Politicians tackle question of lowering VAT to combat inflation

Eesti Energia power plant chimneys.
Eesti Energia power plant chimneys. Source: Sergei Stepanov/ERR

Politicians have reacted to a proposal from Isamaa members, two MPs and two non-MPs, which would see VAT on energy heating cut from its current rate of 20 percent, to 9 percent, in order to combat soaring electricity and gas prices. While politicians from Center, Reform and the Social Democrats (SDE) question the timing and implementation of the idea, they do not rule it or other solutions out wholly.

Former foreign minister and current MP Urmas Reinsalu, former finance minister and current MP Sven Sester, academy of sciences energy commission chief Arvi Hamburg and Estonian owners' union (Eesti Omanike Keskliit) boss Priit Pärn made the proposal at the weekend, saying that the cut would reduce energy inflation – in electricity, gas and household heating – by at least one percentage point, though it would cost state coffers €75 million, they say.

The party's leader, Helir-Valdor Seeder, says ISamaa has not generally discussed the possibility of lowering VAT or concluded an agreement, and this discussion lies still ahead.

Reinsalu: Estonia's inflation sharpest in eurozone

Both Isamaa and SDE have also tabled draft legislation which would exempt consumers from paying the renewable energy fee next year, as an alternative solution.

Urmas Reinsalu said that Estonia's current inflation rate is the most rapidly-rising in the eurozone, and is likely to accelerate further in future.

He said: "It's a problem for everyone. Our proposal is foolproof – let's not tax people any more."

Reducing VAT is one of the simplest measures to solve the problem in the short-term, he added. "It is easiest in the case of VAT – which is taken into account by large companies, Eesti Energia, Eesti Gaas, the district heating companies. Considering what these companies may be afraid of – customers get into payment difficulties," he said.

While Reinsalu did not give a specific time period in which this change would be enacted, the next financial year might be one suitable option, he said.

Isamaa chair: Energy policy key

Isamaa leader, Helir-Valdor Seeder, not one of the four politicians who proposed the change, said that reducing VAT was also a theoretical possibility, which could not be ruled out, adding that energy policy was key in combating inflation.

He said: "The Republic of Estonia can confidently plan this independently, to compensate for the electricity price rise; in fact, they have a free hand to compensate for it."

Reducing renewable energy tariffs would also help consumers regarding electricity prices, Seeder said, if done carefully, while an increase in social benefits and a review of the CO2 quota policy in the longer-term frame-work, which he says does not currently meet the goal of increasing the share of renewable energy, should also be considered. 

Seeder said money already planned from other quota sales for other projects should be utilized. "Half of the quota sales need to go back into green and environmental policy, while the other half is free to use. This 'free' money has been earmarked by the government for other costs, and is being talked about at cabinet level. From there, they can apply for the agreement and approval of the [European] Commission on how to use it, either for social purposes or via business. This free component has been deleted but can be used without the Commission's consent."

Urmas Reinsalu said nonetheless there were no alternatives to fighting price rises. "We will have a huge price shock - people are going to have bills which are several times higher," he said.

Finance minister: State planning measure to combat CO2 quota sales price shocks

Finance minister Keit Pentus-Rosimannus recently said that the state was planning a measure to alleviate the price shocks arising from the proceeds from the sale of CO2 quotas. 

Pentus-Rosimannus  said the overspend will amount to a little over €37 million, but added that the European Commission had set quite rigid and strict rules in implementing it.

Pentus-Rosimannus' party-mate, Mart Võrklaev, said a reduction in VAT should not be the go-to solution, since reversing tax changes is difficult. "We already saw that with excise duties: When you lower them, how difficult it is to return it to the higher level."

At the same time, when cutting taxes, what must be taken into account is that other revenues would not be received in the state budget as a result of the change, Mart Võrklaev, also Reform's Riigikogu group leader, said that: "We have teachers 'salaries in the equation, first responders' salaries, and we have a budget deficit. The question then is how to bring revenue back to the state budget."

"The government is currently working every day to come up with a solution like this. Work is underway. In public, the opposition may call out simple and sound solutions, but they do not tend to work," Võrklaev continued.

Võrklaev: Concrete decision still in offing

The renewable energy fee constitutes only a small proportion of the electricity bill as received by a consumer in their mailbox, up to one tenth, he added, but may not meet the target, since the price of electricity may still rise significantly more on the stock exchange at the same time.

The problem of high electricity prices is under discussion in the government, but no concrete solution has been reached so far and the government is working for it, Võrklaev added, noting that the key question in electricity pricing solutions was to how much to give, to whom and for how long.

Center Party Riigikogu group chair Jaanus Karilaid said that when it came to reducing VAT, all proposals should be taken into account, while remembering that this would have a significant impact on the state budget.

He said: "When reducing VAT, it is necessary to assess the impact on the state budget. It is common knowledge that additional money is needed for education and social welfare - for example, more than €100 million are missing in family care."

The tax system should be viewed holistically, while sudden amendments to it must be made in cautiously, not least with regard to the political balance between Reform and Center, in office together

 "The Center Party is in power together with the Reform Party and we want to reach an agreement with our partner tonight on how to bring down the price of electricity or offer relief to consumers," he said.

SDE leader: VAT reduction should be longer-term ideally

Leader of the opposition Social Democrats (SDE) Indrek Saar said that the calculation of input VAT, to which a new tax calculation system should be applied, would be the main area of concern, but at the same time, if done carefully, the party may not oppose the policy.

"This could be considered as a long-term plan, in itself we have nothing against such various options," Saar said.

A benefit applied to larger electricity consumers is also cynical, as it is carried at the expense of private consumers and small businesses he added.

"A reduction in VAT can be considered, but if it is done as a temporary measure, there will be quite a bit of confusion as an initiative. Then we should look at some longer-term tax cuts," said Saar.

"Of course, ultimately if these prices rise significantly, then all measures must be taken into consideration, to make the price increase tolerable to the consumer," he added.

Laws that increase the fee for renewable energy are also of concern to him, with the new law allowing for the greater use of woody biomass in energy generation likely to drive up demand for the raw material, and with it prices – which would be passed on to the consumer in higher heating prices in Narva and other cities, Saar said.

"We know that most Estonian cities today are heated by burning wooden chips," he said.


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Editor: Andrew Whyte

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