New coalition introduces its tax and economic policies, including extensive tax reforms (1)
Following the conclusion of negotiations, the chairmen of the three parties currently in coalition talks introduced the details of the new coalition's tax and economic policies. This would be Estonia's most extensive tax reform of this century, the new coalition partners underlined.
Speaking in the hall of the Estonian Academy of Sciences, Jüri Ratas, Jevgeni Ossinovski and Margus Tsahkna, the respective heads of the Center Party, the Social Democrats and IRL, the three parties currently in talks to form Estonia's new ruling coalition, intrduced agreed-upon tax changes and changes in Estonia's economic policy at a press conference on Thursday.
"The government budget balance will not change," Ratas stressed as he introduced the package.
Tsahkna backed him up, referring to speculation about potential changes as horror stories. "We will continue conservative policy," he said.
A comprehensive tax reform is set to be implemented. "The income tax rate will not increase; this will remain at 20 percent," said Ratas. "The number of [tax] brackets will remain the same as today as well."
Tsahkna stressed that the income tax-exempt rate would not change either. "We will not be implementing a progressive tax system," said the chairman of IRL.
The income tax-exempt minimum will increase from 170 euros to 500 euros beginning Jan. 1, 2018. Anyone earning a monthly wage of up to 1,200 euros will begin taking home 64 euros more per month.
Beginning at 1,200 euros, the income tax-exempt minimum will steadily drop, and 1,758 euros is the ceiling for wages for which the exemption will apply — the take-home pay of those earning above that amount will remain the same as it is today. 86 percent of Estonia's working population currently earns up to 1,758 euros per month.
Beginning at wages of 2,100 euros per month, the basic exemption will disappear, and the take-home pay of anyone earning above that amount will be 38 euros smaller than currently.
According to Tsahkna, the tax reform will help relieve the wage burden on businesses as well as increase investments. The tax burden on labor will decrease all in all. Ossinovski stressed the fact that this will be one of the most important tax reforms in Estonian history. "75 percent of Estonian wage earners will pocket an additional over 60 euros per month," highlighted the chairman of the SDE.
Tax hikes on wine, cider and beer are set to continue; a bill on the tightening of the country's alcohol policy is set to be sent to the Riigikogu by the government soon.
Off the table, however, are diesel excise tax and accommodation establishments' VAT hikes, which should help improve regional competitiveness. Likewise canceled is a planned decrease of half a percent to the country's social tax, a move which will be replaced by other measures; social tax will remain at 33 percent.
A bank tax will be introduced in order to increase banks' solidary contributions to Estonian society. The new coalition is also planning to restrict the tax-free removal of profits from Estonia and simplify the taxation of company cars.
Corporate income tax burden will be reduced from 20 to 14 percent in the case of stable dividend payments.
A new tax will also be introduced on sugared drinks, which will not include foodstuffs which naturally contain sugar or other foodstuffs containing it but rather target soft drinks.
Plans also include reducing the marginal rate for the tax exemption on interest paid on housing loans, which will preserve the exemption for smaller loans but reduce it for larger ones. "Interest is an earning just like any other," Ossinovski said in explaining why the owners of larger homes, who are presumably more wealthy, should not be eligible for the exemption.
Motor vehicle taxes will increase for vehicles with more powerful engines, while smaller, new vehicles will be taxed at a rate equivalent to one to two percent of the car's purchase price.
There is no plan to increase the unemployment insurance tax in 2017, however the issue was not discussed beyond next year.
Various tax difference measures will be introduced at a capacity of 20 million euros per year in order to encourage job creation in particular. Among other things, one goal is to motivate ship owners to register their ships under the Estonian flag.
According to Ossinovski, the planned tax reform has both a social dimension as well as business-promiting effects. He noted that the increase of some taxes can be expected in order to allow for the decrease of others. All in all, the chairman of the SDE referred to the new tax package as entrepreneur-friendly.
The revenue base of local governments will be increased, while subsidies for the organization of public transport as well as additional funds for intracounty bus route management will be provided directly to county centers.
The new coalition likewise plans to see the nationwide administrative reform through to its completion.
Privatization of state-owned enterprises
The coalition will also launch a three-year investment program worth 315 million euros in order to stimulate the economy. Investments will be directed into three areas — infrastructure, housing and defense investments. The state will not take out any loans for the payment of running costs but rather only for investment purposes, the representatives of all three coalition partners stressed.
Likewise to come is a reform of state-owned enterprise in which the state's minority holdings will be divested. To be divested are up to 30 percent of shares in the Port of Tallinn, up to 49 percent of shares in Eesti Energia subsidiary Enefit Taastuvenergia, up to 49 percent of shares in railway transport company EVR Cargo as well as 100 percent of shares in road maintenance company AS Eesti Teed.
Wage raises and aid
In 2019, teachers' wages are set to increase to 120 percent of the national average wage, which according to current estimates will increase the wage to 1,600 euros per month. Also to be significantly increased is the country's doctoral allowance. Education, Ossinovski confirmed, will be one of the new government's top priorities.
Employees of the cultural sector can expect a supplementary increase in wages as well.
Community policing will be developed and the Police and Border Guard Board's (PPA) rapid response capabilities will be improved as well.
Parental benefit procedures will become more flexible, and additional drug benefits will be introduced for those who require more medications.
Beginning next year, the state budget will begin to cover the cost of cervical cancer vaccines, or HPV vaccines, for girls.
Estonian language studies will be made more accessible, and additional financing will be dedicated to basic swimming instruction. Additional support will be provided to private schools as well.
Monthly support for large families will increase to 300 euros, while three-chid families will begin to receive 500 euros per month in support beginning July 1, 2017.
Top-up support will be reintroduced to agriculture beginning next year, and farmers will be granted full crisis aid.
School lunch costs will increase from 78 cents to one euro per day. The additional funds will go to support smaller rural schools in order to help them avoid having to close their doors, allowing children to continue attending school near home.
Russian-language education will be discussed on Friday; one goal is to support better Estonian language training.
The coalition agreement will likewise be finished up and the distribution of ministerial appointments among the coalition partners decided on Friday. On Saturday the parties' councils must decide whether to collectively join the government.
The Center Party, IRL and SDE are set to meet with the Free Party on Friday morning in order to decide whether or not to invite the latter to join the new coalition or not.
On Thursday night Ratas did not confirm Center MP Olga Ivanova's speculations regarding the possible division of ministerial appointments among coalition parties. "The coalition partners will begin to hold these negotiations tomorrow," he specified.