What is encrypted in the new coalition agreement? What signals are sent to entrepreneurs and the population? Is the government working for a recession or growth of the economy?
- Coalition plan will fuel uncertainty and inflation
- There are no ambitions and no idea where we are going and what we want
- Disconnection from the Russian energy market will result in a new tax
What is encrypted in the new coalition agreement? What signals are sent to entrepreneurs and the population? Is the government working for a recession or growth of the economy?
Economics expert Raivo Vare answered questions from Rus.Postimees live.
Excerpts from the conversation :
– In March, you predicted in this studio that the crisis would be long. Has your forecast improved after reading the coalition agreement and analyzing the financial and economic block of the document?
– Not good. Crises are cyclical, and the speed of overcoming them strongly depends on the decisions made. The crisis is now in its third year – the economy is declining and uncertainty is growing. In such conditions, it is necessary to create a new paradigm.
Are you asking about signals to entrepreneurs and the population? So this signal should give confidence, predictability, and optimism. Unfortunately, there is nothing of the kind in this document. The problem will lead to the fact that the recovery from this crisis will be delayed and different from the normal version of overcoming a recession. This could last until the end of the year, or even longer.
I believe that by the end of the first half of 2025 we will come out of zero, but this will not happen quickly or rapidly, like last time. This time we will come out of all this slowly and tediously.
– For starters, at least get out of the minus. The economic decline is -2.4%. This is Bank of Estonia data for the first quarter on an annual basis…
– We made it! The Estonian economy has been developing at an accelerated pace for 30 years, and now we are thinking that, thank God, if we reach zero. If we get out of this, then it will be good. This is the paradigm shift that I have already talked about.
The coalition agreement has a big problem with inflation, namely fueling inflation. The tax plan includes a number of urgent measures and those postponed until next year, which together are bound to spur inflation. This results in a decrease in the purchasing power of the population.
With the introduction of income tax, the economic model radically changes. Estonia has always been famous for the fact that profits were taxed only in case of payments, and investments were not taxed. Unfortunately, we are now moving away from this principle. And while this is understandable because we temporarily need to finance increased defense spending, it sets a precedent.
There is one more charge. Today, no one, including the Minister of Finance himself, can answer how the new taxes, including the notorious 2% of income tax, VAT and corporate income in a single security package, will be collected and used.
– It is known for sure that 2% will be charged even to pensioners and low-income people…
– And this is a completely separate topic. And this is also an innovation.
– Essentially, this is a reduction in the tax-free minimum?
– Almost yes. Theoretically, no. In this case, tax-free steps are not used. This is called temporary additional taxation.
– What will the introduction of a corporate income tax lead to? And why are the banks essentially untouched? With their profitability of 20%, they will survive a tax of 2%, but for the rest, this turns into a threat to investment, since enterprises, as a rule, invest from 2% to 5%. Will our business stop investing in development?
– Enterprises can invest not from their own capital, but from borrowed capital. And there are also high stakes. And there is no choice. This means that businesses will have even less incentive to finance new investments. It is better to postpone them, since there is a certain element of uncertainty.
Entrepreneurs are almost certain that the government's current approach will not achieve its stated goals. Especially given the fact that economic recovery will take longer than expected. And this will again mean a lack of money, a struggle with the state budget deficit, which will force the government to come up with something else.
Why should entrepreneurs do business under risk conditions? In such a situation, few will be willing to invest, and even then not on a long-term basis, but only in short-term specific transactions.
– What are the business support measures? They call it a reduction in bureaucracy, an abstract promise to attract investment, and a desire to improve the financial situation. Are these not just slogans?
– So far this is laid down at the level of slogans. We don't know anything else. Yes, the slogans are absolutely correct. It is high time!
The only practical promise is a reduction in government spending: 10% over three years, gradually 5%, 2% and 3%, respectively. The total savings will be 800 million euros. We do not yet know whether this will actually be implemented.
The tax plan aims to generate more than 1 billion euros immediately. And due to cuts in government spending – at best, 100 million euros, and only if it works out. This is a long and unpleasant story. In fact, the public sector is still growing, both quantitatively and in terms of costs. All cite a lack of funds for firefighters, police officers, teachers and doctors. However, this is not the problem at all, since management costs are growing. And they grow all the time.
– Nowadays there is a lot of talk about electricity, which is twice as expensive here as in Finland and Sweden, and loans cost 1–1.5% more. How to eliminate competitive disadvantages? Are solutions proposed in the coalition agreement?
– No. We continue to believe in the absoluteness of the free market, which in fact is not free, but speculative. Secondly, we do not yet know the consequences of structural changes in the energy market that will be associated with a disconnection from Russia early next year.
– They no longer hide the fact that electricity will become noticeably more expensive…
– It is already 100% known that it will become more expensive. And what is it? Electricity fee or actual tax? After all, everyone will pay it, like 2% from scratch in the defense package. Essentially, it is exactly the same tax. In this case, for maintaining the frequency at the required level and for making the necessary investments.
In fact, this would mean a targeted tax for everyone without exception. In this way, we will once again spur inflation, and as a result, we will reduce competitiveness, which will delay economic development and create a negative impact on competitiveness for the future.
God forbid they think of imposing a turnover tax on exports as well! Then all! Then the collapse of the economy will be guaranteed.
– Have the consequences of introducing a car tax and an annual increase in excise taxes by 5% been calculated? Are we facing another surge in cross-border trade? Why are we ready to step on the same rake again?
– As a practitioner, I think you are right, it will be so. Theoretically, of course, some calculations were made, but not in terms of the impact on the economy, that is, on consumption. Only the estimated fiscal impact was calculated, that is, the filling of the budget with taxes. It is planned to collect about 200 million euros from the car tax and a little more from excise taxes.
Where are we going? Entrepreneurs openly talk about two problems. We have no ambitions. We don’t know what we want even in the future for the next 10 years. There is no big idea where we are going and what we want. Secondly, given the pressure of taxes on consumption, there will definitely not be a rapid economic recovery, and a drop in consumption will lead to a reduction in the revenue tax base. Tax collection calculations will not come true.
– Will the calculations turn out to be a miscalculation?
– Exactly. And then the government will be tempted to do something again to plug the hole in the budget.
– Is the government working to slow down or grow the economy?
– In words it works for growth. In reality, it will delay economic recovery.
More details in replay!
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Postimees Studio: Will the economic downturn drag on? Photo: Oliver Kaur
- At the beginning of March, Raivo Vare predicted that the crisis would be long. Has this forecast improved after analyzing the economic bloc of the coalition agreement?
- How will the new tax plan affect the economy? How many years can the economic recession, which has been going on for 3.5 years, last?
- Who will be hit the hardest by tax increases?
- From 2025, taxes will increase every six months: first, income tax to 22%, after six months – turnover tax to 24%, and after another six months – income tax to 24%. Where it leads?
- Have the consequences of introducing a car tax and increasing excise taxes been calculated?
- What awaits pensioners?
- Can the emergency tax of 2% levied on the first euro be considered as a reduction in the tax-free minimum?
- How will income tax affect the development of enterprises?
- What would be the result of cutting public sector spending by 10%?
- What are the measures to support entrepreneurs?
