TALLINN - Cabinet ministers found themselves on the defensive last week as Central Bank officials expressed concern about the rising threat of inflation 's and the attendant difficulties of adopting the euro 's over the next three years if the tax hikes set out in the country's budget strategy are implemented in full.
Finance Minister Aivar Soerd was quick to calm fears that the proposed tax increases in the budget strategy 's mainly excise duties on alcohol, tobacco and fuel 's could not be amended if inflation spun out of control and became an obstacle to meeting the Maastricht criteria for adopting the common currency.
"We will be following the inflation criterion, we will be following the budget deficit criterion, as well as the criteria set out for public debt and interest rates. The conditions for the transition to the euro must be met," Soerd said May 27.
The Cabinet will over the next month analyze Estonia's abidance by the criteria for adoption of the euro, he said. "If it turns out that the inflation criterion is in jeopardy, necessary measures will be taken," said the People's Union minister.
Inflation is rearing its head in Estonia, as the April 2005 figures show a 4.7 percent increase in the consumer price index from figures a year earlier.
Bank of Estonia officials were among the first to express doubt about the budget strategy, which covers the years 2006 's 2009, saying that it jeopardized the country's plans to introduce the euro.
"The position that has prevailed in commentaries by the government so far is that the additional expenditures arising from the coalition agreement won't be financed by raising indirect taxes, which will bring about inflationary pressure," Ulo Kaasik, head of the bank's economic policy department, told the Postimees daily.
According to the Bank of Estonia's preliminary estimates, the planned increase in the alcohol, tobacco and fuel excise duties will translate into an additional price rise of approximately 0.5 percent in 2006. "Although additional inflationary pressures will come about mainly in the second half of 2006, it will put Estonia's capability to meet the Maastricht inflation criteria under threat, and the goal to adopt the euro from Jan. 1, 2007 will be jeopardized," Kaasik said.
Soerd admitted that it was essential to track other factors affecting domestic prices, including world prices for oil and food as well as local administrative price increases. Domestic demand would also have to be kept in check, he added.
He also said that it is important for Estonia's leadership to control administrative price increases and avoid carrying out an expansive budget policy, the minister said.
Analysts expect the European Commission to evaluate Estonia's readiness for adoption of the euro in autumn 2006. Current criteria dictate that the average rate of inflation must not exceed by 1.5 percentage points the average inflation level in the three eurozone members with the lowest inflation rates.
The opposition also criticized the budget strategy, saying it increased the tax burden on Estonians.
"If the rhetoric of that document is implemented we will not adopt the common European currency from Jan. 1, 2007 because we won't meet the Maastricht price stability criteria," former Finance Minister Taavi Veskimagi, a member of Res Publica, told the Baltic News Service.
He said the government had found ways to add some 2 billion kroons (128 million euros to the budget to bridge the gap created by the coalition agreement. "This coalition will increase the tax burden by at least 0.7 percent or by 1.2 billion kroons compared to what was planned earlier," he explained.
The budget strategy also calls for increasing dividends from state-owned companies by 270 million kroons in 2006, sparking sharp words among businessmen. But it is the government's plan to raise the alcohol duty by 10 percent from next year instead of the planned 5 percent that sparked the harshest criticism.
"Every increase in the excise rates boosts the sale of illegal alcohol," Janek Kalvi, board chairman of the leading alcoholic beverages maker AS Liviko, said. He said that combined with the 5 percent increase already enacted this year, the measure would result in more business for the sellers of illicit alcohol.
Mall Pakler, board member of the tobacco products importer AS Tobaccoland, said the government's additional tobacco excise duty will expand the black market. She said that in the present situation the effect is likely to be substantial.
