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Prime minister: VAT, income tax hikes a 'national defense levy'

Kaja Kallas flanked by Margus Tsahkna and Lauri Läänemets, at Thursday's cabinet meeting.
Kaja Kallas flanked by Margus Tsahkna and Lauri Läänemets, at Thursday's cabinet meeting. Source: Ken Mürk/ERR

Income and VAT increases unveiled in the Reform-Eesti 200-SDE coalition agreement may be unpopular, but should be looked at as a "national defense tax", Prime Minister Kaja Kallas (Reform) says.

Speaking at the new government's inaugural Thursday press conference, the prime minister said the situation is currently a difficult one, where tough decisions must be made.

Neither the prime minister's party nor its two coalition partners made explicit mention of tax hikes of this kind, namely VAT and income tax rises of two percentage points each, during their pre-election campaigning, a fact which the premier initially claimed related to a Constitutional bar on having a referendum on taxation in Estonia.

That tax hikes attract a disproportionate amount of attention was understandable, the prime minister added, but decisions such as those made in relation to VAT and income tax lay the foundations for the future.

Kallas said: "Fundamentally, this increase in income tax and VAT can also be referred to as a national defense tax. In essence, it is just that. It is clear that no matter when or how you say it, [tax increases] will not go down well."

Also appearing at Thursday's press conference was new Foreign Minister Margus Tsahkna (Eesti 200), who said: "What the government is planning to do is this - we will put the state's finances and economy in order, cut expenses, and during the budget process we will review all activities, the actions that the state performs, which have accrued over the last 30 years, to consider whether they are really needed in their current form, or can they be revised; that way, we might obtain some savings."

"It has been stated by various institutions, including the National Audit Office, and for a lengthy period of time, that with the tax base that we have, we will not able to maintain a country with the same level of prosperity [it has had so far]," Tsahkna went on.

Interior Minister Lauri Läänemets (SDE) said the cabinet discussed work processes and division of tasks at the meeting which, as per standard practice, preceded the press conference.

Läänemets pointed out that, for example, there is much to be done internally at the regional ministry, including the merger of ministries which will set up the new authority, and at the same time getting started with major projects such as the reorganization of public transport. Previously, the organization of public transport within Estonia was divided between many different people and authorities; now the intention is for all this to be concentrated in one place.

Under the terms of the coalition agreement, municipalities will also be given the opportunity to introduce local taxes. "This doesn't fulfill their revenue base. It's an opportunity for municipalities, if they want to regulate something, direct something, reduce the environmental impact or somehow compensate for it, for example, in terms of tourists, they can utilize that, but this is not meant to boost their revenue base," Läänemets said.

"There is a plan for that to financially increase the budget of those local governments who are doing worse today," he went on.

The impact of the taxation changes should be mitigated by an increase in the minimum wage, he added.

The prime minister said that the clause on the minimum wage written into the coalition agreement was formulated specifically as a goal, as the government is not ready at the time to write an increase in the minimum wage into law without the consent of the social partners. 

Tsahkna reiterated that this was the case, saying: "The tripartite discussion and debate that is taking place with the current legislation is a value in itself."

"We must not discard those values ​​that have been valid in society to the present, and which both parties [in wage negotiations] are already accustomed to. This is a value in and of itself," he continued.

Läänemets said he, too, does not support enshrining the rise in the minimum wage into law, adding he would prefer to attain a rise in the minimum wage via an agreement, taking on board to the needs of both employers and trade unions.

Kallas noted that the coalition agreement also provides for making labor relations more flexible, something which employers have requested, she said.

Läänemets added that: "I don't think that anyone in Estonia wants our economy to be based on cheap labor. I think that every self-respecting company in Estonia strives to pay people a living wage. None of us wants more people to be reliant on social benefits. People need to make do with their salary,"

Meanwhile, leaders of the opposition Center Party say they plan to picket the Stenbock House, seat of the Estonian government and the venue for the regular Thursday meeting and press conference, expressly in protest against the government's tax hikes.

Center's leader, Jüri Ratas, was joined by Tanel Kiik, a former minister, and several supporters at the first of these pickets, daily Postimees reports (link in Estonian).

The weekly protests will culminate in a larger demonstration in mid-May, Postimees says.

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Editor: Andrew Whyte, Barbara Oja

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