including long-term health and pension implicit liabilities increases total exposure by a further 266.9 percent of GDP.
- Contingency reserves and stabilization:
  - Unforeseen Expenditure Reserve spending averaged 0.5 percent of GDP between 2016 and 2019.
  - Stabilization reserve operates as a sovereign wealth fund; no expenditure incurred since 2009.
- Assets and liabilities management (selected figures):
  - 2019 public sector figures (excluding implicit social security pension liabilities):
    - Total assets: EUR 40,344 million (143.5 percent of GDP).
    - Total liabilities: EUR 17,333 million (63.1 percent of GDP).
    - Net asset position: EUR 22,610 million (80.4 percent of GDP).
  - Total general government debt: 8.4 percent of GDP at end-2019, rising to 18.5 percent by October 2020.
  - Average maturity of debt: 7.34 years.
  - Liquid reserves around 60 percent of government borrowing in 2020.
- Guarantees:
  - State limit on total value of outstanding guarantees for 2020: EUR 1,572 million.
  - State-backed guarantees totaled 1.5 percent of GDP at end-2019 (7.0 percent of GDP including EFSF liabilities).
- PPPs:
  - Assessment: Not met — no systematic disclosure of contingent liabilities from PPPs; current PPP liabilities less than 0.1 percent of GDP.
- Financial sector resilience:
  - Guarantee Fund current assets (2019): EUR 242 million (1.7 percent of guaranteed deposits).
  - Total maximum potential liabilities from deposit insurance up to EUR 14,259 million (around 50 percent of 2020 GDP); big banks’ maximum up to EUR 13,054 million; smaller banks’ up to EUR 1,205 million.
- Natural resources and environment:
  - Shale oil value added: 1.4 percent of GDP.
  - Forestry value added: 1.5 percent of GDP.
  - Forest resources valued at 2.5 percent of GDP (EUR 692 million) end-2019.
  - Royalties from mineral resources: EUR 20 million (0.1 percent of budgetary central government revenue) in 2019.
  - Dividends and income tax from State Forest Management Centre: EUR 51 million (0.3 percent of budgetary central government revenue).
- Long-term sustainability:
  - Population expected decline by 8 percent by 2070; old-age dependency ratio expected to increase by 40 percent by 2070.
  - MoF has published long-term projections to 2070 in previous documents; 2020 documents omitted due to Covid-19 uncertainty.

### Priority recommendations on fiscal risks (selected)
- Recommendation 3.1 (MoF, medium term):
  - Deepen macroeconomic risk analysis with more extensive sensitivity analysis and probabilistic fan-charts; include retrospective comments on realization of prior risk scenarios.
- Recommendation 3.2 (MoF, medium term):
  - Prepare and publish an annual Fiscal Risk Statement discussing size and nature of material fiscal risks, including evaluation of likelihood and potential fiscal impact of guarantees being called and potential cost of emergencies.
- Recommendation 3.3 (MoF, medium term):
  - Regularly publish long-term projections for the health fund and health expenditure sustainability similar to pensions sustainability.
- Recommendation 3.4 (MoF, short term):
  - Develop and publish a comprehensive asset and liability management strategy covering short-, medium- and long-term policy toward government assets, liabilities, and net worth.
- Recommendation 3.5 (MoF in cooperation with SOEs, short term):
  - Identify SOEs undertaking quasi-fiscal activities, cost these accurately and report on them in the annual SOE performance report.

### Government Fiscal Transparency Action Plan (selected items related to natural resources and valuation)
- 1.1(a): Expand coverage of non-financial assets in the general government balance sheet by including stocks of mineral resources; include an estimation of shale oil reserves in the 2020 consolidated balance sheet (MoF and Ministry of Environment); elaborate accounting guidance on valuation of mineral resources (MoF and Ministry of Environment).
- 1.1(b): Report stocks of non-financial assets at market value and holding gains/losses and other changes in volume; elaborate accounting guidance and implement policies to apply market valuation in PSFS (MoF).

### Annex for the 2023 budget (selected action items and timing)
- Carryovers and medium-term framework:
  - Amend State Budget Act to reintroduce a cap on overall size of carryovers; apply new cap to the 2023 budget. (MoF)
  - Disclose outturns of two previous years alongside current estimated outturn and four years of projection in main MTBF tables for 2022-2025; require program documents to include at least two outturn years for 2023 draft budget. (MoF)
- Investment transparency and monitoring:
  - Establish a centralized project monitoring database with financial and physical progress; create project review process for projects at risk. (MoF/MoP and LMs)
  - Require line ministries to include total project costs (historical and future) in multi-year investment plans for 2022-2025; use new database to generate multi-year plans for 2023-2026. (MoF, LMs, MoP)
  - Standardize appraisal requirements and ensure all large projects follow new requirements. (MoF/MoP/LMs/SOEs)
- Performance budgeting:
  - Ensure budget expenditure and output/outcome results from 2020 performance budgeting are presented and analyzed in 2022 budget documents; consult stakeholders and iterate processes. (MoF)
- Citizen participation:
  - Publish non-technical summaries of Spring forecast and proposed budget; expand distributional analysis; develop options paper for citizen participation and implement chosen option in preparation for 2023 budget. (MoF)
- Forecast reconciliations:
  - Adopt a comprehensive forecast reconciliation format and include reconciliation table with explanations in State Budget Strategy and Draft Budget Memorandum for 2023-2026. (MoF, in consultation with CB, FC and experts)
- Fiscal risk actions:
  - Draft internal paper listing full range of fiscal risks with estimation of exposure, likelihood, and management approach for 2022 budget; produce public Fiscal Risk Statement for 2023. (MoF)
  - Legislate or commit to periodic health fund long-term sustainability analysis beginning 2022. (MoF)
  - Publish a whole-of-public sector asset and liability management strategy; evaluate guarantees’ likelihood and fiscal impact; update guidance on estimating costs of emergencies; identify and cost SOE quasi-fiscal activities and include in SOE annual report. (MoF; Ministry of Interior; MoP; SOEs)

_Italic: Source: PREFACE and EXECUTIVE SUMMARY from the IMF Fiscal Transparency Evaluation (Estonia), mission conducted November 18–December 9, 2020._

### PREFACE ___________________________________________________________________________________________________ 6

### 1estea2021003 - PREFACE ___________________________________________________________________________________________________ 6

### Preface: mission scope and participants
- The Fiscal Transparency Evaluation (FTE) was conducted remotely during November 18 to December 9, 2020, at the request of Mr. Martin Helme, Minister of Finance.
- The FTE assessed Estonia’s fiscal transparency institutions and practices against the first three pillars of the IMF’s Fiscal Transparency Code.
- Meetings were held with representatives from:
  - Ministry of Finance: Accounting Department; Budget Development Department; Fiscal Policy Department; Local Governments Financial Management Department; Public Governance Department; State Asset Department; State Budget Department; State Shared Service Center; State Treasury Department.
  - Ministry of Economy and Communication: Budget Department; Energy Policy Department; Transport Development and Investments Department.
  - Ministry of Environment: Advisor to the Management.
  - Ministry of Interior: Advisor of vital services and emergency risk assessment, Rescue and Crisis Management Policy Department.
  - Bank of Estonia: Economic Policy and Forecast Division; Financial Markets Policy Department; Financial Stability Department; Statistics Department.
  - Statistics Estonia: Economic and Environment Statistics Department.
  - Tallinn City financial management and treasury team.
  - Fiscal Council; State Budget Control Select Committee; Finance Committee of Parliament.
- The evaluation is based on information available at the time of the virtual mission in December 2020.
- Findings and recommendations represent the views and advice of the IMF mission team and do not necessarily reflect those of the authorities.
- Unless otherwise specified, data presented are IMF mission team estimates and not official government estimates.

### Executive summary: overall assessment and main findings
- Estonia meets good or advanced practices on 27 out of the 36 principles of the Fiscal Transparency Code, basic practice on a further six principles, and three principles are not met.
- Strengths:
  - Fiscal Reporting: Estonia complies with the comprehensive general government reporting framework established by the European Union and the IMF’s Special Data Dissemination Standard.
  - Public sector accounting applies equally to public corporations, placing Estonia at the forefront of public sector reporting.
  - Public Sector Financial Statements enabled IMF staff estimates of a comprehensive public sector wealth position.
  - Fiscal statistics are produced by the professionally independent Statistics Estonia.
  - Regular reconciliations are published and audit opinions are largely clean from the independent National Audit Office.
- Areas with scope for improvement:
  - Fiscal Forecasting and Budgeting.
  - Fiscal Risk Analysis and Management.
  - Specific improvements feasible with existing systems, knowledge, and capacity.
- Key quantitative estimates for 2019 (IMF mission team estimates):
  - Revenue: 46.3 percent of GDP.
  - Expense: 44.6 percent of GDP.
  - Asset holdings: 143.5 percent of GDP.
  - Liabilities: 63.1 percent of GDP.
  - Net worth: 80.4 percent of GDP.
- Caveats on valuation:
  - Net worth is underestimated primarily due to using historical cost valuations for fixed assets and excluding subsoil assets from the balance sheet.
  - Recognizing fair value (market value) of assets and including subsoil assets would change the estimates and facilitate disclosure of other economic flows.

### Fiscal reporting: strengths and remaining issues
- Strengths:
  - Public sector accounting and fiscal statistics follow international, regional and national reporting standards and cover the entire public sector.
  - Reports generally include appropriately classified information on accrual-based revenue and expenditure, transactions in assets and liabilities, some revaluations and balance sheets.
  - Estimates on foregone tax expenditure are published biannually.
  - Fiscal reports are produced on a timely basis.
- Remaining issues:
  - In-year budget execution reporting lacks sufficient detail on expenditure to allow assessment of all fiscal aggregates against budgeted amounts and is not published in a user-friendly format.
  - Underestimation of government assets (noted: 33.9 percent of GDP on a consolidated basis) in the public sector balance sheet requires:
    - Revaluation of significant fixed assets.
    - Valuation and inclusion of subsoil assets in the balance sheet.
  - Recognizing fair/market valuations could improve asset management and allow reporting of other economic flows.

### Fiscal forecasting and budgeting: processes and suggested enhancements
- Current practices:
  - Two-stage budget formulation approach: first-stage medium-term projections provide ceilings for second-stage budget formulation.
  - Budget processes regulated by clear and modern fiscal legislation enabling orderly and timely adoption.
  - Budget execution generally proceeds as planned without frequent supplementary budgets.
  - Budget formulation is guided by fiscal rules that exceed European Union requirements; adherence assessed by the Fiscal Council.
- Suggested enhancements:
  - Present previous two years outturns and current year estimated outturn alongside 4-year budget strategy projections.
  - Expand forecast reconciliations and improve sensitivity analysis.
  - Include budget plans of extrabudgetary funds and social security funds in budget documentation to clarify transfers.
  - Publish a citizen’s guide to the budget and provide for public participation in the budget process.
  - Improve comparability of in-year budgetary reporting and compile consolidated, user-friendly monthly and quarterly execution reports.

### Fiscal risks: current practice and gaps
- Strengths:
  - Strong overview of risks related to the financial sector and local government coordination.
  - Effective understanding and management of external macroeconomic risks and long-term sustainability.
  - Well-established budget contingency framework with clear eligibility rules and processes.
  - Strong reporting and management of SOE financial performance; legislative ceilings on guarantees minimize risk.
  - Good understanding of public sector financial position through detailed asset and liability information.
- Gaps:
  - No comprehensive, single overview of fiscal risks; information is spread across various published and unpublished documents.
  - Lack of quantified likelihoods and costs for several risks:
    - No quantification that guarantees will be called.
    - Potential costs of environmental risks and natural resource risks are not available.
- Suggested action:
  - Coordinate and publish an annual Fiscal Risk Statement that discusses the size and nature of the full range of specific fiscal risks and their costs, quantifying likelihoods where feasible.

### Key recommendations (excerpt of chapter recommendations and Action Plan)
- Improve integrated fiscal reporting in consolidated public sector financial statements and fiscal statistics by:
  - Including stocks of mineral resources.
  - Using fair/market valuations of assets.
  - Reporting on other economic flows.
- Consolidate budget execution information, currently internal or fragmented, into monthly and quarterly reports that allow clear assessment of fiscal aggregates against budgeted amounts.
- Strengthen budget unity by including extrabudgetary funds and social security funds’ financial plans in budget annexes.
- Improve fiscal forecasting by presenting previous two years outturns and current year estimated outturn and 4-year budget strategy projections together with forecast reconciliation and improved sensitivity analysis.
- Improve transparency and effectiveness of public investment decisions by implementing the recommendations of the PIMA report.
- Facilitate improved citizen understanding of, and involvement in, the budget process (e.g., publish a citizen’s guide).
- Coordinate the publication of an annual Fiscal Risk Statement that discusses the size and nature of the full range of specific fiscal risks and their costs.

### Public Sector Financial Overview, 2019 (selected figures from Table 0.2)
- Revenue: 46.3 percent of GDP (consolidated general government).
- Expenditure: 47.1 percent of GDP (consolidated general government).
- Expense: 44.6 percent of GDP (consolidated general government).
- Investment in Non-financial assets: 2.4 percent of GDP (consolidated general government).
- Gross operating balance: 5.8 percent of GDP (consolidated general government).
- Net lending/borrowing: -0.8 percent of GDP (consolidated general government).
- Assets (total): 143.5 percent of GDP (consolidated general government).
  - Nonfinancial assets: 93.6 percent of GDP (consolidated general government).
  - o/w Mineral resources: 1.4 percent of GDP.
  - Financial assets: 49.9 percent of GDP (consolidated general government).
- Liabilities (total): 63.1 percent of GDP (consolidated general government).
  - Liabilities other than equity: 61.6 percent of GDP (consolidated general government).
  - o/w civil servants pension entitlements: 10.1 percent of GDP.
- Equity (public corporations memorandum): 1.5 percent of GDP (consolidated general government context).
- Net worth: 80.4 percent of GDP (consolidated general government).
- Net financial worth: -13.2 percent of GDP (consolidated general government).
- Memorandum items:
  - Social security pension entitlements: 244.6 percent of GDP.
  - Net worth including social security pension entitlements: -191.1 percent of GDP.

_Italic: Source: PREFACE and EXECUTIVE SUMMARY from the IMF Fiscal Transparency Evaluation (Estonia), mission conducted November 18–December 9, 2020._

### 1.      Fiscal reports should provide a comprehensive, relevant, timely and reliable

### 1.      Fiscal reports should provide a comprehensive, relevant, timely and reliable overview of the government’s financial positions and performance

### Overview
- Chapter assesses the quality of fiscal reporting in Estonia against the Fiscal Transparency Code (FTC) across four dimensions:
  - The coverage of institutions, stocks, and flows;
  - The frequency and timeliness of fiscal reports;
  - The quality of fiscal reporting;
  - The integrity of fiscal reports.

### Reporting framework and data flow
- Fiscal reports include: the budget, in-year budget execution reports, financial plans of government foundations and state-owned enterprises, fiscal statistics, and annual financial statements.
- Expected characteristics of fiscal reports:
  - Cover all institutional units in the public sector classified according to international standards;
  - Record all assets, liabilities, revenue, expenditure, financing, and other economic flows;
  - Be published in a frequent and timely manner;
  - Reconcile different balances and have comparable data across reports;
  - Be prepared by an independent agency (for statistics) and scrutinized by an independent audit institution (for financial statements).
- Estonia follows international/regional standards:
  - Fiscal statistics: European System of Accounts 2010 (ESA 2010);
  - Government financial statements: national accounting standards broadly following International Public Sector Accounting Standards (IPSASs).
- Data compilation:
  - State Shared Service Centre (SSSC) sets unified reporting requirements and collects monthly, quarterly and annual data into the Public Sector Financial Statements (PSFS) database.
  - SSSC and Statistics Estonia (SE) extract source data and compile respective fiscal accounts and reports using their methodologies.

### Main fiscal reports (coverage, basis, frequency, timeliness)
- Monthly State Budget execution report:
  - Compiled by MoF, published on SE website within a month of period end;
  - Presents state revenue and main expenditure categories of budgetary central government;
  - Prepared on an accrual basis since 2017 and reconciled to the state’s financial statements.
- Consolidated Annual Report of the State:
  - Produced by MoF, audited by National Audit Office (NAO);
  - Presents annual implementation of State Budget and financial statements for consolidated public sector and subsectors;
  - Accrual-based statements: balance sheet, statement of financial performance, cash-flow statements, statement of changes in net assets, explanatory notes and annexes.
- Monthly report on revenue and expenditure:
  - Published by MoF following EC Directive 2011/85;
  - Presents data for all general government subsectors compiled following financial statements methodology.
- Contingent liabilities and other fiscal indicators:
  - Annual data on liabilities of public corporations and non-profit institutions classified outside general government, government guarantees, non-performing loans held by government, and government participation in public corporations’ capital;
  - Based on EC Directive 2011/85.
- Quarterly General Government National Accounts:
  - Produced by SE in accordance with ESA 2010;
  - Present accrued revenue and expenditure, transactions in financial assets and liabilities, a financial balance sheet, and data on Maastricht debt.
- Annual General Government National Accounts:
  - Produced by SE in accordance with ESA 2010;
  - Include revenue, expenditure, financing, financial balance sheet, COFOG expenditure, and detailed taxes and social contributions.
- Excessive Deficit Procedure (EDP) tables:
  - Compiled biannually by SE; present annual data on general government deficit and debt and reconciliations (including stock-flow-adjustment).
- State Ownership Report:
  - Produced by MoF annually in accordance with the State Assets Act; presents overview and analysis of financial performance of state-owned commercial companies and foundations.

- Table excerpted (selected frequencies and timeliness as presented):
  - Monthly State Budget Execution (MoF): Accrual; Monthly; Timeliness: 25d
  - Monthly revenue/expense (MoF): Accrual; Monthly; Timeliness: 1m
  - Quarterly non-financial national accounts (SE): Accrual; Quarterly; Timeliness: 3m
  - Quarterly financial accounts and financial balance sheet (SE): Accrual; Quarterly; Timeliness: 3m
  - Annual Financial Statements of the Public Sector (MoF): Accrual; Annual; Timeliness: 6m
  - State Ownership Report (MoF): Accrual; Annual; Timeliness: 10m
  - Biannual EDP Notification (SE): Accrual ESA 2010; Annual; Timeliness: 3m, 9m (biannual)
  - Sectoral General Government accounts (SE): Accrual ESA 2010; Annual; Timeliness: 9m
  - Contingent liabilities and other fiscal indicators (SE, MoF): Accrual IPSAS; Annual; Timeliness: 9m
  - General Government expenditure by function (SE): Accrual COFOG; Annual; Timeliness: 12m
  - Detailed Tax and Social Contribution Receipts (SE): Accrual (time adjusted cash) ESA 2010; Annual; Timeliness: 10m
  - Accrued to date pension entitlements in social insurance (SE): Accrual ESA 2010; 3 years; Timeliness: 24m

### Coverage of institutions (findings)
- In 2019 Estonia’s public sector comprises 2,719 institutional units, subsector breakdown:
  - Central government: 159 budgetary organizations and 109 extrabudgetary funds (includes state chancellery, 11 ministries, 140 agencies, 7 constitutional units; government employee civil service pension fund and social security pension fund integrated with central budgetary organizations; extrabudgetary funds include 22 public institutions, 74 state foundations, 13 commercially oriented non-market producers).
  - Local government: 2,214 units (79 municipalities, 1,904 other budgetary organizations, 213 foundations, 18 non-market enterprises).
  - Social security funds: Health Insurance Fund and Unemployment Fund (Pension Social Security Fund included in state budget and classified in central government).
  - Public nonfinancial corporations: 233 corporations (31 state owned enterprises, 202 enterprises owned by municipalities; mostly energy, water, sewerage, waste management).
  - Public financial corporations: 2 (Bank of Estonia and KredEx).
- Public sector expenditure in 2019:
  - Total public sector expenditure estimated at 47 percent of GDP.
  - General government expenditure: 37.8 percent of GDP (consolidated); almost two-thirds through central government, one-third by local governments and social security funds.
  - Public corporations expenditure: 8.9 percent of GDP; more than 95 percent spent by public nonfinancial corporations.
- Table 1.2 summary (selected entries, Percent of GDP unless otherwise stated):
  - Public Sector: Number of entities 2 719; Revenue 46.3; Expenditure 47.1; Net lending -0.8; Intra-PS Expenditure 47.1; Percent of total 100.0
  - General Government: Number of entities 2 484; Revenue 38.3; Expenditure 38.2; Net lending 0.1; Intra-PS 0.4; End-Point Expenditure 37.8; Percent of total 80.2
  - Central Government: Number of entities 268; Revenue 32.7; Expenditure 32.8; Net lending -0.1; Intra-PS 9.1; End-Point Expenditure 23.6; Percent of total 50.2
  - Budgetary Central Gov’t: Number 159; Revenue 29.8; Expenditure 30.2; Net lending -0.4; Intra-PS 12.2; End-Point Expenditure 18.1; Percent of total 38.4
  - Extrabudgetary Funds: Number 109; Revenue 6.1; Expenditure 5.8; Net lending 0.3; Intra-PS 0.2; End-Point Expenditure 5.6; Percent of total 11.8
  - Local Government: Number 2 214; Revenue 9.8; Expenditure 9.9; Net lending -0.1; Intra-PS 0.0; End-Point Expenditure 9.9; Percent of total 21.1
  - Social Security Funds: Number 2; Revenue 7.3; Expenditure 7.1; Net lending 0.3; Intra-PS 2.9; End-Point Expenditure 4.2; Percent of total 9.0
  - Nonfinancial public corporations: Number 233; Revenue 8.4; Expenditure 9.5; Net lending -1.1; Intra-PS 0.6; End-Point Expenditure 8.9; Percent of total 18.9
  - Financial public corporations: Number 2; Revenue 0.6; Expenditure 0.4; Net lending 0.2; Intra-PS 0.0; End-Point Expenditure 0.4; Percent of total 0.9
- Consolidated Annual Financial Statements of the State:
  - Most comprehensive, covering entire public sector;
  - Prepared by SSSC using Accounting Standards Board guidelines based on IPSAS;
  - Presents balance sheet, statement of financial performance, cash-flow, statement of changes in net assets for each subsector.
- Classification and coverage:
  - Institutional coverage in financial statements determined by SE classification per ESA 2010/MGDD sectorization rules.
  - All new public sector units registered by SSSC; SE regularly assesses classification.
  - Some methodological differences between accounting and statistical standards cause differences in expenditure levels; “unreported” expenditure of 8.9 percent of GDP reflects methodological differences rather than institutional omission.

### Coverage of stocks (findings and gaps)
- PSFS contains balance sheets of consolidated general government and public sector; SE publishes general government balance sheet quarterly (does not include non-financial assets).
- SE compiles annual data on stocks of fixed assets and inventories at market prices covering all sectors (ESA 2010 Table 26), published two years after reporting year; excludes mineral resources and other non-produced assets and valuables.
- Completeness and valuation gaps contribute to large underestimation of public sector stocks:
  - Gaps contribute to underestimation of at least 69 percent of GDP on an unconsolidated basis, or almost 40 percent on a consolidated basis (2019).
- Specific gaps identified:
  - Subsoil assets:
    - Stocks of subsoil assets not included in balance sheet;
    - Shale oil reserves: discounted cashflow valuation by Eesti Energia at least EUR 392 million, equivalent to 1.4 percent of GDP in 2019.
    - Significant passive reserves of phosphorite resources exist; reliable monetary estimate not available.
  - Other non-financial assets:
    - MoF records non-financial assets predominantly at historic prices;
    - Fixed assets acquired during Soviet times revalued only once in 2005;
    - Difference between reported value and estimated market value of public sector fixed assets (based on SE ESA 2010 Table 26) is 32.5 percent of GDP in 2019.
  - Equity of public corporations:
    - Balance sheet does not present a comprehensive picture of equity capital held by public sector units;
    - Equity capital derived from liability side of financial statements of municipal-controlled public corporations significantly higher than holdings of equity in local government assets;
    - Adjustment of non-financial assets to market prices would further increase equity capital on both sides, with no impact on consolidated public sector balance sheet due to elimination in consolidation;
    - Estimated amount of unreported equity is 35.5 percent of GDP on an unconsolidated basis in 2019.
  - Social security pension liabilities:
    - Implicit liabilities of social security pension scheme treated off-balance sheet per statistical standards;
    - Presenting accrued pension entitlements as a memo item would enhance reporting and policy discussion on sustainability;
    - Estimated value of accrued pension entitlements (ESA 2010 Transmission Program Table 28) is 244.6 percent of GDP.
- Aggregate stock estimates (end-2019):
  - Consolidated public sector asset holdings estimated around 143.5 percent of GDP.
  - Consolidated public sector liabilities estimated around 63.1 percent of GDP.
  - Public sector net worth estimated 80.4 percent of GDP.
  - Public sector net financial worth estimated -13.2 percent of GDP.
  - Considering accrued implicit social security pension liabilities, public sector net worth is estimated at a negative value (implicit pension liability inclusion reverses net worth sign).

### Key implications and suggested reporting enhancements (from text)
- Enhancements to public sector balance sheet completeness and valuation would provide a more comprehensive view of public wealth. Specific considerations:
  - Include subsoil assets (e.g., shale oil reserves valued at EUR 392 million, 1.4 percent of GDP in 2019) where reliable valuations exist;
  - Revalue non-financial fixed assets toward market values to reflect closer-to-market valuations (current gap: 32.5 percent of GDP);
  - Improve comprehensive presentation of equity of public corporations and reconcile municipal-level equity holdings with corporate financial statements (estimated unreported equity 35.5 percent of GDP on unconsolidated basis);
  - Present accrued implicit social security pension liabilities as a memo item (estimated 244.6 percent of GDP) to facilitate sustainability analysis.

*Source: 1estea2021003 - 1.      Fiscal reports should provide a comprehensive, relevant, timely and reliable (PDF).*

### 191.1 percent of GDP. The main  components include:

### 1estea2021003 - 191.1 percent of GDP. The main  components include:

### Public sector balance sheet composition (2019)
- Total estimated consolidated public sector net worth components sum to 191.1 percent of GDP.
- Nonfinancial assets: 93.6 percent of GDP, primarily fixed assets.
- Financial assets: 49.9 percent of GDP, on a consolidated basis mainly assets held by the Central Bank (debt securities and loans).
- Liabilities other than equity: 61.6 percent of GDP, primarily on a consolidated basis:
  - Central Bank deposits: 30.9 percent of GDP (composed of banknotes in circulation 12 percent of GDP and liabilities to euro area credit institutions related to monetary policy operations 17 percent of GDP).
  - Loan debt of general government: 7.5 percent of GDP.
  - Loan debt of non-financial corporations: 7.1 percent of GDP.
  - Civil servants pension liabilities: 10.1 percent of GDP.
- Note on pension entitlements estimate: The 2019 estimate used the percentage share of 2015 pension entitlements to GDP applied to 2019 GDP (based on Table 29 “Accrued to-date pension entitlements in social insurance”).

### Comparative net worth and asset/liability positions
- Consolidated general government assets estimated at 103.8 percent of GDP, of which 51.7 percent of GDP represents nonfinancial assets.
- Consolidated public sector liabilities: 63.1 percent of GDP.
- General government liabilities (including only civil servants pension liabilities): 23.4 percent of GDP.
- Public sector net worth: 80.4 percent of GDP — larger than the average of 24 other countries that have published their net worth.

### Coverage of flows in fiscal reports (advanced)
- Fiscal reports cover:
  - Cash flows.
  - Accrual-based revenue, expenditure, and financing.
  - Partial information on other economic flows.
- Estonia’s consolidated PSFS include:
  - Statement of financial performance (accrued revenue and expense “result”).
  - Cash-flow statement (operating, investment, and financing activities reconciled with changes in cash and deposits).
  - Statement of changes in net assets (reconciliation of stocks and flows of “net assets”; does not distinguish all individual asset/liability categories).
- Valuation and revaluation issues:
  - Most assets recorded at historic prices; statement of changes in net assets does not provide comprehensive information on market impacts.
  - Estimated holding gains since 2005 on public sector fixed assets: 32.5 percent of GDP.
  - No presentation of gains/losses from holdings of mineral resources, which are not reported in the balance sheet.

### Accrued revenue/expenditure adjustments and statistical treatment
- Consolidated Annual Report of the State presents accrued revenue and expenditure with statistical adjustments aiming to align with ESA 2010.
- Adjustments mainly relate to timing of recording for:
  - Taxes (recorded following the simple time-adjusted cash method).
  - Pensions (provisions eliminated and replaced by related cash flows).
  - EU grants.
  - Emission trading rights.

### Other economic flows (limitations)
- SE follows ESA 2010 but compilation of other economic flows (holding gains/losses and other volume changes) is challenging due to limited source data; largely calculated as a residual.
- SE publishes only total other economic flows in financial assets and liabilities (omits non-financial assets; does not distinguish revaluation vs. volume changes).
- Table: Estonia: Other Economic Flows, General Government (Percent of GDP)
  - Other economic flows in non-financial assets: n.a. n.a. n.a. n.a. n.a. (2015–2019)
  - Other economic flows in financial assets: 0.1 (2015), 0.7 (2016), 1.5 (2017), 0.4 (2018), -1.3 (2019)
  - Other economic flows in liabilities: 0.0 (2015), 0.4 (2016), 0.0 (2017), 0.0 (2018), -0.2 (2019)

### Coverage of tax expenditure (good)
- MoF publishes estimates of foregone revenue (exemptions, reduced rates, tax credits) but not outturns.
- Since 2012, State Budget Strategy lists over 20 distinct tax provisions; most significant include reduced VAT rates on accommodation, medicines and medical products, and reduced excise duties on diesel fuel for certain users.
- Tax expenditure:
  - Fell sharply in 2018 after removal of some exemptions.
  - Estimates around 0.9 percent of GDP, or 3.2 percent of total revenue, based on the “first round” effects, excluding behavioral changes.
  - Level is low compared to select European countries.
- Classification and transparency shortcomings:
  - Annual budget documents classify tax expenditure by sector but do not present budgetary objectives, performance information, or legal constraints on size.
  - Supporting information on objectives and expected outcomes is provided in explanatory notes when provisions are established or amended but is not easily available to the public.
  - Annual budget documents do not present rationales or performance indicators for tax expenditures.

### Frequency and timeliness of fiscal reporting
- Monthly in-year reporting:
  - Monthly fiscal data on general government published within a month after the end of each month.
  - MoF compiles monthly budget execution data on main revenue and expenditure categories; data posted on MoF and SE data portals and downloadable within a month.
  - MoF publishes monthly revenue and expenditure data of general government and subsectors in accordance with accounting principles applied in public financial statements (CD 2011/85 EU requirements).
  - SE publishes quarterly (three months after reporting period) non-financial and financial ESA 2010 based accounts, as well as a financial balance sheet and debt for general government and subsectors.
- Timeliness of annual financial statements:
  - Annual financial statements of government prepared by end-May and published within six months after the end of each financial year.
  - State Budget Act Article 79: MoF shall submit Consolidated Annual Report of the State to NAO not later than by 30 June of the year following the accounting year; report to be published immediately after submission.
  - Consolidated Annual Report presents State Budget execution and IPSAS based financial statements for State, comprising central government, local government, consolidated general government and public sector.
  - Publication dates posted on MoF website:
    - 2019: June 30, 2020
    - 2018: July 2, 2019
    - 2017: June 29, 2018
    - 2016: July 3, 2017

### Quality of fiscal reports
- Classification (good):
  - Fiscal statistics use economic and functional classification consistent with ESA 2010; expenditure also presented by COFOG.
  - General government accounts by SE are based on financial statements produced by SSSC and adhere to internationally accepted financial reporting standards.
  - Accounting chart includes trading partner codes, COFOG functional codes, transaction type codes, and financial resource codes.
- Budget classifications:
  - Budget and budget execution reports use administrative, functional, economic classifications, and program classification introduced in 2020.
  - Economic classification distinguishes revenue, expense, investment and financing; revenue broken down by type of tax and non-tax revenue; expense broken down into grants, labor and management expense, other operating expense, and financial expense.
  - Program classification rollout: first full report on actual outcome of performance based on the 2020 budget programs expected in 2021; 2021 program classification built on around 17 high-level performance areas.
- Internal consistency (good):
  - SE publishes reconciliation of annual net financing with change in stock of general government debt twice a year (EDP T3).
  - Consolidated Annual Report presents reconciliation of cash flow statement with operating statement and balance sheet for State Budget, consolidated general government, and consolidated public sector.
  - SE prepares regular reconciliation of fiscal balance and financing; discrepancy between above-the-line and below-the-line transactions cumulated during 2016-2019: 0.05 percent of GDP.
  - No single fiscal report reconciles debt issuance and debt holders; Estonian reporting standard from 2018 does not obligate disclosure of debt holders/creditors.
  - MoF publishes some creditor data for State Treasury debt (European Investment Bank and Nordic Investment Bank); T-bills and Eurobonds holders not disclosed.
  - SE compiles but does not publish figures on holders of general government debt (grouped into ESA 2010 economic sectors); SE data indicate almost 70 percent of total general government debt is held by the rest of the world.
- Stock-flow adjustments:
  - On average 2016–2019: stock-flow adjustments were -0.1 percent of GDP (less than EU average 0.2 percent of GDP).
  - 2019 positive stock-flow adjustment mainly due to increase in government debt exceeding deficit — central government deposits accumulated from newly issued debt unspent.
  - Discrepancies between flows and change in stocks of government debt limited to EUR 13 million on average in absolute terms between 2016 and 2019.
- Historical revisions (good):
  - Revisions to historical fiscal statistics reported with explanations; SE follows established revision policy and makes regular historical revisions twice a year as part of EDP notifications.
  - Between April 2013 and October 2020, revisions to deficit for 2012–2019 were brought down by 0.2 percent of GDP on average (higher than EU average 0.1 percent of GDP).
  - Revisions to debt during 2014–2019 averaged -0.1 percent of GDP (smaller than EU average 0.2 percent of GDP).
  - Notable revisions: change from surplus to deficit in 2016 (revision by 0.6 percentage points) due to updated source data on military equipment deliveries and correction in recording of funds received from the EU; improvement in 2019 fiscal balance by 0.4 percent of GDP related to correction of preliminary figures on revenue from structural funds.

### Integrity of fiscal reports
- Statistical integrity (advanced):
  - Fiscal statistics compiled using regional ESA 2010 guidelines and prepared by the professionally independent SE.
  - SE is an arm’s length “governmental authority” under the MoF; professional independence governed by the Statistics Act and EU regulations.
  - SE is part of the European Statistical System (ESS) and follows the European Statistics Code of Practice.
  - Compliance with ESA 2010 methodology is scrutinized by Eurostat through regular Excessive Deficit Procedures (EDP) dialogue visits.

*Source: SE, MoF, and staff estimates as presented in the supplied IMF content unit.*

### 31.      Estonia’s fiscal statistics also adhere  to the Special Data Dissemination Standards

### 31. Estonia’s fiscal statistics also adhere to the Special Data Dissemination Standards (SDDS)

### SDDS observance and data dissemination
- Estonia meets the SDDS requirements since 2000.
- The SE’s website includes the National Summary Data Page of Estonia where data on central and general government operations and debt are published according to the SDDS requirements.
- Based on the IMF 2018 Observance report, Estonia met the punctuality requirement for most data categories with the exception of data on central government where some delays were observed.
- Estonia exceeded the SDDS timeliness requirements for the reporting of general government operations.

### External audit (Advanced)
- The consolidated annual financial statements of the State are audited by the independent NAO in accordance with international auditing standards.
- The NAO is a constitutional office headed by an Auditor General appointed for 5 years by the Riigikogu upon the recommendation of the President. The Auditor General may only be removed from office by the Riigikogu for incapacity lasting more than six months or conviction of a criminal offense.
- The MoF submits its consolidated annual financial statements to the NAO by June 30 each year; the NAO completes its audit report by August 31.
- Both reports are submitted by the MoF to the Riigikogu within seven working days of receiving the NAO report, and at the same time published on the MoF’s website.
- The Riigikogu generally concludes its debate on the consolidated report in November, ahead of the vote on the next year’s budget in December.
- Compliance with this audit timetable has been good.
- The NAO performs other audits using a risk-based approach, provides guidelines for third-party audits of government institutions, local governments and public corporations, and undertakes performance audits of the Health and Unemployment Insurance Funds.
- The NAO reports have consistently provided positive opinions on the financial statements in recent years, with only one qualification issued in 2019 (the first in 6 years), concerning the stock of fixed assets managed by the defense forces which the NAO was unable to reconcile.
- The NAO considers the level of accounting to be good, with few errors in the financial statements.
- The audit process benefits from the NAO’s direct access to the MoF’s accounting IT system allowing it to examine detailed transactions and to start its annual audit prior to receiving the official reports.
- The NAO raised concerns over the readability of the annual report and in 2019 raised concerns over limited in-year monitoring of budgetary expenditure despite online availability of data; the NAO follows up qualifications yearly and follows up recommendations every 3−4 years.

### Comparability of fiscal data (Good)
- The Consolidated Annual Report of the State includes a Report on the Implementation of the State Budget that presents outturn data comparable to the original budget and reconciled with the financial statements.
- The annual budget execution report:
  - Shows the actual outcome based on the budget methodology and is presented alongside financial statements based on the accounting standards of the state.
  - Includes a table comparing economic categories in the budget execution and those in the accounting financial performance statement, specifying and quantifying categories not included in the budget but reported in the statement of financial performance (e.g., change in fair value of biological assets and profit/loss from financial investments).
  - Accompanies the table with a note explaining specific methodological differences.
- The NAO assessed the reconciliation of budget execution data and financial statements and found it clearly presented in the Consolidated Annual Report of the State.
- The Consolidated Annual Report also presents a reconciliation between the financial statements and the ESA 2010-based fiscal balance, explaining differences between the general government’s operating balance from financial statements and the net lending/net borrowing compiled by the SE following ESA 2010 methodology. Differences relate to:
  - items in the financial performance statement that do not impact ESA 2010 revenue and expenditure and should be eliminated;
  - expenditure not reported in the financial performance statement that should be added into the ESA 2010 accounts;
  - adjustments to the time of recording of some categories.
- Based on the reconciliation table, the difference between the general government’s operating balance and the net lending/net borrowing accounted for -0.3 percent of GDP in 2019 and 1.1 percent of GDP in 2018.
- The MoF publishes a methodological note following EU requirements for budgetary frameworks of Member States (Directive 2011/85), explaining differences between the fiscal balance reported in the monthly report on general government revenue and expenditure and the ESA 2010 net lending/net borrowing.
- While a reconciliation between state budget execution and net lending/net borrowing is presented in the EDP reporting, there is no published reconciliation of gross revenue and expenditure data.
- The EDP notification Table 2A includes a reconciliation of the budget balance with the net lending/net borrowing of each subsector, but gross revenue and expenditure data presented in budget outturn reports and fiscal statistics are not reconciled.
- Monthly state budget execution reports present sufficient detail on revenue comparable to the budget; the expenditure side is presented at a much more aggregated level than in the budget.
  - The monthly budget implementation report prepared by the SSSC and published by SE presents only five categories of expense: (i) grants and other transfers; (ii) labor cost and operating expense; (iii) other operating expense; (iv) financial expense; and (v) purchase and maintenance of tangible and intangible assets.
- The NAO expressed concern on lack of monitoring of in-year expense in their 2020 audit on risks associated with financial forecasting and monitoring national fiscal policy.
- Parliamentary oversight committees expressed frustration with lack of information on in-year fiscal developments, particularly on the expenditure side; waiting for annual financial reports is insufficient for month-to-month monitoring.

### Conclusion: strengths and areas for improvement
- Fiscal reporting in Estonia is well established and meets good or advanced practices in all but one area.
- Strengths:
  - Fiscal reports follow international, regional, and national reporting standards and cover the entire public sector.
  - Financial statements are compiled on an accrual-basis and monthly, quarterly and annual source data are comprehensively captured in an electronic system.
  - Institutional coverage, timeliness and frequency of reporting place Estonia at the forefront of good fiscal reporting practices.
  - SE is an independent institution subject to the European Statistics Code of Practices and uses source data to report fiscal statistics in accordance with ESA 2010.
  - Integrity of financial statements is ensured by regular NAO audits; limited and insignificant qualifications indicate high data quality.
- Areas for improvement:
  - In-year budget execution reports are weak on reporting a breakdown of expenditure comparable to the budget, hampering in-year monitoring.
  - Fiscal report formats could be more user-friendly and adapted to various users; consider summary reports on overall performance with supplementary detailed reports.
  - Deficiencies exist in recognition and valuation of non-financial assets, resulting in underestimation of government asset values.
  - No ceiling on the size of tax expenditure; policy objectives behind existing tax expenditure could be more clearly communicated and monitoring of actual costs (rather than only estimated costs) could be improved.

### Priority recommendations for improving transparency of fiscal reporting
- Recommendation 1.1: Improve integrated fiscal reporting in the consolidated PSFS and fiscal statistics by:
  - including data on stocks of mineral resources;
  - using fair/market valuation of assets and liabilities;
  - reporting on holding gains/losses and other changes in the volume of assets and liabilities.
  - (MoF and SE, medium term)
- Recommendation 1.2: Improve disclosure and management of revenue loss due to tax expenditure by:
  - requesting line ministries to prepare rationales and performance indicators for tax expenditure in their respective functional areas;
  - including tax expenditure outturns alongside estimates for the budget year;
  - including a section on tax expenditure in the annual budget documentation that details their policy rationale and performance information that allows the impact of tax expenditure to be monitored.
  - (MoF, for the 2022 State Budget Strategy)
- Recommendation 1.3: Consolidate internally available or fragmented information into more user-friendly disseminated reports on:
  - debt issued and its holders by the ESA 2010 sectors;
  - detailed monthly and quarterly comparable budget execution reports that allow for a clear assessment of all fiscal aggregates against budgeted amounts;
  - a statement of general government operations presenting reconciliation of above and below the line operations;
  - a bridge table between the old and new GFS time series for major revisions;
  - monthly spending from the contingency reserve.
  - (MoF and SE, medium term)

### Key statistics and figures (preserved exactly)
- NAO appointment term: 5 years.
- MoF submission deadline to NAO: June 30 each year.
- NAO completes audit report by: August 31.
- Reports submitted by MoF to Riigikogu within: seven working days of receiving the NAO report.
- Difference between general government operating balance and net lending/net borrowing: -0.3 percent of GDP in 2019 and 1.1 percent of GDP in 2018.
- Five categories of expense in monthly budget implementation report: (i) grants and other transfers; (ii) labor cost and operating expense; (iii) other operating expense; (iv) financial expense; and (v) purchase and maintenance of tangible and intangible assets.
- Table 1.5 excerpted numeric highlights:
  - Market value of fixed assets is higher by 32.5 per cent of GDP (coverage of stocks).
  - Unreported natural resources: 1.4 percent of GDP (coverage of stocks).
  - Accumulated holding gains on public sector fixed assets accounted for 32.5 of GDP since 2005.
  - Estimated revenue loss from tax expenditure: 0.9 per cent of GDP.
- Table 2.1: Transfers to extrabudgetary funds (EUR millions): 2015: 796; 2016: 743; 2017: 810; 2018: 867; 2019: 849.
  - Current transfers (EUR millions): 2015: 633; 2016: 657; 2017: 688; 2018: 752; 2019: 752.
  - Capital transfers (EUR millions): 2015: 163; 2016: 86; 2017: 122; 2018: 115; 2019: 97.
  - Share of State Budget expenditure (percent): 2015: 11.9; 2016: 10.8; 2017: 11.1; 2018: 10.6; 2019: 9.8.
  - Share of extrabudgetary funds’ revenue (percent): 2015: 58.7; 2016: 57.2; 2017: 55.0; 2018: 53.9; 2019: 48.6.
- Table 2.2: Social security contributions (EUR millions): 2015: 1,110; 2016: 1,179; 2017: 1,282; 2018: 1,407; 2019: 1,541.
  - Share of State Budget expenditure (percent): 2015: 16.6; 2016: 17.2; 2017: 17.5; 2018: 17.2; 2019: 17.7.
  - Share of HIF and UIF revenue (percent): 2015: 97.6; 2016: 95.8; 2017: 88.6; 2018: 79.0; 2019: 74.4.
- Table 2.3: Own-source revenue (percent of GDP): 2015: 15.2; 2016: 15.0; 2017: 15.1; 2018: 15.2; 2019: 15.6.
  - Social security contributions (percent of GDP): 2015: 11.3; 2016: 11.4; 2017: 11.4; 2018: 11.7; 2019: 11.8.
  - Other own source revenue (percent of GDP): 2015: 3.9; 2016: 3.6; 2017: 3.7; 2018: 3.5; 2019: 3.7.
- Reported general government own source revenue amounted to around 3.7 percent of GDP in 2019 (excluding social security contributions of the two social security funds as these are recorded on the state budget).

*Source: 1estea2021003 - 31. Estonia’s fiscal statistics also adhere to the Special Data Dissemination Standards.*

### 45.      Other documents linked to the budget process provide fiscal data for the general

### Other documents linked to the budget process provide fiscal data for the general government sector (Table 2.4)

### Fiscal documentation and coverage
- General government fiscal data are presented in the State Budget Strategy and Stability Programme issued annually at the end of April and in the Draft Budget Plan submitted to the EU in October.
- The mid-year State Budget Strategy and the explanatory note to the budget include detailed medium-term analysis of sectors and medium-term projections of key fiscal indicators covering the general government.
- Starting with the 2020 budget, data are presented also with a program classification, both in the State Budget and in explanatory documents submitted to Riigikogu alongside the Act; program-based spending is detailed over the medium term.
- Table 2.4 (summary of documents and coverage) indicates publications by the MoF and line ministries covering GG and CG, on a revenues/expenses/debt accrual basis, with timing including early April and September, end of April, end September, October, and mid October. (See Table 2.4 entries in source.)

### Carryovers and execution practice
- The adopted State Budget does not include carryovers from the previous year which average around 5 percent of total expenditure.
- The table listing carryovers and its value is presented to Riigikogu in a separate document before the annual State Budget Act is adopted, but these carryovers are not voted on nor included in the annual State Budget Act.
- Carryovers must be used for the same purpose for which they were originally approved.
- Over the last 6 years, carryovers have averaged just over 5 percent of total expenditure with more than 50 percent of carryovers relating to investment spending.
- No limits are set for carryovers on investment spending. Carryovers of current spending were limited to 3 percent of total expenditure, but in 2020 this limit was relaxed after cases of unused balances of current expenditure were found to have been reallocated to investment lines which were then carried over.
- Guidance: while carryover provisions are appropriate for a restricted set of unavoidable circumstances, care should be taken to avoid abuse and to always assess carryovers against the priorities of the next budget.
- Reference to further technical guidance on carryovers is provided in an IMF technical guidance note (referenced in source).

### Macroeconomic forecasting practice (Advanced)
- The MoF publishes economic forecasts twice a year with explanations of key macroeconomic forecasts, components, and underlying assumptions.
- Spring Economic Forecast (March/April) provides four-year forecasts for real and nominal GDP, decomposition into consumption, investment and net exports, projected contributions from labor, capital and total productivity, and assumptions on external developments (oil prices, regional growth rates, Euro: Dollar exchange rate), plus forecasts for inflation, employment, current account balance and interest rates.
- Preparation of forecasts includes consultation with stakeholders and publication of comparisons with other forecasts; spring forecasts underpin the medium-term State Budget Strategy finalized in April.
- Summer Economic Forecast (August/early September) provides an update informing the draft annual State Budget finalized in September.
- Estonia’s Fiscal Council provides an opinion on both spring and summer forecasts; much policy debate focuses on potential GDP, output gap, and size of Estonia’s structural deficit.
- Table 2.5 (published documents containing macroeconomic forecasts) lists Spring Economic Forecast (March/April), Fiscal Council Opinion on Spring Forecast (April), State Budget Strategy and Stability Programme (April), Summer Economic Forecast (August/September), Fiscal Council Opinion on Summer Forecast (September), Draft Annual Budget Memorandum (September), Draft Budgetary Plan (October) with their respective forecasting contents.

### Forecast accuracy and transparency
- Estonia’s summer forecast for real GDP growth exhibited an average error of 1.5 percentage points between 2012-2019, higher than the EU average.
- There has been an optimism bias in real GDP forecasts, although this has reversed in recent years.
- Revenue forecasts are unbiased and have a smaller than average error compared to EU peers, and GDP forecast errors do not appear to have a large impact on revenue forecast accuracy.
- Article 16 of the State Budget Act of 2014 includes a provision for regular publication of analysis of forecast errors. An analysis was first published in 2018 and a second analysis is planned for 2021, though there is no formal link between this work and revisions in forecasting methods.
- Analysis of key economic relationships is presented in detail in Spring and Summer forecast documents; sector-specific analysis is limited because the Estonian economy is not driven by any particular sector, though Stability Programme tables give forecasts by primary, manufacturing, construction, and service sectors.

### Medium-Term Budget Framework (Good)
- The State Budget Strategy (introduced in 2000) provides four-year fiscal projections and budgetary aggregates covering general government; prepared by the MoF in April after spring macro forecasts, adopted by Cabinet before end-April, then published and submitted to Riigikogu for information.
- The State Budget Strategy also serves as the Stability Programme submitted to the EU by end of April.
- The Strategy discusses key policy changes over four years at macro and sectoral levels and sets out a four-year revenue, expenditure, and financing plan for the State Budget and aggregate fiscal projections for general government.
- The Strategy is based on four-year programs submitted in March by main central government budgetary entities; general government projections rely on subnational budget strategies adopted in October of the previous year.
- State Budget Strategy projections for the budget year are considered ceilings for annual budget preparation and financial transactions between state and subnational governments; subsequent changes to ceilings usually limited to impact of summer macro forecasts.
- Expenditure allocations are broken down by: (i) main budget entities—State Chancellery, 7 constitutional bodies and 11 ministries; (ii) main economic category; and (iii) from 2020 by program. A separate table lists projects in the investment plan.

### Medium-term forecast errors and conservatism
- Fiscal outturns have deviated moderately from medium-term plans since 2012 and on the whole display a conservative pessimistic bias.
- Revenue and expenditure forecasts deviated from outturns by around 2 percent of GDP in the third year; deviations in the second and first years have been 1 percent or less.
- Budget balance deviations have been within 0.5 percent of GDP.
- Estonia is one of the most conservative revenue forecasters in the EU based on forecast error bias.
- The conservative medium-term forecasting approach has helped contain upward pressures on expenditure and allowed build-up of fiscal reserves at central and local government levels and in extrabudgetary funds to cater for downturns such as the Covid-19-related crisis.
- A shortcoming: outturn data for two previous years is not presented in the budget strategy, diminishing the impact of the medium-term framework; inclusion of such outturns in the budget strategy documentation is recommended to provide context and show impacts of planned policy changes.

### Investment planning and management (Basic)
- Budget documentation includes details of ongoing and new investment projects over the four years of the budget strategy but does not present total costs for multi-annual projects.
- Investment spending is aggregated by ministry in the annual State Budget Act, except a few major projects presented separately.
- The four-year investment plan in the Explanatory Memorandum presents project details but not total project costs for multi-annual projects; this omission was raised in a 2020 NAO audit report on public investment.
- Appraisals of large projects are undertaken and provide comprehensive technical, economic, and financial analysis prior to approval, but there is no standardized approach; project appraisals generally include risk assessments and costed mitigation plans.
- Project financial plans usually include a 5 percent risk mitigation contingency reserve.
- Appraisals for EU-funded projects are published at the tender stage; those for domestically funded projects are generally not published.
- The 2020 NAO report found most ministries do not undertake ex-post evaluation of cost-effectiveness and wider socioeconomic impact of completed projects.

### Procurement, investment levels, and EU funds absorption
- The 2017 update of the Public Procurement Act established a modern, transparent procurement process based on open tender procedures via an e-procurement system.
- Around 10,000 procurements per year with a value of EUR 2-3 billion, most (by value) done through open tender.
- The MoF is responsible for procurement policy, regulation, supervision, and e-procurement system management; complaints handled by an independent Public Procurement Review Committee and the courts; the NAO regularly monitors larger procurements.
- General government investment has averaged 5.2 percent of GDP over the last decade compared to an EU average of 3.5 percent of GDP; Estonia has maintained investment within a range of 4.5 and 6.5 percent of GDP.
- As of end-2020, Estonia’s absorption rate for the 2014−20 EU financing cycle stands at around 55 percent for structural funds as a whole, with all projects expected to finish by 2023 (end of extension period). The new financing round is expected to include around EUR 1.8 billion allocated to public investments for 2021−29.

### PIMA recommendations and NAO issues for public investment management
- Government plans to use Public Investment Management Assessment (PIMA) recommendations to guide reforms, including:
  - ensuring realism in costing the long-term planning framework;
  - standardizing the appraisal methodology;
  - establishing central monitoring of public investment projects;
  - presenting total costs for major multi-year projects;
  - strengthening oversight of PPPs and reporting on their fiscal risks;
  - establishing a pipeline of prepared projects.
- Address NAO recommendations, particularly strengthening ex-post evaluation practices in line ministries to better assess cost-benefit and socioeconomic impact of completed projects.

### Fiscal legislation and timeliness (Advanced)
- The Constitution of 1992 provides key responsibilities and dates for budget preparation, implementation, and audit:
  - draft budget to be submitted no later than 3 months before the start of the fiscal year;
  - Riigikogu to adopt it as an Act before the start of the fiscal year, failing which the budget can be temporarily executed for up to two months on basis of 1/12 after which President to call elections;
  - Auditor General to submit audit report alongside annual report by end-August.
- The State Budget Act of 2014 (as amended) and subsidiary regulations provide detailed rules on preparation, adoption, execution, reporting and auditing of the State Budget, including provisions on:
  - fiscal rules;
  - four-year State Budget Strategy (MTBF) adoption timeline (no later than eight months before start of fiscal year) and submission to Riigikogu for information;
  - contents of the State Budget Act and Explanatory Memorandum;
  - appropriation structure including performance areas and programs from 2020;
  - budget amendment rules and conditions for supplementary budgets;
  - oversight by the Fiscal Council;
  - MoF responsibilities for single treasury account, debt management, in-year monitoring, and preparation of annual financial statements and reports by end June and their audit by end-August followed within seven days by submission to Riigikogu.
- A weakness: absence of provisions for publication of in-year budget execution reports despite monthly submission of accounts by government institutions to the MoF and quarterly submission by public corporations.
- Local Government Financial Management Act of 2010 requires local governments to prepare a 4-year budget strategy by mid-October and draft budget one month before the budget year; council should adopt budget before start of fiscal year though the act allows spending to start if not adopted.
- Article 25 of the act obliges the state to compensate local governments for revenue reductions or expenditure increases arising from state action.
- Article 46 of the State Budget Act establishes formal consultation with local governments on transferable taxes, expenditure grants, and imposition of state functions.
- Constitutional timing: Article 115 requires State Budget submission to Riigikogu no later than three months before the budget year; Article 118 stipulates the State Budget passed by Riigikogu comes into force at the beginning of the budget year and allows one-twelfth temporary execution if budget not adopted for first two months; Article 27 defines the budget year as January 1 to December 31.

*Source: IMF staff.*

### 64.      The timetable required by law has been fully respected in the last six years

### The timetable required by law has been fully respected in the last six years

### Budget timetable and legal compliance
- The budget act, after adoption by Riigikogu, is sent to the President for signature and then published in the official gazette.
- In all years covered, the budget has been gazetted before the start of the budget year.
- Table of submission and approval dates (2015–20):
  - Submission to Riigikogu (required: 3 months before the start of budget year (end of September)):
    - 2015 Budget: 09/24/14
    - 2016 Budget: 09/29/15
    - 2017 Budget: 09/28/16
    - 2018 Budget: 09/27/17
    - 2019 Budget: 09/26/18
    - 2020 Budget: 09/25/19
  - Final approval by Riigikogu (required: Before the start of budget year (January 1)):
    - 2015 Budget: 12/10/14
    - 2016 Budget: 12/09/15
    - 2017 Budget: 12/19/16
    - 2018 Budget: 12/13/17
    - 2019 Budget: 12/12/18
    - 2020 Budget: 12/11/19

### Fiscal policy objectives, rules, and reporting
- Legal framework:
  - State Budget Act, 2014 (Chapters 1 and 2) sets fiscal policy objectives for central government and wider general government; outlines Fiscal Council role and references EU fiscal directives.
- Government reporting:
  - Regular public reporting on compliance with structural deficit fiscal rules.
  - State Budget Strategy (spring) and draft next year’s budget (September) outline plans for achieving fiscal rules.
  - Annual State Budget documents summarize plans to meet fiscal rules over the medium term.
  - Government reports to the European Commission through the annual Stability Programme.
- Reporting gaps and observations:
  - Reporting focuses almost exclusively on the structural deficit rule; other rules are reported only implicitly.
  - Fiscal rules targeting financial positions of individual central government institutions are not expressly reported on.
  - The debt rule is not explicitly mentioned recently; Estonia’s general government debt was 8.4 percent of GDP in 2019, rising to 18.5 percent by October 2020 as a result of Covid-19 related borrowing.
  - Recommendation: Explicit reporting on performance against all fiscal rules would strengthen fiscal policy reporting.
- Structural balance rule enforcement:
  - The Fiscal Council reports annually on whether government met statutory requirements for the preceding year.
  - In the four years presented, government met the requirements in half of the years.
  - In 2020, the government suspended the fiscal rules by triggering the emergency clause in Section 9 of the 2014 Act due to the Covid-19 pandemic.

### Fiscal Council opinions on structural balance (selected)
- Fiscal Council opinions (Fiscal years 2015–19):
  - 2015 (Date of opinion: July 2016): "The Fiscal Council finds the outcomes for the fiscal year 2015 to be in line with the current legal framework and with the budget policy targets set for this year."
  - 2016 (Date of opinion: July 2017): "The Fiscal Council finds that based on the current estimate, the general government structural budget position for 2016 is in line with the State Budget Act."
  - 2018 (Date of opinion: April 2019): "The Fiscal Council finds that the target set for the structural fiscal position in 2018 went unmet."
  - 2019 (Date of opinion: April 2020): "The Fiscal Council finds that the government did not meet its budget targets for 2019 or the requirements of the correction mechanism that are necessary if structural balance is to be regained."
- Note: The fiscal rule changed during 2017 and no opinion for this fiscal year is available on the Fiscal Council website.

### Fiscal rules amendments and credibility concerns
- 2017 amendments allowed more flexibility in operating the structural deficit rule in light of previously accumulated surpluses.
- Proposed amendments in 2019 (aimed at loosening the structural deficit rule) were suspended because of Covid-19 deterioration of fiscal circumstances.
- Fiscal Council concern: Frequent amendment of fiscal rules risks undermining credibility and ability to guide fiscal policy.

### Performance budgeting reforms
- Major performance budgeting reform piloted in 2019 and rolled out in the 2020 budget to link expenditure more closely to results.
- 2020 structure:
  - Expenditure programs divided into 21 performance areas and 45 lower-level programs, each supported by measures, activities and service areas.
- 2021 changes:
  - Performance areas consolidated into 17 performance areas.
- Costing and reporting:
  - Specific costs attached to each level to enable comparison of spending over time in relation to outputs and outcomes.
  - Information available in State Budget, budget explanatory documents, and program documents on ministries’ websites.
- Reporting cycle:
  - Reporting of financial outturn and performance against each program area in the State Budget is expected in 2021.
  - Once full 2020 performance reports are available, Estonia’s score under the performance principle would improve.

### Public participation (assessment: Not Met)
- Budget documentation lacks an accessible summary of implications for typical citizens and provides no opportunities for citizen participation in budget deliberations.
- Key documents are technical and aimed at an expert audience.
- MoF sometimes produces summary slides of macroeconomic forecasts, but not consistently and often technical.
- No systematic distributional analysis of tax and spending proposals’ impact on different groups/households.
- No specific opportunity for citizens to provide input into State Budget preparation; MoF website provides general contact details but not a formal mechanism for citizen input.
- Local governments do provide formal citizen consultation processes for their budgets; business, labor, and other interest groups have informal contacts with MoF.

### Credibility: Independent evaluation and institutions
- Fiscal Council:
  - Established in 2014 via amendment to the Bank of Estonia Act of 1993; operates as a small independent unit within the Bank of Estonia.
  - Composed of six members (all in their second five-year terms) supported by three part-time economists on the Bank of Estonia payroll.
  - Independence established under Article 4.2 of the Bank of Estonia Act; Article 4 requires opinions on objectives of the general government structural budget position in Budget Strategy and Stability Programme and on achievement for the previous year prior to budget approval.
  - The Fiscal Council does not have capacity to prepare its own forecasts or undertake much analytical work.
  - Opinions are posted on its website and presented to Riigikogu and the media.
  - Timeliness: Fiscal Council must provide opinions within two weeks of macroeconomic and fiscal forecasts being published; MoF then has two weeks to justify disregarding the opinion.
  - Relationship with MoF: Cooperative; MoF provides access to data and information.
  - Recent concerns expressed: timeframe for post-Covid-19 adjustment (Fiscal Council argued for faster return to pre-crisis fiscal policy) and frequency of changes to fiscal rules.

### Supplementary budget practices (Advanced)
- Legal requirements:
  - Any change to total appropriation requires ex-ante Riigikogu approval; other changes allowed by law must be reported ex-ante to Riigikogu.
  - State Budget Act requires government to submit a State Budget Amendment Act no later than two months before end of budget year to regularize reallocations (Article 43).
  - To increase or reduce total appropriation, government must submit a Supplementary Budget Act no later than three months before the end of the budget year (Article 44).
- 2020 Supplementary Budget Act (first supplementary budget in a decade due to Covid-19):
  - Projects an 11.6 percent shortfall of revenue (EUR 1.4 billion).
  - Projects a 6 percent increase in spending (EUR 0.7 billion) over the original budget.
  - Additional financing needs of EUR 2 billion to cover these changes.
- Historical outturns:
  - In the 6 years up to 2019, outturns averaged around 97 percent of initial budget.

### Forecast reconciliation practices (Basic)
- Mid-year State Budget Strategy and Stability Programme include an appendix table summarizing changes in forecasts from previous year’s vintage.
- The 2020−23 budget strategy documents provide vintage changes for real and nominal GDP, CPI, nominal budgetary position, and debt of general government, but do not include changes in revenue and expenditure nor accompanying explanation.
- The fiscal framework section tabulates impacts of revenue and expenditure measures aimed at limiting structural deficit to 0.4 percent of GDP in 2020 and achieving a balanced budget from 2021 onwards.
- Table: Comparison Between Vintages of Stability Programs (selected entries)
  - Real GDP growth (percent)
    - Previous version: 4.0 3.2 3.0 2.9 2.9 -
    - Current update: 3.9 3.1 2.7 2.7 2.6 2.5
    - Difference: -0.1 -0.1 -0.3 -0.2 -0.3 -
  - Nominal GDP growth (percent)
    - Previous version: 7.6 6.3 5.8 5.4 5.4 -
    - Current update: 8.6 6.0 5.5 5.3 5.0 4.9
    - Difference: 1.0 -0.3 -0.3 -0.1 -0.4 -
  - Harmonized consumer price index (HPI) (percent)
    - Previous version: 3.0 2.5 2.6 2.1 2.1 -
    - Current update: 3.4 2.2 2.3 2.1 2.1 2.1
    - Difference: 0.4 -0.3 -0.3 0,0 0.0 -
  - Nominal budgetary position of general government (percent of GDP)
    - Previous version: 0.2 0.5 0.4 0.2 0.1 -
    - Current update: -0.5 -0.4 0.1 0.4 0.3 0.2
    - Difference: -0.7 -0.9 -0.3 0.2 0.2 -
  - General government debt (percent of GDP)
    - Previous version: 8.5 7.7 6.9 6.2 5.3 -
    - Current update: 7.9 8.2 7.7 7.1 6.5 5.9
    - Difference: -0.6 0.5 0.8 0.9 1.2 -
- Draft Budget Plan (submitted mid-October to EU) includes projections based on a no-policy change scenario but does not present differences between that scenario and previous forecasts.
- Budget Memorandum (submitted alongside Draft State Budget Act) does not include substantive discussion of forecast changes from previous vintages.
- Assessment:
  - Practices only partially meet forecast reconciliation requirements; relevant information exists across documents but not consolidated.
  - Article 25 of the State Budget Act of 2014 calls for a “comparison between the previous and updated budget strategy if the policy objectives have changed compared to the previous budget strategy”; practices do not fully address this requirement.
  - Revisions to years 2−4 range between 1 and 2 percent of GDP (Figure 2.6 shows revisions; staff notes that budget-year revisions tend to be quite small).

### Revenue and expenditure measures (Table highlights, percent of GDP)
- Selected measures and impacts (2019–2023):
  - Taking into account revenue from the new external funds period: 2021: 0.33; 2022: 0.94; 2023: 0.60
  - Reduction of excise duty on alcohol: 2019: -0.04; 2020: 0,01; 2021: 0,01; 2022: 0,01; 2023: 0,01
  - Staggering the rise of excise duty on tobacco: 2020: -0.02; 2021: - ; 2022: 0.02; 2023: 0.04
  - Effect of the higher price of CO2 on the budget position: 2020: 0.07; 2021: 0.06; 2022: 0.04; 2023: 0.03
  - Additional dividends with income tax: 2020: 0.08; 2021: 0.22; 2022: 0.04
  - Shift in selling and additional sales of frequency licenses: 2019: -0.06; 2020: 0.06; 2021: 0.05
  - Additional income tax exemption for pensioners: 2020: -0.05; 2021: -0.06; 2022: -0.07; 2023: -0.07
  - Total revenue measures: 2019: -0.10; 2020: 0.15; 2021: 0.63; 2022: 0.99; 2023: 0.61
  - Changes in operating expense and activity grants: 2019: -0.01; 2020: 0.11; 2021: 0.09; 2022: -0.08; 2023: -0.11
  - Changes in investment: 2020: 0.15; 2021: 0.18; 2022: 0.17; 2023: -0.09
  - Changes in social expenditure: 2021: -0.01; 2022: -0.02; 2023: -0.03
  - Increase in transport grants: 2020: -0.03; 2021: -0.03; 2022: -0.03; 2023: -0.02
  - Total expenditure measures: 2019: -0.01; 2020: 0.22; 2021: 0.22; 2022: 0.04; 2023: -0.26
  - TOTAL (net): 2019: -0.11; 2020: 0.37; 2021: 0.85; 2022: 1.03; 2023: 0.35

### Conclusion and recommendations
- Overall assessment:
  - Estonia’s fiscal forecasting and budgeting practices follow good or advanced practices in many areas.
  - The budget is submitted and adopted in a timely manner, implemented as planned, and framed within a comprehensive legal framework with prudent independently-assessed medium-term forecasts and spending plans.
- Areas for enhancement (specific recommendations):
  - Enhance transparency of medium-term budgetary forecasts by presenting outturns of the previous two years and current year estimated outturn alongside 4-year projections.
  - Improve transparency by providing further information on own-revenue of extrabudgetary funds and social security funds and on total costs of investment projects.
  - Provide more detailed reconciliation between forecast vintages to explain revisions to revenue and expenditure projections.
  - Complete the program/performance budgeting cycle and publish full performance reports to link resources spent to results.
  - Improve accessibility to the broader public by publishing an annual citizen’s guide to the budget.

*Source: Riigikogu website; Estonian Fiscal Council reports; State Budget Strategy 2020-23 and Stability Programme 2019 (as presented in the provided text).*

### 85.      Based on the above assessment, the evaluation highlights the following priorities

### 85.      Based on the above assessment, the evaluation highlights the following priorities

### Recommendations for improving transparency of fiscal forecasts and budgets
- Recommendation 2.1: Strengthen budget unit by including extrabudgetary funds and social security funds’ financial plans in budget annex; and by introducing a regulatory cap on size of carryovers. (MoF, for 2022 budget)
- Recommendation 2.2: Improve the transparency and effectiveness of investment decisions by implementing the recommendations of the PIMA report, including:
  - Publish total project costs in budget documents;
  - Standardize and publish project appraisals for large projects;
  (MoF and LMs, medium term)
- Recommendation 2.3: Facilitate improved citizen understanding of, and involvement in, the budget process by:
  - Developing a ‘Citizens Guide‘ to the annual budget containing in non-technical terms a summary of the macroeconomic situation and the government‘s tax and spending plans alongside a distributional analysis of the budget‘s impact on different types of citizens and households. (MoF, 2022 budget);
  - Implementing a formal process for encouraging citizen participation in the budget process. (MoF, 2022 and 2023 budget.)
- Recommendation 2.4: Include a comprehensive forecast reconciliation table, accompanied by explanations, in the budget strategy and an update in the budget memorandum. (MoF, for 2023-2026 budget strategy.)

### Summary Evaluation: Fiscal Forecasting and Budgeting (selected findings from Table 2.10)
- Principle 2.1.1 Budget Unity
  - Assessment: Basic: Significant own-source revenue not reflected in the budget; no limit on carryovers.
  - Importance: Medium: Own source revenues of 3.7 percent of GDP not reflected in budget; carryovers amount to 5 percent of expenditure.
  - Rec: 2.1
- Principle 2.1.2 Macroeconomic Forecasts
  - Assessment: Advanced: Budget documentation includes forecasts and explanations of key macroeconomic variables, their components and assumptions.
  - Importance: Medium: Absolute average error of Estonia’s real GDP forecast for the budget year is 1.5 percent, higher than the EU average.
- Principle 2.1.3 Medium-Term Budget Framework
  - Assessment: Good: Mid-year budget strategy provides reliable projections and establishes ceilings, but actual outturns are not shown alongside projections.
  - Importance: Low: Revenue and expenditure forecasts have deviated from outturns by 2 per cent of GDP in the third year, deviations in the second and first years have been 1 percent or less.
- Principle 2.1.4 Investment Projects
  - Assessment: Basic: Procurement is through open and competitive tender, but total project costs are not published, and appraisal methodology is not standardized.
  - Importance: Medium: Annual public investment budget (5 per cent of GDP) are not monitored centrally; projects are not tracked for potential cost overruns and delays; information on total project costs is not readily available.
  - Rec: 2.2
- Principle 2.2.1 Fiscal Legislation
  - Assessment: Advanced: Comprehensive fiscal legislation defines key dates, budget documents and responsibilities
  - Importance: Low: In-year budget comparable execution reporting is not adequately prescribed.
- Principle 2.2.2 Timeliness of Budget Documents
  - Assessment: Advanced: Budget submitted in September to Riigikogu and adopted in December in last 6 years
  - Importance: Low: Deadlines strictly adhered to even in election years and under the current Covid-19 related crisis
- Principle 2.3.1 Fiscal Policy Objectives
  - Assessment: Advanced: Numerical fiscal rules set out in law and government regularly reports performance against them.
  - Importance: Medium: Adjustments to the fiscal rules and not meeting targets in two of four years risk undermining its credibility; some fiscal rules are not explicitly reported on.
- Principle 2.3.2 Performance Information
  - Assessment: Basic: Actual outcome of performance information currently not yet available.
  - Importance: Low: Programs implemented in 2020 Budget – once performance reports become available in 2021 it will lead to significant improvement in Estonia’s assessment
- Principle 2.3.3 Public Participation
  - Assessment: Not met: No provision for formal participation of citizens in the budget process; budget documentation does not include easily accessible explanations of budget impact on ordinary citizens
  - Importance: Medium: Improving public participation in and understanding of the budget would enhance public buy-in and tax payer responsibility at relatively low cost
  - Rec grouping: 2.3
- Principle 2.4.1 Independent Evaluation
  - Assessment: Advanced: Fiscal Council established in 2014 evaluates spring and summer forecasts and reviews fiscal outcomes
  - Importance: Low: Fiscal Council regularly publishes opinions prescribed by law, but in-depth analysis and research limited by capacity constraints
- Principle 2.4.2 Supplementary Budget
  - Assessment: Advanced: The conditions for using supplementary budgets are well regulated and rarely used
  - Importance: Low: Only one supplementary budget in recent years linked to 2020 Covid-19 pandemic
- Principle 2.4.3 Forecast Reconciliation
  - Assessment: Basic: Vintage changes reported for 5 macro indicators published along with impact of new revenue and expenditure policies. However, reconciliation remains partial and explanations limited.
  - Importance: Medium: Revisions of 1 to 2 per cent of GDP for years 2-4 demand clearer explanations
  - Rec grouping: 2.4

### Fiscal risks: disclosure, analysis, and management (Ch. III highlights)
- Objectives of assessment:
  - Evaluate Estonia against IMF’s FTC dimensions:
    - General arrangements for disclosure and analysis of fiscal risks;
    - Management of risks from specific sources (government contingencies and guarantees, PPPs, financial sector);
    - Coordination of fiscal relations between central government, local governments, and public corporations (PCs).
- Disclosure practices and documents (selected)
  - MoF produces twice-yearly macroeconomic forecasts, medium-term and annual budget proposals.
  - Other reports include the Consolidated Annual Report of the State, SOE Ownership Report, Bank of Estonia Financial Stability Review, Stability Programme, National Risk Assessment, Pensions sustainability review, Local government financial capability radar.
  - Table 3.1 lists reports and authors (MoF, BoE, MoI, EU, etc.).
- Macroeconomic risks (Assessment: Good)
  - Estonia faces relatively high macroeconomic volatility: standard deviations of growth in nominal GDP and revenue are higher than most other EU countries.
  - The spring and summer forecasts include a short risk scenario (single standalone alternative fiscal forecast), but:
    - It does not provide probabilistic likelihoods;
    - It is less detailed than the main forecasts and lacks detailed breakdowns for sub-categories;
    - It is not presented as a series of possible outcomes (no full sensitivity analysis).
  - Table 3.2 (Summer 2019) — Risk scenario vs base forecast (EU R millions and % of GDP):
    - General government budgetary position: 2019 -69; 2020 -105; 2021 -233; Difference from base forecast: 2019 -1; 2020 -149; 2021 -234
    - Central government: 2019 -105; 2020 -34; 2021 -45; Difference: 2019 -1; 2020 -83; 2021 -117
    - Social security funds: 2019 52; 2020 0; 2021 -37; Difference: 2019 0; 2020 -42; 2021 -76
    - Local authorities: 2019 -17; 2020 -71; 2021 -151; Difference: 2019 0; 2020 -24; 2021 -41
    - % of GDP rows mirror the EU R millions rows with values such as General government budgetary position: -0,3% (2019), -0,4% (2020), -0,8% (2021) and differences 0,0% (2019), -0,5% (2020), -0,8% (2021).
- Specific fiscal risks (Assessment: Not Met)
  - Government does not publish a consolidated summary statement of main fiscal risks nor collate such a report for internal use; information exists across multiple reports but is not formally consolidated.
  - Estonia’s exposure to selected fiscal risks — Maximum total exposure: 110.3 percent of GDP (Table 3.3). Main elements include:
    - Explicit contingent liabilities: €5 199 million — 18.5 percent of 2019 GDP (MoF, annual state report, public)
      - Ownership interest in international institutions: €1 538 million — 5.5 percent of 2019 GDP
      - Guarantees given: €386 million — 1.4 percent of 2019 GDP
      - EFSF: €1 543 million — 5.5 percent of 2019 GDP
      - Grant award and pass through liabilities: €437 million — 1.6 percent of 2019 GDP
    - Public sector total liabilities (excluding equity) of financial and non-financial public corporations: €11 622 million — 41.3 percent of 2019 GDP (MoF)
    - Financial sector maximum extent of deposit insurance guarantee (net of assets): €14 017 million — 50.0 percent of 2019 GDP (MoF, depositor guarantee fund, not publicly reported)
    - Contingent events — Natural disasters: €130 million — 0.5 percent of 2019 GDP (Emergencies database)
    - Long-term risks:
      - NPV of health spending change (2019-2050): €6 266 million — 22.3 percent of 2019 GDP (IMF Fiscal Monitor)
      - Social security pension liabilities: €68 772 million — 244.6 percent of 2019 GDP (IMF staff estimates included in PSFS)
  - Including long-term demands of health expenditure and implicit social security pension liabilities increases total exposure by a further 266.9 percent of GDP.
- Long-term sustainability (Assessment: Good)
  - MoF publishes long-term fiscal projections related to ageing in the State Budget Strategy and Stability Programme and participates in EU Ageing Working Group. Forecasts have covered up to 2060 (2017, 2018) and 2070 (2019); 2020 documents omitted this due to Covid-19 uncertainty.
  - MoF publishes macroeconomic forecast to year 2070.
  - Demographic projections:
    - Population expected to decline by 8 percent by 2070.
    - Old-age dependency ratio expected to increase by 40 percent (percentage of population 65+ compared to 15−64).
  - Projected fiscal impacts (2019−50, IMF Fiscal Monitor):
    - Net present value of estimated change in healthcare spending up to 2050: 23 percent of 2019 GDP.
    - Projected fall in net present value of public pension spending: 16 percent of 2019 GDP (partial offset).
  - Estonia has high implicit social security pension liabilities relative to comparator countries; these liabilities are a fiscal risk due to potential political pressure to honor pension entitlements.
  - Legal requirements and processes:
    - State Pension Insurance Act (2001) and Funded Pensions Act (2004) oblige periodic analyses of pension system sustainability.
    - First analysis published in 2016; next analytical study expected in 2023 and then every five years.
    - Participation in European Commission’s Ageing Working Group produces country-specific long-term expenditure analysis.

*Source: https://www.imf.org/-/media/files/publications/cr/2021/english/1estea2021003.pdf*

### 98.      The long-term  sustainability analysis of the Health Insurance Fund is also regularly

### 1estea2021003 - 98.      The long-term  sustainability analysis of the Health Insurance Fund is also regularly

### Long-term sustainability analysis of the Health Insurance Fund
- The fund that finances the bulk of national health expenditure published a sustainability analysis for the fund up to 2060 in 2014.
- The initial 2014 analysis was adapted for regular internal use; results are presented annually to the supervisory board of the fund.
- Results are shared with the MoF but:
  - It is not mandated by law or regulation.
  - It is not routinely published (unlike pensions sustainability analysis).

### Fiscal Risk Management — Budgetary Contingencies (Good)
- The annual budget contains reserves to deal with unexpected spending:
  - A reserve fund (Vabariigi Valitsuse reservi) is appropriated as part of the annual budget (State Budget Act, Section 58).
  - Following regulation RT I, 05.08.2014 the MoF divides this into:
    - “Unforeseen Expenditure Reserve” (Sihtotstarbeta Reserv) — the principal contingency reserve.
    - “Special Purpose Reserve” (Sihtotstarbeline Reserv) — for known expenditure not yet allocated to a ministry.
- Spending from the Unforeseen Expenditure Reserve averaged 0.5 percent of GDP between 2016 and 2019 (Figure 3.6).
- Use of reserves:
  - State Budget Act: Unforeseen Expenditure Reserve is for “unforeseeable expenditure, investments and financing transactions which cannot be planned in the legislative proceeding of the draft State Budget.”
  - Allocation procedures set by regulation; MoF oversees the process.
  - Requests must include “a detailed calculation of the requested amount, justification of the necessity to allocate funds, analysis of possibilities to cover expense at the cost of available resources, and other relevant information.”
- Reporting and audit:
  - Monthly budget execution reports do not report on the allocation of contingency expenditure during the year.
  - Finance Orders are published on the government website detailing some allocations.
  - A breakdown of allocations is published in the Consolidated Annual Report of the State; spending is audited by the NAO and reports published.
  - NAO audit reports have noted some spending from the reserve may not be accurately classified as ‘unforeseen.’
- Stabilization reserve:
  - Exists and operates more as a sovereign wealth fund; designed to cover “extraordinary situations or a crisis with material effect.”
  - No expenditure has been incurred from this fund since 2009.

### Management of Assets and Liabilities (Good)
- Consolidated Annual Report of the State discloses overall assets and liabilities through consolidated PSFS including a balance sheet.
- 2019 public sector figures (excluding implicit social security pension liabilities):
  - Total assets: EUR 40,344 million (143.5 percent of GDP).
  - Total liabilities: EUR 17,333 million (63.1 percent of GDP).
  - Net asset position: EUR 22,610 million (80.4 percent of GDP).
- MoF publishes principles and plans related to asset/liability management and risk analysis:
  - Cash and liquidity management summary and legal requirements available on government website.
  - Annual State Budget Strategies and Stability Programmes set out medium-term borrowing strategy and risk analysis.
  - Government regulation sets principles for providing government loans or guarantees.
  - January 2020 policy document guides management of investments in SOEs.
- Disaggregated disclosures and practices:
  - Quarterly breakdown of government borrowing and liquidity reserve on MoF website.
  - Mid-year State Budget Strategy and Stability Programme sets out debt situation, risks, and forward plans.
  - Full list of state loans on-lent and government guarantees published and regularly updated.
  - Individual SOEs report quarterly to parent ministries, report finances quarterly on their website, report annually per company rules, and input quarterly financial data into the state accounting system at the SSSC.
- Fiscal risk from government debt liabilities:
  - Total general government debt was 8.4 percent of GDP at the end of 2019, rising to 18.5 percent by October 2020.
  - Average maturity of debt: 7.34 years.
  - Liquid reserves are around 60 percent of government borrowing in 2020.
  - No exchange rate risk: government debt entirely denominated in Euro.
- Legal framework:
  - Key laws: State Budget Act (2014), State Asset Act (2009), Public Procurement Act (2007).
  - Budget approved by Riigikogu provides annual limits on overall government borrowing and ceilings for guarantees and on-lending.
  - Local governments constrained by Local Government Finance Act (2010).
  - SOE asset and liability management overseen by supervisory boards; foundation supervisory board members appointed by parent ministries with one board member appointed by the finance ministry.
- Gap identified:
  - No comprehensive asset and liability strategy for the entire public sector.
  - Annual public sector balance sheet lacks discussion of reasons for year-on-year changes or future plans for managing overall net worth.
  - A comprehensive strategy would be useful given rising government liabilities, sizeable changes in liquidity reserve, and potential SOE challenges.

### Guarantees (Good)
- Publication and limits:
  - MoF publishes a quarterly detailed report listing all previous and existing loans and guarantees, including creditor, borrower, issuance date, intended purpose, and expiry date.
  - State Consolidated Annual Reports include a summary table of outstanding guarantees.
  - State Budget Act requires the government to set an annual limit on the total value of outstanding guarantees, to be agreed by Riigikogu and published in the budget explanatory memorandum.
  - For 2020 this limit is EUR 1,572 million.
  - Information on the probability of guarantees being called is not published.
- Stock of guarantees:
  - State-backed guarantees totaled 1.5 percent of GDP at end-2019.
  - This rises to 7.0 percent of GDP if guarantees to the European Financial Stability Facility are included.
  - Standardized guarantee schemes include export credits, housing loans, and student loan guarantees.
  - Largest one-off guarantee relates to an investment in the health sector.

### Public-Private Partnerships (Not met)
- Current PPP usage:
  - Limited to a number of local government PPPs in housing and school buildings from the 2000s and seven private sector built and managed government buildings via Riigi Kinnisvara Aktsiaselts (RKAS).
  - Many PPPs resemble long-term lease agreements, renewable every 10 years, with varying end-of-contract options for the State.
  - Authorities do not disclose explicit contingent liabilities from existing PPP contracts.
- Framework and plans:
  - PPP framework adopted in 2019; first pilot is a large road widening scheme scheduled for tender in 2021.
- Disclosure gap:
  - No systematic disclosure of government rights and obligations for existing PPPs.
  - Current PPP liabilities are less than 0.1 percent of GDP.
  - Service payments generally classified as other operating expense; central government does not disclose long-term contractual obligations.
  - Expansion under the new framework will require administrative capacity to:
    - Systematically report on PPP use.
    - Record PPPs in accordance with international standards.
    - Assess and disclose fiscal implications and potential fiscal risks.

### Financial Sector (Advanced)
- Government exposure:
  - Government has little direct exposure to the financial sector: no state-owned banks; central government does not hold equity or investments in private banks.
  - Government securities are not a significant asset on financial institutions’ balance sheets due to low government debt and limited issuance until 2020.
- Deposit insurance and guarantees:
  - Guarantee Fund (Tagatisfond), established in 2003, provides deposit protection.
  - As of 2019, Guarantee Fund current assets: EUR 242 million, comprising 1.7 percent of guaranteed deposits (more than twice the minimum 0.8 percent required under EU rules).
  - Fund was adequately capitalised to handle the 2018 bank resolution without additional funding.
  - Guarantee Fund cooperates with the Estonian Financial Supervisory Authority, is subject to regular financial reporting and internal stress tests, and is considered part of the general government sector.
  - The total potential liability for deposit insurance does not appear on the government’s list of contingent liabilities and the total amount guaranteed by government is not regularly disclosed.
  - In line with European directives, government is ultimate guarantor for domestic deposits of up to EUR 100 000 in nine Estonian banks; EU-wide resolution schemes cover deposits in larger banks.
  - Total maximum potential liabilities stemming from these banks are up to EUR 14,259 million (around 50 percent of 2020 GDP).
    - Of this, big banks’ maximum potential liabilities up to EUR 13,054 million are considered for crisis management and not going to pay-out.
    - Smaller banks’ maximum potential liabilities up to EUR 1,205 million — government considers the risk of being required to directly finance simultaneous pay-outs of the smaller banks as extremely low.
- Financial sector resilience:
  - 2019: sum of financial sector assets and non-equity liabilities as percent of GDP relatively low compared to most European countries (Figure 3.11).
  - Banks held capital buffers in excess of required minimum and above the European average (Figure 3.12).
  - Bank of Estonia financial stability report (second half of 2020) states risks to the financial system have grown significantly but Estonian banks continue to be profitable and operate with strong capitalisation.
- Stress testing and reporting:
  - Bank of Estonia publishes financial stability reports twice a year; discuss current status and risk scenarios.
  - Bank of Estonia regularly undertakes stress test modelling.
  - During 2019 and 2020 only one (2019/1) of four stability reports contained an extended discussion of stress test results — scenario: fall in GDP of 10 percent, increase in unemployment to 13 percent, and decline in real estate prices by 48 percent.
  - More commonly, stress test results are captured in the ‘risk scenario’ table and inform discussion of financial sector resilience.
  - Bank of Estonia is in regular discussion with the MoF regarding policy implications of its financial stability report findings.

### Natural Resources (Basic)
- Main resources:
  - Shale oil and forests account for the majority of Estonia’s natural resource wealth.
  - Value added from shale oil: 1.4 percent of GDP.
  - Value added from forestry: 1.5 percent of GDP.
- Use and reporting:
  - Most shale oil is purchased by the state electricity company for power and heating.
  - Estonia has a high level of natural resource wealth per capita by European standards.
  - Significant reserves of phosphates exist but are not currently utilized.
  - The Consolidated Balance Sheet of Mineral Resources of the Republic of Estonia details field-by-field reserve estimates of known subsoil assets and the previous year’s extraction volumes.
  - The State Forest Management Centre (a government profit-making state agency) details forest stock volume, annual harvesting and sales in its annual reports.

*Source: Excerpt from IMF country report chapter (Consolidated Annual Report of the State and MoF materials as cited in text).*

### 119.      Fiscal revenue from natural resource use are captured in government reporting of

### Fiscal revenue from natural resource use are captured in government reporting of the state

### Fiscal revenues from minerals and forestry
- Royalties are the principle fiscal revenue from mineral resources and totaled EUR 20 million (0.1 percent of budgetary central government revenue) in 2019.
- Dividends and income tax from the State Forest Management Centre comprise the fiscal revenue from forestry activities (Eur 51 million, or 0.3 percent of budgetary central government revenue).
- Reporting channels:
  - State Consolidated Annual Report (referenced).
  - State Environment Board website (mining and environmental use charges).
  - Financial statements of the State Forest Management Centre (forestry sales, dividends, and income tax).

### Valuation and reporting of natural resource stocks
- Forest resources:
  - Valued following the Accounting Standards Board methodology based on fair value.
  - These assets are valued at 2.5 percent of GDP (EUR 692 million) as at the end-of 2019.
  - Presented in both the Consolidated Annual Report of the State and in the financial statements of the State Forest Management Centre.
- Subsoil assets:
  - Eesti Energia provides an off balance sheet estimate for their shale oil reserves in their annual report (EUR 392 million).
  - Consolidated Balance Sheet includes a calculation on the value of potential royalty payments (calculated as the royalty rate multiplied by the active stock).
  - No comprehensive estimate based on the future discounted cash flow arising from mineral extraction is presented, as per the 2008 SNA/ESA 2010/GSFM 2014 methodology (calculated as the net present value of the expected pre-tax cash flows resulting from commercial exploitation).

### Natural resource rents (context)
- Total natural resource rents are the sum of oil, natural gas, coal (hard and soft), mineral and forest rents.
- Figure referenced: Natural Resource Rents, 2019 (Percent of GDP) — Source: World Bank World Development Indicators.

### Environmental risks and natural disasters
- Estonia appears less vulnerable than most countries to environmental risks.
- Historical natural disaster experience:
  - Earthquakes are a very low risk according to the European Seismic Hazard Map.
  - International Disaster Database lists only a handful of events over the past 20 years; storms and cold weather events are most frequent.
  - Extra-tropical storm Erwin in 2005 caused an estimated US Dollar 130 million in damages (0.9 percent of GDP).
- Risk assessment practice:
  - 2017 legislation requires individual emergency risk assessments to be prepared and updated every three years, including:
    - A five-point scale assessment of the probability of occurrence of an emergency (which would include environmental risks).
    - An assessment of the direct financial cost together with assessments of other impacts.
  - In practice:
    - Few completed risk assessments.
    - None include any estimate of potential costs to the state or to the wider economy.
    - No central guidance detailing how to estimate these costs or how to manage these in accordance with a published strategy.

### Subnational governments: reporting and fiscal controls
- Consolidation and reporting:
  - Consolidated balance sheet of all 79 subnational governments is included in the Consolidated Annual Report of the State issued by June each year.
  - Information based on financial statements submitted by each local government to the State Chief Accountant through the SSSC; monthly accounts reported with a one-month lag to the SSC.
  - MoF’s Local Government Financial Management Department prepares a consolidated report used to monitor the aggregate local government fiscal position.
  - Subnational governments are required to present quarterly budget execution reports to their councils; adherence varies.
- Borrowing limits and monitoring:
  - Local Government Financial Management Act of 2010 limits local government borrowing to between 60 and 100 percent of their operating revenue, depending on their primary surplus.
  - Target ceilings for consolidated local government are set in the annual State Budget Strategy following consultations with local government representatives.
  - Article 35.1 of the Local Government Financial Management Act allows the MoF to impose restrictions if the general government fiscal position deteriorates.
- Size and fiscal position:
  - Subnational governments’ expenditure is around a quarter of general government expenditure (around 10 percent of GDP).
  - Their debt represents a third of general government debt (or 2.7 percent of GDP).
  - Consolidated budget balance position of subnational governments shows a small deficit of just under 0.1 percent of GDP.
  - Self-reliance of Estonia’s subnational governments is 20 percent (second lowest in Europe).
- Monitoring tools:
  - MoF has established a local government financial capability radar page on its government financial data website to provide early detection of risks against 17 indicators.

### Public corporations (SOEs): reporting, capitalization, and quasi-fiscal activities
- Reporting and disclosures:
  - State Assets Department of the MoF produces a detailed annual report on the financial performance of State-Owned Enterprises (SOEs) and their main transactions with government.
  - The report includes consolidated aggregated analysis of SOEs, discussions on revenue, expense, profitability and capital structure, dividends paid from SOEs to the state, and transfers from the state budget to SOEs (transfers small at under EUR 0.2 million in 2019).
  - Consolidated Annual Report of the State provides more granular financial information, distinguishes between subsidies and capital transfers, and reports payments of taxes and royalties by SOEs.
- Capitalization and liabilities:
  - The Estonian SOE sector is well capitalized: assets more than cover non-equity liabilities, with local government owned enterprises having near zero levels of debt.
  - SOE non-equity liabilities are below the EU average of 33.5 percent of GDP.
- Ownership policy:
  - Government adopted a Corporate Participation State Ownership Policy in January 2020 covering principles of ownership, governance structures, reporting requirements, a dividend policy, approach to compensating public service obligations, and government’s obligations as a shareholder.
- Quasi-fiscal activities:
  - The policy states public service obligations and other quasi-fiscal activities should not be financed by cross-subsidization and SOEs should be adequately compensated by the state.
  - Authorities acknowledge this does not happen in practice; quasi-fiscal activities are currently not monitored or measured.

### Conclusions and prioritized recommendations
- Assessment summary:
  - Estonia meets good or advanced practice in eight of the code’s 12 dimensions, above the average for European peers.
  - There remains significant scope to further enhance analysis and reporting; consolidated information on all fiscal risks are not presented, costed, or considered holistically.
- Prioritized recommendations (with timing and lead indicated in parentheses):
  - Recommendation 3.1. Deepen existing macroeconomic risk analysis by including more extensive sensitivity analysis and probablistic fan-charts; and retrospective comments on the realization of previously published risk scenarios. (MoF, medium term)
  - Recommendation 3.2. Prepare and publish an annual Fiscal Risk Statement that discusses the size and nature of material specific fiscal risks to the public finances including, amongst others: (MoF, medium term)
    - an evaluation of the likelihood and potential fiscal impact of guarantees being called (MoF, medium-term);
    - the potential cost of emergencies based on guidance to be developed on how these costs should be estimated (MoF in cooperation with Ministry of Interior, medium-term).
  - Recommendation 3.3. Regularly publish long-term projections for the health fund and for health expenditure sustainability similar to that for pensions sustainability. (MoF, medium term)
  - Recommendation 3.4. Develop and publish a comprehensive strategy covering government‘s policy towards managing all of its assets, liabilities, and overall net worth in the short, medium and long-term. (MoF, short term)
  - Recommendation 3.5. Identify SOEs which undertake quasi-fiscal activities and accurately cost these activities and report on them in the annual report on SOE performance. (MoF in cooperation with respective SOEs, short-term)

### Government Fiscal Transparency Action Plan (selected items related to natural resources and asset valuation)
- 1.1. Improve further fiscal reporting
  - (a) Expand the coverage of non-financial assets in the general government balance sheet by including stocks of mineral resources:
    - Include in the 2020 consolidated balance sheet an estimation of the shale oil reserves (MoF and Ministry of Environment).
    - Elaborate accounting guidance on the valuation of mineral resources (MoF and Ministry of Environment).
- 1.1.(b) Report stocks of non-financial assets at market value and holding gains and losses and other changes in the volume of assets and liabilities:
  - Elaborate accounting guidance on the market/fair valuation of fixed assets (MoF).
  - Develop accounting policies that will allow realistic valuation of fixed assets (MoF).
  - Implement policies that will result in fair valuation of significant fixed assets (MoF).
  - Apply market valuation of assets and liabilities in the PSFS and report on the related holding gains/losses and volume changes (MoF).

*Italic: IMF staff compilation from the provided chapter content.*

### annex for the 2023

### annex for the 2023 budget (1estea2021003)

### 2. Budget execution, carryovers, and medium-term framework
- Restrict the size of carryovers:
  - Amend the State Budget Act to reintroduce a cap on the overall size of carryovers, in line with best practice. (MoF)
  - Apply the new cap on carryovers to the 2023 budget. (MoF)
- Disclose outturns of previous years alongside medium-term projections to improve understanding of revenue and expenditure trends:
  - Add columns for outturns of two previous years, alongside current year estimated outturn and four years of projection, in the main medium-term budget framework tables of the State Budget Strategy for 2022-2025. (MoF)
  - Require program/performance supporting documents to include at least two outturn years alongside projections for the 2023 draft State Budget. (MoF)

### 2.3 Improve transparency and effectiveness of investment decisions
- (a) Centralized project monitoring:
  - Establish a project monitoring database which includes reporting of both financial and physical progress. (MoF/MoP in collaboration with LMs)
  - Establish a project review process, using the new database, for projects at risk or those which have delays or cost overruns. (MoF/MoP and LMs)
- (b) Ensure Riigikogu approval is supported by full understanding of total costs:
  - Require line ministries to include total project costs, historical as well as future, in the multi-year investment plans they submit for the State Budget Strategy and the annual Draft Budget Memorandum for the 2022-2025 budget. (MoF, LMs to supply plans)
  - Use the new database to generate the multi-year investment plans for the 2023-2026 budget documents. (MoF/MoP in collaboration with LMs)
- (c) Standardize appraisal requirements for large projects:
  - Review current appraisal practices in Estonia, agree framework for future large project appraisal requirements, and issue new regulation that will standardize appraisal processes. (MoF/MoP/key LMs and SOEs)
  - Ensure all large projects follow the new standardized appraisal requirements, providing training and guidance where necessary. (MoF/MoP/LMs/SOEs)

### 2.4 Performance budgeting reforms
- Strengthen links in budget documentation between inputs and outputs/outcomes:
  - Ensure that all budget expenditure information, and all output/outcome results information, related to the first round of performance budgeting in the 2020 budget is presented, analyzed, and discussed in the budget documents produced for the 2022 budget. (MoF)
  - Consult with stakeholders in the performance budgeting process (e.g., line ministries, service delivery agencies, Parliament) regarding their experience of the first full round of performance budgeting and reporting and make necessary amendments to future processes. (MoF)
  - Continue these practices in future years, iterating and improving processes and procedures as required. (MoF)

### 2.5 Citizen understanding and participation in the budget process
- Develop a non-technical “Citizens Guide” and summaries:
  - Publish a non-technical summary of the Summer macroeconomic forecast setting out a broad ‘storyline’ for how international and national economic developments are affecting Estonia’s macroeconomic and fiscal position and what this means for the forthcoming 2022 budget. (MoF)
  - Publish a non-technical summary of the proposed 2022 budget setting out overall fiscal policy approach; the headline tax and spending measures; and the budget’s impacts on the finances of the typical citizen, and the typical household. (MoF)
  - Expand the distributional analysis of the impact of the budget to include a wider range of individuals and households. (MoF)
- Implement formal citizen participation:
  - Draw on international comparative experience to develop an options paper setting out different ways for improving citizen input into the budget process that are appropriate to Estonia’s institutional context. (MoF)
  - Implement the chosen citizen participation option in the process of preparation for the 2023 budget. (MoF)

### 2.6 Comprehensive forecast reconciliations
- Present a comprehensive reconciliation between forecast vintages:
  - Review reconciliation tables presented in other countries with good practices and agree on a format to adopt for Estonia. (MoF, in consultation with CB, FC and other experts)
  - Include a comprehensive forecast reconciliation table, based on the agreed model, accompanied by explanations, in the State Budget Strategy and an update in the draft State Budget Memorandum for 2023-2026 budget. (MoF)

### 3. Macroeconomic and fiscal risk analysis and fiscal transparency
- 3.1 Deepen macroeconomic risk analysis:
  - Use more extensive sensitivity analysis and probabilistic fan-charts to model risk for both macroeconomic and fiscal variables.
  - Include in future forecasts a retrospective comment on realization or not of previously published risk scenarios.
  - Actions: Extend Spring and Summer 2021 forecasts to include clearer sensitivity analysis around key macroeconomic variables and generate probabilistic fan-chart models for both macroeconomic and fiscal variables; in the Spring and Summer macroeconomic forecasts, refer back to previous risk scenarios and discuss realization and implications. (MoF)
  - Continue this practice in future years. (MoF)
- 3.2 Annual Fiscal Risk Statement:
  - Coordinate publication of an annual Fiscal Risk Statement that discusses the size and nature of a full range of specific fiscal risks, including PPPs, to the public finances.
  - Actions: As part of preparation for the 2022 budget, draft an internal paper outlining a full list of potential risks to the public finances from various sources, including from PPPs, with estimation of exposure, likelihood, government’s approach to managing that risk, and implications for the 2022 budget. (MoF)
  - Repeat and develop a public version as part of preparation for the 2023 budget.
- 3.3 Health spending sustainability disclosure:
  - Regularly publish long-term projections for the health fund and for health expenditure sustainability similar to that for pensions sustainability.
  - Actions: Include in budget legislation, or other suitable legislation, an obligation for periodic (e.g. every 3-4 years) published health fund and health spending long-term sustainability analysis, starting in 2022. (MoF)
  - If legislation is not possible, publicly commit to producing such analysis on a periodic (e.g. every 3-4 years) basis; starting in 2022 (MoF). Publish the health spending sustainability analysis in accordance with the new legal requirement/commitment.
- 3.4 Comprehensive asset and liability management strategy:
  - Develop and publish a comprehensive strategy covering policy towards managing all government assets, liabilities, and overall net worth in the short, medium and long-term.
  - Actions: Using the PSFS, gather existing government policies and strategies relevant to public sector assets and liabilities for review. (MoF)
  - Based on analysis, draft a whole-of-public sector asset and liability management strategy or policy for ministerial approval and publication. (MoF)
  - Implement the approved strategy across public sector assets and liabilities. (MoF)
- 3.5 Guarantees: likelihood and fiscal impact
  - Evaluate, estimate, and publish the likelihood and fiscal impact of guarantees being called.
  - Action: Undertake analysis of existing guarantees to estimate the likelihood and fiscal impact of guarantees being called. (MoF)
- 3.6 Guidance on cost of emergencies
  - Strengthen guidance on how the costs of emergencies are estimated as part of the risk assessment process.
  - Action: Update guidance for the competent authorities responsible for various risks on how to estimate the potential fiscal impact of emergencies. (MoF, Ministry of Interior)
- 3.7 Quasi-fiscal activities of SOEs
  - Identify SOEs that undertake quasi-fiscal activities, accurately cost these activities, and report on them in the annual report on SOE performance.
  - Actions: Work with SOEs to identify and cost quasi-fiscal activities. (MoF)
  - Include cost estimates of quasi-fiscal activities in annual SOE report. (MoF)

*annex for the 2023 budget (MoF) — 1estea2021003*

---


_Source: https://www.imf.org/-/media/files/publications/cr/2021/english/1estea2021003.pdf_