Hyperinflation and economic uncertainty are the main reasons why it is better to have a moratorium on tax at the moment, Arto Aas, head of the Employers' Confederation (Tööandjate Keskliit) and member of the supervisory board of the Unemployment Insurance Fund (Töötukassa) says. Health and Labor Minister Peep Peterson's (SDE) goal of a tax increase is therefore not justifiable, Aas told ERR's radio news.
Aas said that the decision of Minister Peterson, who is also a chair of the supervisory board of the Unemployment Insurance Fund, to recommend the government increase the unemployment insurance contribution rate came as a surprise, as no such position had emerged at the meeting of the board members on Tuesday, he said.
Aas said: "We discussed the financial outlook and tax rates, but there was no sentiment or desire to approach the government with a proposal to increase the tax rate. My view is that the unemployment insurance fund is currently quite well-funded; we are able to cover our current expenditure and we have more than €500 million in reserves."
Peterson's decision to increase the unemployment insurance contribution rate by 0.2 percent for workers, and by 0.1 percent for employers, was motivated by the need to restore the unemployment fund's reserves, which had been drained by more than €300 million during the pandemic.
Increasing reserves during a period of strong inflation is a questionable move, Aas went on.
"It seems impractical to increase reserves in the face of hyperinflation. /.../ The Unemployment Insurance Fund's reserves used to be rather high. Nevertheless, in a changing world and atmosphere of rising inflation, the importance of reserves has dwindled. Even more so since the unemployment insurance reserves were recently combined into a single national purse. /.../ Keeping such large reserves in an account that does not yield interest income in good times, and rapidly erodes their real value in bad times is not the most prudent course of action."
Peterson also said that beginning in the new year, taxes should be increased because the economy as a whole is doing well.
Aas says, however, that the economic environment is unpredictable now and businesses are primarily seeking tax stability.
"Currently, the economic climate is uncertain, and a slowdown in economic activity is likely. And to send out the message that we would increase the tax burden in these uncertain times is clearly not in line with the views of employers. /.../ On the basis of latest information, I would say it is more likely that fiscal tranquility is needed and that we should offer stability, and that the unemployment fund does not anticipate any financial crises now or in the near future," he said.
The supervisory board of the Unemployment Insurance Fund, through the minister, will present a proposal to the government by August 21 at the latest regarding the unemployment insurance contribution rates for the next four years.
Aas said that the decision should be made by a consensus between the members of the board, which is comprised of employers, trade unions, representatives of the Ministry of Finance and the Minister of Social Affairs.
However, the employers do not endorse Peterson's approach.
"These must be really compelling arguments, based on a shared understanding, of why tax rates should be reduced or raised. We would like to review the expenditure side of the unemployment fund, based on the most recent information, before we discuss any hikes in the tax rate, that is, whether all of the benefits and services at this level are necessary, are our assets liquid enough, and do we have a buffer for a sudden crisis. I believe we have such a buffer at the moment," Aas said.
The coronavirus pandemic drained reserves
The reserve of the Unemployment Fund, which stood at €838.1 million at the end of 2020, has reduced to roughly €500 million at present. This decline was mainly due to pandemic-related payments of benefits.
The Unemployment Insurance Fund informed ERR that compensation for salaries, which it paid out three times during the pandemic, accounted for the largest expense, twice nationwide and once to companies in Harju and Ida-Viru county.
Three payments totaling about €370 million were issued, made up installments of €275 million, €21 million, and €71 million.
More than 200,000 workers received benefits.
"In addition, unemployment increased in 2020 and 2021, which resulted in a rise in payments, i.e. the number of bankruptcies and the number of individuals receiving unemployment insurance benefits. People's wages have also increased - this means that payments to the unemployed would also increase," said Lauri Kool, the unemployment insurance fund's spokesperson.
Kool said that war refugees from Ukraine do not receive unemployment benefits from unemployment insurance; their unemployment benefits come from the state budget.
The unemployment insurance contribution rate in Estonia has set at been 1.6 percent of wages for employees and 0.8 percent for employers for many years.
According to the Unemployment Insurance Act, an employee's unemployment insurance contribution can range from 0.5 percent to 2.8 percent of wages. Employer contributions for unemployment insurance can range from 0.25 to 14 percent of earnings.
Editor: Kristina Kersa