Economist: Effects of tax hikes should be the focus instead of growth

Heido Vitsur.
Heido Vitsur. Source: Kirke Ert/ERR

Fiscal balance should not be a target in itself and tax hike should be seen in the broader context of their socioeconomic effects, economist Heido Vitsur told ERR. He said that it is high time for Estonians to learn why the Finns, Danes and Swedes are happier and were when their GDP per capita was where Estonia's is now.

Asked on the "Vikerhommik" morning show what he thinks of the government's tax package and whether he believes it would fix state finances, economist Heido Vitsur said that the answer depends on one's definition of tidy state finances.

"If tidy finances stands for a balanced state budget, this can be achieved through tax hikes. And if it cannot be fixed by hiking the VAT rate to 22 percent, we'll just go for 24 percent, which rumors suggest was the initial plan. So, the short answer is that it can be fixed this way. However, it is more difficult to predict the socioeconomic effect as companies are bound to lose from falling demand and individuals from rising prices and a measure of returning inflation."

Vitsur said that fiscal balance should not be a goal in itself as other countries take a broader look at what it entails for businesses and individuals.

He added that Estonia started out with a very simple economic model, a flat and stable system of no exceptions based on the principle of not meddling in the economy as the market would sort things out. It was the right thing to do after Estonia regained its independence as the country had no capacity in the 1990s.

"In truth, it is high time for us to learn why the Danes, Finns or Swedes, who take all manner of different economic decisions and introduce exceptions, are developing so rapidly and are happier than we are. And they were happier also back when their GDP per capita was where Estonia's is today," the economist remarked.

Vitsur does not support the idea of taxing banks' profits in Estonia and described taxing someone at the first sign of profit to be a harebrained idea in general.

He said that while Estonia could tax companies and profits, the country decided to go down another path 20 years ago to encourage investments, and that the proposal would constitute taking money away from investments today.

Commenting on claims that abolishing accommodation providers' 9 percent special VAT rate (the general rate is currently 20 percent with plans to hike it to 22 percent – ed.) would kill off tourism, Vitsur suggested that even Covid did not manage to do that, while the competitive ability of the hotel and tourism sectors will suffer.

He gave the example of people moving to Tenerife and living comfortably as the VAT rate on food is 5 percent in Spain.

Euribor unlikely to keep climbing for long

The six months' Euribor stands at 3.6 percent as of last Friday. Vitsur suggested that Euribor is unlikely to keep growing for long, while an additional hike of 0.25 or 0.5 percentage points cannot be ruled out. He recalled that the Euribor rate was between 1-5 percent before the financial crisis, with 3.6 its historical average until then.

For 90 percent of Estonians, income gains will not be enough to offset what soaring inflation cost them last year and the one before that, the economist said.

He said that while other countries work to offset market fluctuation and fix energy prices, Estonia's open economy is very dependent on the market, and that loans being based on the Euribor rate and previously very cheap energy prices contributed the most to inflation.


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

Editor: Marcus Turovski

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: