Economist: Tax burden in Estonia is low, increasing pensions and maintaining services is beyond the budget's means

The economic growth postponed until next year will be accompanied by a noticeable increase in prices and a decrease in real consumption. What does the new budget promise? What is the benefit of government bonds offered to the population?

• Stimulating economic growth is too expensive
• Education and medicine will partially become fee-based
• Government bonds are not a means of investment

Elena Poverina, video column host August 30, 2024, 07:50

The economic growth postponed until next year will be accompanied by a noticeable increase in prices and a decrease in real consumption. What does the new budget promise? What is the benefit of government bonds offered to the population?

Swedbank Chief Economist Tõnu Mertsina answered Rus.Postimees' questions live on air.

Excerpts from the conversation :

– The Ministry of Finance and commercial banks have published economic forecasts. What questions remain unanswered?

– We do not yet know what the full tax package will be in the end. We made our forecast taking into account the already legalized taxes and previously planned expenses. In September, the coalition will discuss the state budget. More tax changes may follow.

– One analyst noted that the forecasts do not take into account the likely decline in tax revenues – people and businesses will tighten their belts, and alcohol trade will flow abroad…

– Of course, there are risks. First of all, when we talk about increasing the excise tax on alcohol. I believe that the state understands this. The impact of the increase in excise taxes on border trade will be studied.

The state plans to receive 251 million euros from the excise tax on alcohol, which is less than 2% of the total amount of taxes.

– Why is economic growth postponed until next year?

– Real household incomes have been growing since the middle of last year. Trade is still in the red, this indicator is -2% compared to last year. Household confidence in the future is still very low, and this is reflected in the population's willingness to buy and spend.

Exports are gradually approaching zero. We may even see a small plus this year. This will have a positive effect on the Estonian economy.

In the first half of the year, Estonia's GDP fell by 1.4%, the second half will look better, but will still end up in the negative. Swedbank predicts -0.6%.

– We are facing rising prices and a decline in real consumption. What are the consequences of all this for the economy?

– When the state comes out with another package of tax changes and cuts budget expenditures, this has a negative impact on GDP, which in turn has a negative impact on domestic demand.

According to Swedbank's forecast, real net wages will decrease next year. This will have a negative effect on private consumption, which accounts for about half of GDP.

– Is there no alternative to further tax increases and spending cuts?

– Yes. The tax burden in Estonia is low compared to the EU average or Finland. And this affects the state's revenues. And the population's expectations of public services are too high. Current taxes are not enough to cover existing demands.

– So, in the future, higher education and medicine will become paid, and pensions and social benefits will have to be cut?

– Many people already pay for medical services themselves. Healthcare will not become completely paid, but the share of paid medicine may increase.

Higher education should guarantee a job with a high salary. If there is no such guarantee, young people will go to study and work abroad. I do not believe that higher education will become completely paid, but it is possible that some education will be transferred to a paid basis.

– What awaits pensions and social benefits?

– There are 310,000 old-age pensioners in Estonia. Any increase in pensions by even a couple of percent is a big burden on the budget. An increase will only be possible when tax revenues allow it.

– What does the new budget promise us?

– The priority is to reduce the budget deficit. The most important goal is economic growth. Stimulating economic growth would cost the state a lot.

– Estonia will offer the population government bonds at 3.3% per annum. What is the benefit? Are we promised 3.3% per annum with inflation at 5% and the need to pay VAT when selling bonds?

– This rate is the result of a market compromise and the state's capabilities. The market is interested in higher returns, but the state cannot pay such a rate. I think 3.3% is the best option. In Latvia and Lithuania, the layout is approximately the same, only inflation is lower there.

Most likely, government bonds should be viewed not as a means of investment, but as an opportunity to preserve your savings.

More details in the replay!

Postimees Studio: What do the forecasts, new budget and government bonds promise? / Presenter's clothes: Tallinna Kaubamaja / InWear Photo: Madis Veltman

• Why is economic growth postponed until next year?
• What are the consequences of a new round of price increases and a decline in real consumption?
• Are there alternatives to further tax increases and spending cuts?
• What does the new budget promise us?
• Will higher education and medicine become paid?
• Pensions and social benefits under threat of cuts?
• The Swedish economy is going through hard times, while Lithuania is booming. Why? How will this affect the Estonian economy?
• What will be the consequences of the payroll tax?
• What is the benefit of government bonds at 3.3% per annum?
• The decline in the construction sector in Estonia in Q2 was 4% year-on-year. Where else is a decline inevitable? Which sectors are expecting growth?

Presenter's clothes: Tallinna Kaubamaja / InWear

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