wages will put upward pressure on the prices of domestic goods and services. one reason for the rapidly rising labour costs has been the decline in the working age population, but faster growth in wages than in productivity could endanger the competitiveness of the estonian economy in the longer term. companies are for now able to cover the rapidly rising labour costs from their profit buffers, but in the longer perspective this will inevitably cease to be possible. reduced profits threaten the ability of companies to invest in higher productivity and in the human capital needed for more complex and highervalue work. i have often said, and it bears repeating again today, that the key challenge in the development of the estonian economy is how more complex work than hitherto can be accomplished with a smaller workforce. the rapid rises in wage income and household consumption boosted tax revenues in 2014, which in turn improved the state finances and helped lift the state budget to a small surplus in 2014. going forward it is important that the government stick to the target agreed in the budget strategy of maintaining a nominal budget balance and building up its reserves. • here i should note that the purchases of bonds by central banks and the resulting fall in interest rates have encouraged the belief or the conviction that there is a free lunch to be had and estonia is denying itself a feed because the estonian state does not issue bonds. we all know full well that there is no such thing as a free lunch. even were the central bank to purchase one quarter of the bonds issued by the state, those bonds would still constitute a debt that would have to be paid back eventually. • financing new investment through state bonds could well prove inefficient and harmful for the estonian economy as a whole, even if the investments are in good projects. the low unemployment and rapid wage rises that we see at the moment bis central bankers ’ speeches would cause a large part of the extra money gained from the emission of state bonds to be lost, as infrastructure projects would cost much more than before. large state construction projects that can only be temporary in nature would also cause economic and social problems in estonia, because once the large projects finish, a great number of those working on them would find themselves unemployed, having left jobs in other sectors. • it must be understood that estonia already profits from the purchases of bonds by the central banks of the euro area. financial markets act as a series of communicating vessels, so that when interest rates in one area fall, the effect is passed on to other areas.

at a conference in budapest about a month ago, on 19 january 2007, by jacques de larosiere, former managing director of the imf and ebrd president and former governor of the banque de france : stage one : before the 1980s, governments were convinced that there was a trade off between “ a little more inflation ” and less unemployment. this policy eventually led to double digit inflation in advanced economies and galloping inflation in a number of developing countries. high inflation was finally recognized as inimical to growth and socially disruptive. in 1979 - 1980, the game of systematically seeking employment at the expense of price stability came to an end. the whole process had entailed high economic and social costs ; stage two : in 1980s and 1990s, monetary policy managed to reduce inflation. most central banks were gradually made independent from governments and acquired new credibility. this was the period of the triumph of central bankers. us inflation came down from 13 % in 1979 - 1980 to 2. 2 % in 1999. ” inflation has been a part of our lives for the last thirty years and it has become practically impossible to imagine living without it. it is always on our minds – when buying things or planning our future, when borrowing or giving presents – and it would feel strange not to count with the increase in prices! because it has been with us for over 3 decades, an abnormal situation has become normal and it is now feels abnormal that there is no inflation. true, if there is inflation, it is easier to do the budgeting, to plan, to breathe, etc. because if your prices are changing all the time and your exchange rate is unstable, you will never really be comparable with the rest of the world, as today ’ s calculation will simply not apply tomorrow, let alone the day after. the same is true of my role as the nbs governor : my job would be far easier if i chose to cover up my own and the institution ’ s inefficiency by means of inflation and currency depreciation. but times are changing, for, let me remind you, serbia is still in the process of transition and it will take some time yet to complete! if nothing else, the stability of prices and currency has at least impelled many to come up with much more creative “ explanations ” for price rises. only a year ago, the increase in prices of milk, cable tv and public transport services was blamed on the exchange rate … in the course of the past