By Vivienne Russell | 28 September 2012

Estonia shows that a drastic reduction in public spending can return economies to strong and stable growth, the Centre for Policy Studies claimed today.

The UK-based pro-market think-tank has issued a case study on the austerity programme adopted by the Baltic country in 2008. It includes comments from Jürgen Ligi, the Estonian finance minister who oversaw the programme.

Ligi cut government spending by 10% between 2008 and 2010. In the short-term output weakened and unemployment rose to 20%. However, since then, unemployment has fallen back to just over 10% and growth recovered to 3.3% in 2010 and 8.3% in 2011. The government also met its target for the deficit not to exceed 3% of gross domestic product.

‘We had a period of illusory growth, based largely on spiralling private sector debt,’ Ligi writes in the report’s foreword. ‘This was unsustainable… In order to keep our economic foundations intact, the only viable way was a swift reduction in government spending.

‘The recession initially came at a high price. But in hindsight this was a necessity to put us back on the path of long-term, sustainable economic growth.’

He added that Estonia continued to have a balanced budget and low debt – ‘increasingly rare qualities in the world we live in today’.

Estonia has been at the centre of an online row, after the American economist Paul Krugman argued that the country’s recovery had been somewhat overstated, a stance that drew angry rebuttals from Estonian president Toomas Hendrik Ilves. The CPS’s paper also takes issue with Krugman’s criticisms.