Estonia's finmin-designate: VAT exemptions not efficient

TALLINN - Mart Vorklaev, Estonia's finance minister-designate from the Reform Party, said that it would not be reasonable to make any concessions or exemptions to the VAT hike planned from 2024 as they are inefficient as a whole, distort the revenue base and would prove administratively expensive.

"According to various studies, VAT reductions are only partially carried over to prices and a share of the reduction goes into the profits of merchants and producers, which would mean that the impact on inflation would be smaller than expected. Therefore, the loss in budget revenue from a VAT reduction would be larger than what consumers would gain as a result of lower prices," Vorklaev told BNS.

The VAT on foodstuffs can be lowered in theory, but it would be a very costly measure for the state that probably does not result in an equal volume of price decrease or slower inflation.

"Of our neighboring countries, Finland is currently weighing eliminating or changing its exemption, which means that the VAT rate on food would be raised instead," Vorklaev said.

He added that the governing coalition has an obligation to improve the state budget position, which means that in order to reduce the deficit and cover Estonia's increased defense spending, decisions need to be made to improve revenues.

"Supplementary exemptions would bring the budget even deeper into negative territory. We cannot let that happen, and each one of us needs to contribute to it as a citizen," he said. "According to the food industry, their price increase was due to the increase in energy prices, which have now fallen significantly. Therefore, it should also have an impact on food prices," Vorklaev opined.

The incoming governing coalition has decided that the VAT rate is to increase by 2 percentage points to 22 percent from Jan. 1, 2024, and that both personal income tax and corporate income tax on distributed profits will likewise grow by 2 percentage points to 22 percent.