Kaarel Tarand: The consumer letting the government down yet again

Kaarel Tarand.
Kaarel Tarand. Source: ERR

The economic forecast is an aching reminder that it's time to do something about the country's modest loan burden, Kaarel Tarand writes in a comment originally published by Sirp magazine.

On Monday morning, I happened upon Toomas Paul explaining the concurrences and differences of the three synoptic gospels on Vikerraadio. Paul points out that the men who brought us Jesus' speeches or core texts were not keeping stenographic records but were instead writing abstracts based on their ideological convictions.

While Matthew has Jesus say during the Sermon on the Mount that blessed are the poor in spirit, the socially more sensitive Luke leaves spirit aside and simply declares as blessed "the poor."

Toomas Paul's timing was hardly random as Ministry of Finance analysts also published its fall economic forecast on Monday – a core text on which the government will base next year's state budget and Estonia's four-year budget strategy.

Much as was to be expected, the three coalition partners or rather the political priests that run them set about attaching their own interpretations to the base material even before the government sat down for deliberation at Sagadi Manor (the results of talks are unknown at the time of writing). However, they only disagree on details, while they agree on spending more and being the best possible friend to the poor and the oppressed, irrespective of whether there is any way to pay for relevant expenses.

The analysts' forecast is based on facts and legislation. But experts are not consulted for political recommendations because politics is not an exact science but rather a negotiation to find common ground in wishful thinking.

It's a crying shame because the forecast does not reflect what the leaders want to see. Nevertheless, the government is adamant in its "steady as she goes" stance. And yet, as analysts have drawn up equations involving multiple variables, nothing would be simpler than asking what would happen to revenue, employment and growth were some of those variables, such as tax rates, adjusted.

The question should apply to all underfunded administrative areas, while parties exercising state power should be the first to ask it. As we know, parties only test their political whims in terms of their attractiveness instead of commissioning a professional economic analysis.

The economic forecast offers food for thought on every single page. Allow me to give an example. "The net assets of the Health Insurance Fund amounted to €239 million at the start of the year. Considering valid restrictions on the use of these funds, the Health Insurance Fund will not be financially viable next year." (Page 19.)

Another one. "Wealth taxes. (land tax, Guarantee Fund payments in Estonia) that support the effectiveness of the tax system and are considered the least detrimental to growth make up 0.8 percent of all taxes in 2020. Data from 2018 suggests their relative importance is lowest in Estonia in the European Union (EU average is 6.4 percent). The weight of wealth taxes is set to fall to 0.7 percent by 2024." (Page 30.)

Prime Minister Jüri Ratas promised to launch a major tax debate a year ago. He told ERR in October of 2019 that "Estonia will not be able to continue offering public services at its current tax burden" and promised that Center will draw up a set of proposals by the spring of 2020. Instead, the PM undertook a crusade against the invisible enemy and it is a matter of taste whether we refer to Ratas' promise of a tax debate as his biggest or just a run-of-the-mill lie.

These outtakes from the economic forecast are an acute reminder of the need to do something about Estonia's modest tax burden that is set to fall further in the coming years. If we stick to the principle of social tax-based healthcare funding that the current tax rate cannot accommodate, we can either hike the healthcare portion of social tax at the expense of the pension portion, hike the social tax rate or increase the share of private healthcare.

The PM can spend every waking morning shaking hands and thanking "front line workers" in front of hospitals, but it will not buy us healthcare services and he will soon run out of hands to shake. A modest tax hike would be the most acceptable solution politically, despite mild irritation on the part of entrepreneurs.

Hiking the health insurance tax rate to 15 percent of gross salary from the current 13 percent would cost employers an extra €30 a month on average that would give the Health Insurance Fund an additional €250 million a year without causing anyone to go out of business. Besides, it would not be difficult to saddle the employee with 30 percent of the hike during a time when Estonia is grappling with the virus and where availability and quality of healthcare matters to people.

The inability to tax property makes Estonia an oddball in Europe. Estonia that is not a wealthy country in the European context is courageous when it comes to demanding the rich show solidarity and pay their way, while it should also be polite and sensible to demonstrate solidarity when it comes to taxing the population.

The aid we receive for constructing all manner of wonders of the world at least indirectly comes from the property taxes paid by the Germans, Dutch etc. Besides, a situation where property is sufficiently taxed tells the owner that their property is indeed valued, works to liven up the market and make sure people take care of their property instead of letting it waste away.

I'm required to pay around €80 in land tax for some ten hectares of forest every year which fact lessens my perception of the property's true value. I would not spend one second in anger were I told by the state that I would have to pay €400 in land tax next year as the emotional value I get from my forest still immeasurably exceeds that sum.

And I believe I'm not the only one who feels this way. The important thing is for the government (or local government in case of land tax) to convincingly explain how they plan to use the money. If even a part of my contribution to the local budget would end up benefiting teachers at the local school or finding the area a family doctor, I would be satisfied. However, were it used to hire another local government official to "process" things or "carry out activities" then definitely not.

It is clear that potential new taxes or the hiking of current rates would not translate fully into new revenue for the state. Hiking the tax burden in a situation where people's income stays the same impacts consumer spending.

I speculated a year ago that perhaps we have reached peak consumption in Estonia and its share in GDP will start falling as a result of new attitudes. Unfortunately, there is no way to verify this hypothesis as the virus has quite unexpectedly become my ally in dialing back consumption.

The recent economic forecast includes some rather telling facts. Deposits grew by an extra €800 million in the second quarter of the year alone. People's spending abroad fell by €300 million. Domestic tourism picking up did not compensate for the recent contribution of foreign tourists.

The government's aid measures did not manage to maintain consumption, with the total falling short of last year's result by 5 percent. Whether because of common sense or fear, but spending was dialed back.

The optimistic outlook of the entire forecast is that the pandemic will be defeated and the economy can continue developing without hindrances. But even considering this optimistic source material, private consumption is not forecast to explode in the coming year, with its share in GDP believed to fall from 48.5 percent in 2019 to 45.5 percent in 2024.

This raises another question for the rulers. Namely, whether this change would be a good or bad thing. If it's bad, what should we do about it? Lower consumption taxes further and hope for additional revenue from turnover? Give people borrowed money to spend that our children would have to repay?

Whereas it is the latter path our coalition parties seem to be favoring as what besides consumption can draw strength from assurances according to which the coalition agreement will be performed and the money "found" for an extraordinary pensions hike, child and family benefits as well as consumer vouchers.

A perilous path and one devoid of principles as it would constitute simply handing out loan money also to those who do not need it (Estonia has both wealthy pensioners and large families). At the same time, companies and economic sectors are supported unevenly and the tourism sector has already been told that blanket support measures are out of the question.

Channeling additional funds into consumption also entails the risk of the recipients maintaining their cautious line that would cause the money to stay out of circulation and pile up in people's savings accounts. Once the borders open, the children are free to run wild again and take the money they've saved up abroad. The end result is a debt shouldered by both the rich and the poor, with no one having gained anything.


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Editor: Marcus Turovski

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