Government counts money, drafts budget 2006 - 09 strategy

  • 2005-06-01
  • By Ksenia Repson
TALLINN - The government adopted a budget strategy, aiming to discharge numerous coalition obligations, for the next four financial years on May 26.

The strategy will be tackled through the ecological tax reform, anticipating the rise of excises taxes on fuel, tobacco and alcohol, and earning profit from "Eesti Energia" and other state-owned share industries.

The 203-page document includes a detailed description of future plans concerning built-in budgetary items. Now that it has been approved, it must be balanced.

Eiki Nestor, member of the Riigikogu's (Estonian parliament's) select committee on the control of the state budget, told The Baltic Times that the main problem lies in Estonia's incapability to plan expenses for the upcoming years.

One such example is the Estonian Health Insurance Fund deficit. According to the budget strategy, the deficit will grow to 377 million kroons (24 million euros) in 2006. Hospital service payments will be examined and analyzed as a means of covering future expenses. Hospital profits will be considered as well.

Minister of Social Affairs Jaak Aab intends to submit 10 propositions on how to pay off the incurred deficit.

It is already known that in the beginning of 2006 social security tax will be pushed to 1,000 kroons. That will give an extra 52.1 million kroons to the Estonian Health Insurance Fund and 78.8 million kroons to the Pension Insurance Fund, which is also in poor condition. As the budget strategy states, social security rates should reach the minimum salary level by 2009.

Meanwhile, the reaction from the Estonian Employer's Confederation was predictable. In a published statement, the confederation promised to freeze the minimum wage growth within four days, after the strategy had been adopted and a rough discussion had begun.

The group does not find it reasonable to withstand supporting the health insurance fund with increasing social taxes rates, since social insurance rates in Estonia are among Europe's highest, while salaries are notably lower. As a result, they proposed to raise social taxes for individuals from 700 kroons to 2,690 kroons, the state's minimum salary, to cover health expenses.

Based on data from the Estonian Tax and Customs Board, it was calculated that the Estonian Health Insurance Fund's income could be increased by 150 million kroons. Nearly 180 million kroons could be saved if work disability payments were shaved to 70 percent and sick-list indemnities were rated from the forth day of illness. Public and political discussions on the topic are currently being held.

Aivar Soerd, minister of finance, emphasized that the new strategy, as well as the fiscal and social policy, takes into account inflation, the budget deficit and national debts that fall under the Maastricht agreement (see story on Page 8).

To implement coalition promises, the minimum income tax rate will be decreased for families with two or more children. In return, this will cut down budgetary earnings by 360 million kroons a year.

Meanwhile, income taxation will be reduced gradually by 1 percent a year and reach 20 percent in 2009. The tax-free income minimum for individuals will be 2000 kroons per month, and local governments will receive 11.8 percent of their gross-income.

The European Union has established Dec. 31, 2009 as the deadlines for Estonia to raise the abovementioned excise tax rates. However, an earlier than scheduled jump in fuel, tobacco and alcohol excise taxes is planned.

According to a report by Soerd, the excise tax on unleaded gasoline will be increased by 5,000 kroons per 1,000 liters on June 1, 2006 - 500 kroons more than today. This means a rise of 0.5 kroon a liter in gas and diesel-fuel oil.

At the same time, Soerd added, the price for tobacco and alcoholic beverages will rise by approximately 13 percent.

Politicians plan to establish an ecological tax reform as well, which will help earn funds from energy taxes and ecological taxes. Levying a motor-vehicle tax is also an option for the future.

Finance committee member and former Finance Minister Taavi Veskimagi (Res Publica) said that the budget strategy was a step back for the ruling coalition. In his opinion, the coalition was going to fill the budget hole with income taxes 0.7 percent or 1.2 billion kroons higher than the current level.

Veskimagi added that he was also bothered by the fact that if the document comes into force the way it is now, transition to the euro will not be as easy for the country. When the coalition was discussing its agreement, he added, it seemed there were enough funds to implement their obligations. What they lacked was an elementary understanding of the state budget position.