Finmin: IMF urges Estonia to put its public finances into order

  • 2024-06-22
  • BNS/TBT Staff

TALLINN - Estonian Finance Minister Mart Vorklaev said that recommendations from the International Monetary Fund (IMF) align with government actions -- in order to curb Estonia's debt burden and budget deficit growth, expenditures and potential revenues must be thoroughly reviewed.

"The government's budgetary stimulus has helped the economy weather years of decline better; now, as our economy gradually emerges from recession, it is essential to continue reducing the budget deficit even more seriously," the finance minister said.

Regarding tax measures, the IMF affirmed that the motor vehicle tax puts Estonia on the right track.

"The parliament passed the law last week. Its implementation from 2025 is essential both for achieving environmental goals and for generating budget revenues to make necessary investments, such as in roads and public transport," Vorklaev said.

The IMF also stresses that Estonia must soon choose whether to remain a relatively low-tax burden country or opt for greater welfare and higher-quality public services, which would entail a tax rate higher by a couple of percentage points.

"Due to the need for increased defense spending, the introduction of a broad-based security tax is inevitable. The revenue from this tax will cover additional defense needs, as well as other wide-ranging security-related activities already decided and funded in the 2024 budget, such as strengthening internal security, enhancing crisis readiness in social and health care sectors, cybersecurity, and transitioning to Estonian-language education. Now, decisions must be made on the exact form of this tax; discussions on this have been ongoing with coalition partners since the beginning of the year and will continue," the minister said.

The IMF also commended the government's efforts to limit public sector wage increases and to systematically review expenses during budget revision.

The IMF does not support windfall taxes on banks. The larger profits of banks are largely cyclical. Loan volumes have already begun to decline, and financing costs for loans have increased, affecting bank capital. Sufficient buffers are necessary, however, to be prepared for possible shocks and to ensure loan availability.

Estonia's economic transformation and growth could also be supported by a more ambitious green transition and the adoption of digital technologies in traditional sectors, which are challenges not only for Estonia but also for all of Europe.

"The government, through EU support funds, has created all opportunities for companies to promote the digitalization of their activities. I urge all entrepreneurs to invest this money in their competitive advantage and contribute to economic growth -- approximately 350 million euros is available for companies to use for this purpose," Vorklaev said.

On Friday, the IMF released a comprehensive report assessing Estonia's economic competitiveness and providing economic policy recommendations.