Reform party leader, Prime Minister Kaja Kallas tells ERR in an interview that her fall promise of no tax hikes concerned the government of the Reform Party, Isamaa and SDE back then and the 2023 state budget. Asked why the election campaign made little mention of taxes, the PM suggested that the Estonian Constitution prohibits referendums on tax matters.
The incoming government's coalition agreement has delivered quite a shock to the Estonian public. Eyebrows have also been raised over new ministerial assignments. Good morning, Prime Minister Kaja Kallas. The displeasure of the Estonian people is hard to miss. Social media is teeming, and I Imagine the subject matter dominated Easter dinner conversations. A video of the October 26 Riigikogu sitting where you assure people taxes will not be raised is quite popular. What happened?
Questions put to me at the October 26 Riigikogu Question Time concerned the government at the time, as we were discussing the state budget. The opposition suggested we were hiking taxes. Naturally, I could only reply concerning that government. It crossed my mind that perhaps I should add that my answers only concern the current government, but I'm no good at being that vague. But because I was answering a question, it is possible to take advantage of the meme. However, what should we do? Should I just cancel them [tax hikes] in a situation where I see no other choice if I realize it will come back to bite me?
I have asked financial experts in our ranks who have suggested that certain taxes shouldn't be touched what they think the alternative is. In a situation where we need to spend on defense – which is not temporary – and we cannot just get that money from somewhere, cannot borrow any more as it has become too expensive for us. We are only hiking VAT by 2 percentage points, which –compared to the current 20-percent tax rate – means that a trip to the shops that used to run you €120 will now grow to €122. The effect of the change is just 1.67 percent. That is the truth.
Do I like making such decisions? No! I would love to only make popular decisions, as was done back in 2019, when the deficit was clear to see but we were sold a revision of the state budget, which was, in fact, covered by nothing at all.
We cannot postpone it much longer.
Memes aside, why did you not admit during the elections campaign that state finances were this poor and that there would have to be tax hikes?
We did! We said that the fiscal situation was terrible, and if you read our program, we also said that finances need to be put in order, expenses and income balanced.
But even the things we are doing will leave us with a 3-percent deficit. Perhaps we will be able to maintain that. Fiscal balance will remain unattainable.
The Constitution prohibits putting tax matters up for referendum. Why – because the people would never sign off on them. However, all parties were trying to say it in a roundabout way.
In the past, election campaigns have been a little more concrete in terms of potential tax hikes. We cannot really suggest taxes cannot be put up for referendum. We are not talking about a proper referendum, while the people feel they did not get to vote on what we're getting.
The Constitution is clear in that tax matters cannot be put up for referendum. It is not something I have come up with. It says so right there in the Constitution.
And I believe people should be more demanding when seeking answers to the question of where to find the money.
Looking back to 2016, when the Reform Party was in charge of the government, the budget had a slight surplus or very modest deficit until then. Because common sense also tells us to save for a rainy day.
And we got plenty of rainy days – the Covid crisis, energy crisis, war – but we had burned through our reserves by then because things went downhill from 2016. That is where we are today.
I could, of course, shut my eyes and ears in the pursuit of popularity and say everything is fine. But that would just postpone the impact by a few years. And looking at the budget, overcoming that hole will become more difficult, and it cannot be done any other way.
Another important thing to note is that the VAT rate will be hiked by 2 percentage points from next year. Like I said – it [the effect] comes to 1.67 percent for €100 worth of shopping.
The income tax rate will be hiked in 2025 at the same time we will abolish Estonia's "tax hump" (gradual basic exemption reduction – ed.), meaning that most people will be left with more money after taxes and the basic exemption will be the same for everyone.
Another thing that has the people fuming is the government going after new family benefits that were just laid down.
Yes, everyone was open about that. We were very clear. Talking to people in the street, it was what bothered them the most – that benefits for large families (three children or more – ed.) are so generous compared to others.
What will be done? We will not index these benefits, meaning that they will not grow automatically in time. Also, if you have a grown child and two smaller ones still living at home, you will only be paid the benefit for the latter. Thirdly, we need to dial back the large family benefit to help children with rare diseases and single parents. To keep inequality from getting out of hand. The main criticism has been that families and children are not treated equally.
Let us talk about ministeral assignments. It was suggested on Saturday that Liina Kersna would become culture minister, while it is now clear the post will go to someone else.
I don't know what is being suggested in journalistic circles as I have been busy with coalition talks and engaging people.
Heidy Purga is in charge of the party's culture program, has been an MP for eight years and is well-known in relevant circles. The assignment makes sense.
Let us also talk about plans for a car tax. You just came from "Terevisioon" where you suggested luxury cars could be subject to a bigger tax rate. Have you defined a luxury vehicle for yourselves, and will it be based on engine power or price?
We have not, and it has been decided to introduce the tax from July 2024 to have time to hash it out. There are various proposals – one is to tie it to CO2 emissions and the other to the price of the vehicle. The question is how to calculate the cost, which will be simpler for new cars. The entire system will need to be developed from scratch as we have never had such a tax before.
The important thing is not to punish people living in sparsely populated rural areas who have to use a car for lack of choice.
This will go hand-in-hand with the wider mobility reform to make sure public transport takes people from where they are to where they need to go, so they would not have to rely on a car. But the system is still being put together, and I do not have [more detailed] answers for you at this time.
At the same time, many people will lose access to free county public transport. How to marry that to the idea of freeing people from the use of cars?
Unfortunately, free public transport has not solved people's mobility problem –getting from A to B when it suits them and back again. That is why, while public transport will continue to be free for children, the elderly and people with disabilities, others will have to buy a relatively cheap ticket.
You have emphasized that the incoming coalition sees eye-to-eye. But political scientists are quick to remind us that coalition governments do not tend to last over two years in Estonia. How is it looking?
I will be frank in admitting that I am so tired of these coalition talks that I would jump at the opportunity not to go through it again in the next four years.
Editor: Marcus Turovski