Planned tax hikes included in the freshly inked coalition agreement between the Reform Party, Eesti 200 and the Social Democratic Party (SDE) have drawn significant public attention after being absent altogether from election platforms. Of the leaders of the seven biggest parties to run in the 2023 Riigikogu elections that took part in a live pre-election debate on ETV on March 1, only the chairs of the Center Party and the SDE clearly stated that tax hikes would also be needed to get Estonia's public finances in order.
ERR's online news portal published a full transcription Monday of the part of the March 1 "Valimisstuudio" debate — the final major election debate held before Election Day that Sunday — focused on the bad shape of Estonia's state budget and what opportunities exist to fix it.
The debate was hosted by journalists Liisu Lass and Andres Kuusk.
Liisu Lass: Question for everyone. The budget deficit is swelling like yeast in a warm kitchen; more money is needed from somewhere. Are we now at the point where taxes need to be hiked or we'll just continue borrowing?
Jüri Ratas (Center): Yes, I want to say that not only people are taxpayers, but businesses are taxpayers too, and we can't let businesses go bankrupt.
Do we need to borrow? Yes, we need to borrow money to make investments. Talking about road construction, we've run very late with that. We'll surely be borrowing at much higher interest rates now than we could have 20 years ago, but it needs to be done.
And I don't agree with the fact that nothing has been done in the energy sector to support our people, our businesses. 1,000 megawatts bas been placed on reserve in oil shale. Network fees were zero percent a year ago, and prices were capped too.
I very much agree with Lauri Hussar regarding LNG — it definitely needs to be resolved by the next heating period. I believe that's the only conceivable [way]. Next I want to say that what's important is that these same things that entrepreneurs themselves have said — zero network fees, a price cap on renewable energy fees — those are the things that would save entrepreneurs right now.
And one last thing. In the Isamaa-EKRE-Center government we supported the radar investment that would allow us to start building onshore wind farms. Wind farms need to be utilized!
Andres Kuusk: Yes, we got a bit all-encompassing there just now. We actually tried to direct you toward fiscal policy, as I think that's one issue that's seen little coverage even in ERR's debates. This is a fundamental matter of worldview.
Liisu Lass: Kaja Kallas, the Reform Party has always been a sort of budget balance party, so to speak, and now we've reached a point of no return. Or—?
Kaja Kallas (Reform): We've reached a point where we have three major crises and we inherited a budget with a gaping €1.27 billion hole in it. We tried to balance it, and, indeed, in 2021 the deficit was 2.3 percent and in 2022 it will fall below 2 percent. The biggest deficit was in 2020, when it stood at 5.5 percent.
But if it's being said here that loans must be taken to make investments, the Estonian state has invested 5-6 percent of GDP on average annually, and if we did all of that with loans, then our deficit would be that big. So we have to borrow in any case, but not [to pay for] fixed costs.
Regarding energy — it's a matter of we have too little energy production and too high demand, meaning we won't resolve this problem with subsidies. Rather, we have to make investments to increase production in renewable energy—
Kuusk: Thank you. I don't want to be very rude, but let's try to stay within the one-minute limit.
Lass: Martin Helme, when [the Conservative People's Party of Estonia] was in the government, that was a nice little period of borrowing too. Would you continue with that as a member of the government?
Martin Helme (EKRE): I'll answer that in a second, but I have to set two things straight.
First of all, Lauri [Hussar] is just talking nonsense when claiming that not a single decision has been made. 1,000 megawatts of reserve capacity in Narva — I gave that order myself in 2019.
This is a very important decision — without it we wouldn't have that production capacity in Narva today and we'd be in the dark. Second, the [shale] oil plant investment that all the liberals fought tooth and nail — a very important investment decision.
Third, Kaja, you're constantly talking about that billion[-euro hole in the budget] — now it's a €1.2 billion hole already. It didn't really exist. That was a [state budget strategy, RES] forecast that was wrong from the start, and ultimately the deficit was €250-260 million, meaning €1 billion smaller. I knew ahead of time that that was the case! You're still talking like it actually existed. I knew ahead of time that that was wrong. We put that number in there because we know it was impossible to predict anything based on just forecasts in 2020.
Fiscal balance isn't a fetish topic for me. Fiscal balance is an instrument by which we manage the economy as it is written on the wall, and in the context of an economic recession, it's entirely natural and obvious— [interrupted by the hosts] — and economic growth comes from us stimulating the economy during a downturn.
Helir-Valdor Seeder (Isamaa): In the long run, the state cannot live beyond its means — either the central government or local governments. Now Lauri's idea of introducing a four-day workweek—
Lauri Läänemets (SDE): For everyone in school!
Seeder: —It won't really create much additional social wealth and won't balance the budget if our doctors and police officers switch to a four-day workweek too. I also don't think it's realistic right now.
A smart loan that is used to invest and support economic growth — we shouldn't be afraid of that. That is surely reasonable. And if we're talking about savings here, about what those sources might be — we should actually be saving in all areas.
Let me give you an example. It is considerably more expensive to maintain a bilingual education system than a single uniform Estonian-language education system, which is legalized today thanks to Isamaa's
initiative and which the next governments will hopefully implement. But this is also one of the keys to economical resource use.
Lass: Lavly Perling, will you be going for cuts, then, or is taking out a loan or raising taxes still an option?
Lavly Perling (Parempoolsed): When talking about public finances, three things are essential to bear in mind. First, the forecast. Parempoolsed were the ones who seven, eight months ago already said stop, we're facing a major economic recession. The budget drawn up was based on ridiculous optimism. That's definitely the first thing that cannot be permitted.
The second issue — a simple thing is that the state budget must be easily readable and understandable, and reading it, it has to be precisely comprehendible where the money is being spent.
The third issue is the loan issue. Loans aren't taboo, but when it comes to loans, it's important to consider the conditions on which [a loan] is taken and where it is used.
Using a loan [to cover] fixed costs — which is where we're currently talking about interest in the triple-digit millions — that is irresponsible! That's living at future generations' expense!
Kuusk: Lauri Hussar, who would be on Eesti 200's cutback committee?
Lauri Hussar (Eesti 200): Well there are very good financial experts in Eesti 200, and some of them are also Cambridge University graduates, by the way.
But when I looked at the numbers, if we continue growing this GDP deficit at the same rate, then by 2026 our budget deficit will equal 30 percent of GDP. And now that is a number that should be setting off alarm bells for everyone!
Eesti 200 is very much of the opinion here that we have to carry out an essential and monumental reform of the state apparatus, find those potential savings, find areas for optimization, and also create a zero budget so that we can get budget expenditures under control, and freed up money — should any come up — we can direct elsewhere.
On top of that, a reform of the personal state must certainly be carried out as well so that in the future we can start paying differentiated, need-based support.
Kuusk: Can the outcome of a zero budget not be zero, as the majority of [state budget] expenses are fixed?
Hussar: If I'm seeing here that the minister of the interior found €7 million for education expenses in his budget line, then there is definitely money in the budget. But you just have to find that money and either it needs to be placed in the right budget line or those budget lines need to be redrawn.
Kuusk: I'm giving two sentences to Jüri Ratas before we have a new layer join the table.
Ratas: According to a Bank of Estonia forecast, we have a budget deficit of 4.6 percent. I haven't [earned a degree from] Cambridge; I earned a degree from Tallinn University of Technology (TalTech), but I think that will suffice.
Three things in this budget. One — it needs to be said honestly that we cannot actually maintain a welfare state like this with such a tax base — this is only happening at the expense of the deficit and the increase of the deficit. What should be done? Three things, I would say.
First, it needs to be said honestly that a graduated income tax should be introduced. Secondly, I believe the long-term care issue needs to be resolved, and one possibility is a care insurance tax, which would establish such a fund. And thirdly, I wouldn't at all belittle — what we started with us already, but that government ended — that budget audit should actually be carried out, and that will require politicians' willingness and cooperation between officials.
Kuusk: We haven't even heard the Social Democrats' fiscal policy yet!
Läänemets: Yes, a left-wing party should also have a word among right-wing parties. Our vision is different. First of all, a tax system always serves some sort of purpose. In our view, when we're talking about taxes or loans, what's most important is that we have smart people, skilled people and healthy people. People in Estonia are even just retiring ten years early for health reasons. In other words, every euro we contribute toward education and healthcare pays off — that [money] comes back, economically speaking.
But when it comes to cuts, you know, it just isn't possible! Let's take expenditures: 2.6 percent of GDP is our budget deficit. If we stick the national defense spending amount in there and add in what needs to be invested in healthcare right now, then this amount is a billion a year! In short, I want to say that it isn't possible to achieve that balance today with cuts alone, and we've honestly said, the Social Democrats' [election] platform, just like that of the Center Party, includes a graduated income tax.
We want wealthier people with the means to do so to contribute more to Estonian society. If they help — you pay an extra €50 a month more in taxes, for example — but with that you're helping children or elderly folks somewhere in Estonia, that should be an honor.
Editor: Aili Vahtla