STATE BUDGET STRATEGY 2017-2020 April 2016 Table of Contents Introduction..................................................................................................................... 5 1. PRIORITIES OF THE GOVERNMENT OF THE REPUBLIC......................................... 9 2. PERFORMANCE AREA GOALS .................................................................................... 19 2.1. Family policy .................................................................................................. 19 2.2. Increasing income and fostering entrepreneurship ......................................... 22 2.2.1. Public finance .............................................................................................. 22 2.2.2. Enterprise and innovation ............................................................................ 23 2.2.3. Transport ...................................................................................................... 25 2.2.4. Information society...................................................................................... 27 2.3. State reform and stopping peripheralisation ................................................... 29 2.3.1. Public administration ................................................................................... 29 2.3.2. Regional development and rural life ........................................................... 32 2.4. National security and defence ......................................................................... 34 2.5. Foreign and EU policy .................................................................................... 37 2.6. Energy ............................................................................................................. 40 2.7. Social protection and healthcare ..................................................................... 42 2.7.1. Labour market ............................................................................................. 42 2.7.2. Social protection .......................................................................................... 43 2.7.3. Healthcare .................................................................................................... 46 2.8. Legal order ...................................................................................................... 49 2.9. Internal Security .............................................................................................. 53 2.10. Research and education policy ........................................................................ 57 2.10.1. Research ..................................................................................................... 57 2.10.2. Education ................................................................................................... 59 2.11. Culture and sports ........................................................................................... 63 2.11.1. Culture ....................................................................................................... 63 2.11.2. Sports ......................................................................................................... 66 2.12. Estonian language and identity ....................................................................... 67 2 2.13. Citizenship policy and integration .................................................................. 69 2.14. Environment .................................................................................................... 71 2.15. Agriculture and fishing ................................................................................... 74 2.16. Development of civil society .......................................................................... 79 3. FISCAL FRAMEWORK .................................................................................................. 81 3.1. Fiscal policy objectives of the Government of the Republic .......................... 81 3.1.1. Budgetary position objective of the general government ............................ 82 3.1.2. Tax burden objective ................................................................................... 82 3.2. Budgetary position of the general government ............................................... 82 3.2.1. Cyclically adjusted position of the general government’s budget ............... 84 3.2.2. Structural position of the general government’s budget .............................. 86 3.2.3. Budgetary position of the central government ............................................ 88 3.3. State budget’s position .................................................................................... 89 3.3.1. State budget revenue ................................................................................... 89 3.3.2. State budget expenditure ............................................................................. 90 3.4. Position of other central government ............................................................ 106 3.4.1. Budgetary position of local governments .................................................. 106 3.4.2. Budgetary position of social security funds .............................................. 108 3.5. Tax policy, tax burden and tax expenditure .................................................. 111 3.5.1. Tax differences .......................................................................................... 112 3.5.2. Implicit tax rate and tax wedge ................................................................. 114 3.5.3. Tax expenditure ......................................................................................... 116 3.6. The general government’s debt burden and reserves .................................... 118 3.6.1. General government debt .......................................................................... 118 3.6.2. General government reserves and net position .......................................... 122 SUMMARY ............................................................................................................................ 123 APPENDICES ........................................................................................................................ 124 Appendix 1. Ministry of Finance, economic forecast of spring 2016 ...................... 124 Appendix 2. Financial plan of the State Budgetary Strategy 2017-2020 by areas of government ................................................................................................................. 129 Appendix 3. Use of revenues from EU scheme for greenhouse gas emission allowance trading in 2013-2020................................................................................................... 132 3 4 Introduction Essence of State Budget Strategy The objective of the State Budget Strategy is to ensure fiscal sustainability and to enhance the effectiveness of the government in steering national and sectoral policies. The State Budget Strategy ensures compliance between the state’s needs in sectoral policies and its financial opportunities resulting from forecasts. 1 The first document to serve as a budget strategy was drawn up in 2000. The State Budget Act (in 2002 and 2014) clarified the requirements for the annually prepared budget strategy to be approved by the Government of the Republic, at the proposal of the Minister of Finance, no later than eight months before the beginning of the next fiscal year. The current State Budget Strategy is updated each spring by specifying the plans for the next three years and supplementing the plan for at least one year. This will ensure that medium- term plans are constantly adjusted to changes in the economy, fiscal environment and sectoral operating environment. The budget strategy includes the next four years’ main directions of the state’s budgetary policy, a forecast of economic development, priorities of the Government of the Republic, situation analysis of performance areas, targets with indicators, main policy changes, and a funding plan for areas of government. Implementation and updating of State Budget Policy The State Budget Strategy is implemented via implementation and action plans of sectoral development plans. According to the regulation of the Minister of Finance on drafting the state budget2, constitutional agencies, the Government Office and ministries shall submit draft budgets to the Ministry of Finance for the following year, i.e. action plans and financial plans for the first year of the development plans. Drawing on the summer economic forecast, the Ministry of Finance first analyses the drafts and resolves possible disputes and then submits a draft budget along with an explanatory memorandum to the Government of the Republic for approval. The Riigikogu begins a proceeding of the draft budget no later than three months before the start of the budgetary year. Upon entry into force of the State Budget Act, the Government of the Republic approves the wholesome State Budget Action Plan across areas of government and a supplementary budgetary nomenclature. Each year, ministries add another year to their development documents directed to achievement of the Government’s objectives, thereby ensuring a four-year outlook in strategic planning. The supplements are based on the current State Budget Strategy. As a rule, development plans are submitted to the Ministry of Finance no later than by 1 March. Monitoring the State Budget Strategy Over the course of the current budget year, regular overviews of the state’s