IMF: High Workforce Taxes Prop Up Unemployment Rate
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.