Labor minister plans tax increase to restore Unemployment Fund reserve

Minister of Health and Labor Peep Peterson.
Minister of Health and Labor Peep Peterson. Source: Priit Mürk/ERR

Minister of Health and Labor Peep Peterson (SDE) plans to increase unemployment insurance contributions by 0.2 percentage points for employees and 0.1 percentage points for employers in order to replenish the Estonian Unemployment Insurance Fund's reserve, which was drained by about €300 million, or one third, during the COVID-19 pandemic.

"We are seriously considering and investigating options to increase [contributions] by 0.3 percent, or 0.2 percentage points for employees and 0.1 percent for employers," Peterson, who was also re-elected chairman of the supervisory board of the EUIF, said Tuesday.

Following the hike, the employee's unemployment insurance contribution would be 1.8 percent while the employer's contribution would be 0.9 percent of the employee's wages.

Peterson doesn't know, however, whether these increases in the contribution rates will be approved by coalition partners Reform and Isamaa.

"We are aware of the government's vow not to raise taxes," he acknowledged. "So it's possible this plan won't be well received, and surely our social partners are not enthusiastic about such an idea."

An increase in tax rates is nonetheless necessary to prepare for a potential crisis, however, he continued. "We have a one-year peacetime reserve, but when we test it against, say, the 2008 crisis, alarm bells go off," he said.

The EUIF's reserve totaled €838.1 million at the end of 2020; currently, it stands at around €500 million, or more than €300 million less. This has been due primarily to the COVID pandemic.

"We narrowly avoided the V curve at the time due to these extremely popular wage support measures, which were then praised and appreciated by all, and helped the economy survive," Peterson highlighted. "The question today is whether such measures should be implemented once again."

Another argument is that with the rising unemployment rate, an additional 25,000 people are slated to end up registered unemployed, the minister said, adding that the question now is what size of a crisis the unemployment fund should be prepared to face, and to what extent.

The Ministry of Finance, for its part, has promised to provide input on what the EUIF should be prepared for ahead a planned meeting on August 19.

According to Peterson, taxes should be raised beginning in the new year because the economy is doing rather well overall.

"Considering the big picture, the economy is now growing," he said. "We spend during times of crisis and we should be saving up during times of growth. The EUIF does not look likely to recover considerably at this time."

The unemployment insurance contribution rate in Estonia has remained unchanged at 1.6 percent of wages by the employee and 0.8 percent by the employer for years.

According to the law, an employee's unemployment insurance contribution can range from 0.5 to 2.8 percent of earnings. The employer's unemployment insurance contribution, meanwhile, ranges from 0.25 to 14 percent of wages.

By August 21, the supervisory board of the EUIF will, via the labor minister, submit a proposal to the government regarding the new tax rates for the next four years.

The proposal is supported by a study of the sufficiency of unemployment insurance contribution rates to satisfy the EUIF's objectives for the next four years, taking macroeconomic and labor market projections into account.

The six-member supervisory board is the EUIF's highest governing body.

Of these six, two each are appointed by the Estonian government and the Estonian Employers' Confederation, and one each are appointed by the Estonian Trade Union Confederation (EAKL) and the Estonian Employees' Unions' Confederation (TALO).


Follow ERR News on Facebook and Twitter and never miss an update!

Editor: Kristina Kersa

Hea lugeja, näeme et kasutate vanemat brauseri versiooni või vähelevinud brauserit.

Parema ja terviklikuma kasutajakogemuse tagamiseks soovitame alla laadida uusim versioon mõnest meie toetatud brauserist: