IMF advises Estonia to advance tax hikes

The delegation from the International Monetary Fund (IMF) recommended that Estonia begin reducing its budget deficit in order to curb price increases and maintain its competitiveness, as well as implementing tax increases sooner.

The International Monetary Fund (IMF) has completed its annual evaluation of Estonia's economic policies and found that Estonia has made significant progress over the last two decades, but pressures on Estonia's competitiveness have increased and it could be disadvantaged by a weak fiscal policy. The IMF recommends narrowing the gap between government revenues and expenditures by a much less stimulative fiscal policy.

The chief of the delegation, Vincenzo Guzzo, said the IMF anticipates Estonia's economy to strengthen this year, but that inflation will remain elevated. The IMF forecasts the Estonian economy to contract by 1.2 percent this year and inflation to slow to 9.7 percent.

The governor of the Bank of Estonia (Eesti Pank), Madis Müller, said the central bank agrees with the IMF's assessment that the large budget deficit is accelerating the already rapid rise in prices. In turn, high inflation could increase wage pressures and reduce the economy's competitiveness. "As a result, fiscal policy must be aimed at minimizing price increases," Müller said.

The IMF advises a variety of strategies for reducing the budget deficit in 2023, including limiting public wage growth and accelerating some of the anticipated tax reforms.

The IMF suggested that support for the most vulnerable should be maintained; however, as energy prices decline, the state should consider reversing the increases in family allowances.

Containing public sector wage growth and limiting the ability of ministries and local governments to raise wages, are of utmost importance, according to the IMF.

The IMF emphasized the importance of implementing a car tax as quickly as possible, as well as eliminating the exemption for the residence tax and capping land tax increases at 10 percent.

Minister of Finance Mart Võrklaev (Reform) said that the delegation's visit to Estonia was timely and will aid in future decision-making.

"The IMF suggests that tax changes should be implemented sooner, but we have made it clear that the public debate and the six-month implementation period are the rules we adhere to so that society has time to deliberate," Võrklaev said.

In addition to fiscal policy measures, the IMF recommends pursuing targeted financial sector policies to ensure financial stability in order to achieve long-term, sustainable economic growth.

The IMF's concluding statement is available on the web page of Eesti Pank.

The IMF delegation has been in Estonia since May 9 to discuss the state of Estonia's economy and economic policy steps with representatives of the public and private sector.

During a press conference on Tuesday, Vincenzo Guzzo, the director of the IMF mission in Estonia, summarized his findings in first 25 minutes (the conference link above).


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Editor: Barbara Oja, Kristina Kersa

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