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Why Did Estonia Choose Fiscal Retrenchment after the 2008 Crisis?

Published online by Cambridge University Press:  01 August 2011

Ringa Raudla  and
Rainer Kattel
Ringa Raudla*
Affiliation:
Public Adminsitration, Tallinn U. of Technology
Rainer Kattel*
Affiliation:
Public Adminsitration, Tallinn U. of Technology
*
Dr. Ringa Raudla Department of Public Administration, Tallinn University of Technology, Akadeemia 3, Tallinn 12618, Estonia, e-mail: [email protected]
Prof. Rainer Kattel Department of Public Administration, Tallinn University of Technology, Akadeemia 3, Tallinn 12618, Estonia, e-mail: [email protected]
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Abstract

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.

Type
Research Article
Information
Journal of Public Policy , Volume 31 , Issue 2 , August 2011 , pp. 163 - 186
Copyright
Copyright © Cambridge University Press 2011

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