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Estonian central bank wants nominal budget surplus in 2018

TALLINN (Reuters) - Estonia’s government should seek to achieve a nominal budget surplus next year given the rapid pace of economic growth, central bank governor Ardo Hansson told Reuters.

FILE PHOTO: People walk past Estonia's central bank building in Tallinn, Estonia December 15, 2011. REUTERS/Ints Kalnins/File Photo

Hansson said in an interview conducted on Friday that the government should cut back its spending plans in order to achieve that goal. The government said last week it had reached a preliminary agreement on the 2018 budget, with spending expected to exceed 10 billion euros ($11.94 billion) for the first time.

“We have urged them to do a bit more, because the cyclical position is strong now and if you can’t generate a nominal surplus now in these kinds of circumstances, it would be very hard to do that otherwise,” he said.

“The government is moving in the right direction, they recognize that when they have an economy that is growing 5-1/2 percent, you can’t pursue a policy as if you were growing one or two percent,” Hansson added.

The Estonian economy expanded 5.7 percent year-on-year in the second quarter of 2017, accelerating from a revised 4.6 percent in January-March.

With European Union funds boosting investment in infrastructure, the central bank is particularly concerned about overheating in the construction sector, where costs for the government are rising amid labor shortages.

“EU funds are very cyclical and I think we need to do a better job of public investment management,” said Hansson, adding that the way infrastructure projects are managed was creating a pro-cyclical economic policy.

The Estonian finance ministry said last week the Baltic country’s gross domestic product is expected to grow 4.3 percent in 2017, and by 3.3 percent in 2018 based on domestic demand supported by investments.

But total government sector debt is set to remain the lowest in the euro zone, falling to 8.6 per cent of GDP by 2019 from 9.6 per cent of GDP in 2016.

The government is expected to finalize its 2018 budget by September 27 and send the bill to parliament.

($1 = 0.8372 euros)

Reporting by David Mardiste; Editing by Catherine Evans