Why Did Estonia Choose Fiscal Retrenchment after the 2008 Crisis?

The budgetary response of Estonia to the 2008 global financial crisis poses a puzzle. While many other countries increased public expenditure and ran high deficits in 2009, the Estonian government was different: it undertook fiscal retrenchment, combining expenditure cuts and tax increases, despite...

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Bibliographic Details
Published in:Journal of public policy 2011-08, Vol.31 (2), p.163-186
Main Authors: Raudla, Ringa, Kattel, Rainer
Format: Article
Language:English
Subjects:
Activists
Appropriations and expenditures
Austerity
Budget control
Budget deficit
Budget deficits
Critical path analysis
Economic conditions
Economic Crises
Economic crisis
Economic development
Economic growth
Economic policy
Economic recessions
Estonia
Euro
Expenditures
Financial crisis
Fiscal Policy
GDP
Government
Government budgets
Government crises
Great Recession
Gross Domestic Product
Ideology
Industrialized nations
Institutionalism
International finance
Macroeconomics
Political discourse
Public sector
Sovereign debt
Tax cuts
Tax increases
Taxation
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Summary:The budgetary response of Estonia to the 2008 global financial crisis poses a puzzle. While many other countries increased public expenditure and ran high deficits in 2009, the Estonian government was different: it undertook fiscal retrenchment, combining expenditure cuts and tax increases, despite a large drop in economic output. This article explains why the Estonian government opted for fiscal consolidation during the crisis. The ideological position of the governing parties and their desire the join the euro-zone played an important role in driving fiscal discipline. It also argues that the key to understanding Estonia's fiscal decisions in 2009 is what happened in the 1990s: fiscal policy choices became path-dependent as a result of positive feedback loops from previous periods of fiscal consolidation. Path-dependency was further reinforced by institutional capabilities (or lack thereof) created by initial macroeconomic policy choices.
ISSN:0143-814X
1469-7815
DOI:10.1017/S0143814X11000067