Parliament passes tax amendments with aim to decrease tax burden

  • 2007-05-30
  • By TBT staff
TALLINN - In its first big move since taking power in April, the government on May 24 adopted a package of tax amendments that, according to the Finance Ministry, will save Estonia's taxpayers some 351 million euros over the next four years. Also last week the ratings agency Standard & Poor's gave Estonia a stable outlook despite the Baltic state's struggle to rein in rising inflation and contain robust consumption that has been fueled by cheap loans.

The tax amendments mainly target tobacco, alcohol and gasoline, though an excise on electricity was also approved as part of the package. Ministers lowered income taxes and increased the tax-free minimum.
Finance Minister Ivari Padar stressed that, as a result of the measures, the overall tax burden in the country would decrease from 31.1 percent of gross domestic product in 2007 to 28.8 percent in 2011.
The amendments are the new center-right government's first major economic incentive since taking office in April after the general elections on March 3.

In all, the state will receive an additional 1.8 billion kroons (115 million euros) as a result of the tax changes next year, though by 2011 its losses will amount to 4.2 billion kroons, Prime Minister Andrus Ansip said.
Analysts praised the hikes in the excises, even while admitting they will undoubtedly exacerbate inflation, which is expected to rise to 6.5 percent after the amendments go into force in 2008.
They said that excise taxes, which must be harmonized with those of richer EU member states, should be increased sooner rather than later. "What the government could be reproached for is that such steps weren't taken a few years ago," said Maris Lauri, an analyst at Hansabank.

Ansip said that raising the excises is the best thing that can be done for the sake of the euro, though no one can guarantee that the measures would open the door to eurozone membership.
One day prior to passage of the amendments, Standard & Poor's gave Estonia a favorable ratings outlook due to "a strong track record on fiscal control, a competitive economy, and the prospect of adopting the euro by 2012."
The agency said the Baltic state's "strengths offset the risks…posed by significant external imbalances and the vulnerabilities inherent in a small, open economy." It also pointed out Estonia's high current account deficit and the need to contain domestic demand.

Indeed, the Bank of Estonia announced last week that loan growth among individuals at the end of April amounted to 91.3 billion kroons, an increase of 58 percent year-on-year.
Loans to companies grew by 51.5 percent during the year to 92.1 billion kroons while loans to financing institutions fell by 17 percent to 16.8 billion kroons, the bank said.
The total value of outstanding loans issued by Estonian banks was 202.9 billion kroons at the end of April, compared with 141.6 billion a year ago.

New wage data is also cause for alarm, as it shows that increases in wages have grown significantly faster than prices, which points to a productivity gap.
According to the Statistics Office, gains in the wage index have surpassed the increase in the price index by 49 percent as of December 2006, based on data starting from the second quarter of 2001, pointing to a decline in productivity.
If in the second quarter of 2001 the average wage was 5,767 kroons, in the fourth quarter of 2006 it amounted to 10,212 kroons. Thus, the average wage has grown nearly 77 percent in 5.5 years, while prices have moved up by approximately one-fifth during the same period, the Statistics Office said.

In this context, the words of European Commission Joaquin Almunia, who was in Tallinn last week, were poignant.
He said that in order to maintain growth Estonia must increase the share of the population active on the labor market and improve workers' skills, as well as increase productivity.
Speaking on May 23 at an international conference hosted by the Bank of Estonia, Almunia, who is commissioner of European economic and monetary affairs, said that the shortage of labor was becoming a bottleneck in Estonia's efforts to reach the EU average in terms of GDP per resident.

At the same time, wage increases are reducing the competitiveness of Estonian products in the domestic market and foreign markets alike, the commissioner added.
To ensure continued development, the skill-level of Estonian workers must be improved, which in its turn requires changes in the education system and lifelong learning.
Further changes in laws will help make the labor market more flexible, which in its turn will boost employment and productivity, Almunia said.