Both Tallinn and Pärnu are in tough fiscal situations because of the crisis. Photo by Dirk Heitepriem.
TALLINN — Declining tax revenue has forced two of Estonia’s largest cities into a bitter fight over a loan and a likely bailout request to the cash-strapped national government.
Tallinn’s unpopular 2010 budget continues to cause a conflict between the municipal and national governments, as a loan that could threaten Estonia’s efforts to keep its fiscal deficit within Maastricht criteria has the finance ministry irate. Meanwhile the country’s “summer capital” Pärnu is so awash in debt and deficit it’s prompted city hall to consider asking for a bailout from the national government.
A loan too far
Tallinn still plans to borrow 357 million krooni (€22 million) to repay 233 million krooni (€14.8 million) for earlier loans and to co-fund development projects despite promising earlier not to increase its loan capacity beyond 124 million krooni (€8 million) and the possible Maastricht criteria repercussions, as total government deficit spending cannot exceed 3 percent for eurozone entry. The national government has been persistently critical of Tallinn’s loan plans and now threatens to leave the capital city without some of the income tax revenues if it will take the loan.
According to the Rural Municipality and City Act, a municipal government’s debt burden cannot exceed 60 percent of current year’s budget income. The act requires municipalities to ask permission from the Ministry of Finance if they want to take the loan, and the loan is only allowed for co-financing projects with capital of a foreign origin, such as European Union structural funds. If a local government takes a loan without the ministry’s permission, payments from the ministry to the local government derived from income tax revenue will be cut by 20 percent.
Piret Seeman, a finance ministry spokeswoman said that Tallinn is planning to use part of the money for bridge financing foreign projects, which is not allowed by the law. Seeman said that Tallinn will probably exceed the 60 percent loan capacity by the end of current year and if that happens then the ministry does not allow the loan to go through.
Minister of Finance Jürgen Ligi has criticized the Tallinn budget before, calling it one big mess and arguing it’s not reasonable to consider a loan a source of income. However if the law doesn’t disallow it, the ministry cannot prevent the city from taking a loan.
“I do not blame anyone before the law has been broken, but I will react if that should happen,“ Ligi told Baltic Reports. “If a local government takes on obligations while ignoring the terms by law, then I have to start messing with their revenues.”
The Tallinn municipal government says it is not breaking any laws with the loan. Katrin Kendra, the municipal finance director insists that the city is acting according to law, which allows to use the loan to pay back debts and co-finance projects with foreign-based capital.
“We are following the law and the state can stop the payments from income tax only if we break the law which we are not planning to do,” Kendra told Baltic Reports.”The loan is directly related to loan payments and co-financing foreign projects.”
Estonia’s summer capital to seek help from the state
Financial troubles are not confined to the capital. Pärnu, a coastal city in southwest Estonia with 45,000 residents, is having big financial troubles and is considering asking for financial aid from the Estonian national government.
The shortfall of income tax and poor budgetary decisions made by the former municipal government led by Mart Viisitamm from the Center Party has left the city with payment difficulties. Pärnu’s debt today is 44.5 million krooni (€2.8 million) of which 17 million krooni (€1 million) is formed by unpaid bills, and is forced to ask 20-30 million krooni (€1.2-1.9 million) from the national government.
The decision to apply for government’s help will be decided by Pärnu’s municipal government next month. If that will happen then the national government will have control over the city’s budget.
Mayor Toomas Kivimägi told Postimees on Tuesday that he does not have a problem with government controlling the budget. Rather the opposite, in his opinion the state should have more power to intervene the situations caused by Pärnu’s former municipal government.
According to Maria Murakas-Ollo, the Pärnu municipal government’s public relations adviser, the first step for Pärnu now is to compose a 2010 budget.
“The first step to cross the difficulty is to compile a possibly conservative budget for 2010 without too optimistic income plan, and the costs need a critical overview as well,” Murakas-Ollo told Baltic Reports. The city’s 2010 budget totaled at 667 million krooni (€42.6 million).
