The International Monetary Fund said at the end of its annual Article IV bilateral discussions with Estonia that lowering the tax burden on the low-income part of the workforce is one of the chief measures within Estonia's control when it comes to improving competitiveness.
The IMF's primary conclusions, according to uudised.err.ee:
- As flexible as the Estonian labor market is, the shortage of skilled labor and high tax rates are keeping unemployment high even in good economic times.
- The tax rates on the workforce are high, especially for low-wage workers, and this could curtail hiring and competitiveness. The tax burden on low-income earners should be lowered.
- The resulting shortfall in the budget could be balanced by tax reform (abolishing tax incentives of a regressive nature or establishing a property tax).
- The slowdown in growth (only 0.8 percent last year) was due to non-recurring factors and growth will accelerate through 2015. The IMF says growth will be 2.5 percent this year.
- The country is exposed to foreign trade risks - negative growth in Finland or lower than expected growth in Latvia or Sweden could hamper export or lower FDI.
- Shocks related to the former Soviet sphere to the east could also curtail export and economic growth.
- A rise in interest rates in Nordic banking systems could have a significant effect on household borrowing capacity and in turn reduce consumer demand.
- The labor market in Estonia seems overheated already, as real wage growth outstrips the growth in labor productivity. This could hurt competitiveness and export growth.