Finance minister: IMF feedback confirms necessity of car tax in Estonia

Minister of Finance Mart Võrklaev (Reform).
Minister of Finance Mart Võrklaev (Reform). Source: Ken Mürk/ERR

The 2023 Article IV report released by the International Monetary Fund (IMF) on Friday likewise signals the need to impose a motor vehicle tax in Estonia, Minister of Finance Mart Võrklaev (Reform) said Monday.

In its latest report on Estonia, the IMF has specifically addressed climate change impacts, noting, among other things, that one key to implementing a more ambitious green transition in Estonia would be the introduction of a motor vehicle tax together with incentivizing cleaner means of transport, the Ministry of Finance said in a press release.

"As the IMF also notes in its report, the number of vehicles as well as the number of kilometers driven in Estonia has grown rapidly over the years, reflecting increasing living standards as well as growth in incomes," Võrklaev explained, quoting the report. "While new vehicles are relatively less polluting, emissions readings in CO2 per kilometer in Estonia still remain above the EU average, as we have a small share of zero- and low-emission vehicles."

The majority of the country's emissions outside of the energy sector, meanwhile, come from the transport sector, including from fuels. As noted in the report, transport greenhouse gas (GHG) emissions in Estonia have doubled over the past 30 years.

The IMF believes changes in these sectors, taxing polluting activities and incentivizing cleaner ones could help support the more rapid achievement of climate targets, the ministry highlighted.

"This is one of our goals for the motor vehicle tax as well," Võrklaev stressed. "We can't expect very rapid changes here, because when developing the new tax we also have to consider society's means of coping as well. But we're hoping to finally gain momentum as we gradually move toward a more environmentally friendly fleet of vehicles."

In the European context, car taxes are considered environmental taxes first and foremost. As Estonia currently lacks such a tax, it falls significantly below both its EU peers and the EU average in terms of transport tax revenues.

In its report, the Ministry of Finance highlighted, the IMF more broadly assessed Estonia's economic, budgetary and financial sector situations and provided recommendations for the implementation of economic policies, including striving toward a balanced budget and a neutral fiscal stance to contain inflation, while also retaining targeted support to the country's most vulnerable groups. Doing so would require additional consolidation measures, including saving on government operational expenditures.

The fund noted the importance of budgetary buffers in countering future economic shocks. The IMF likewise welcomed Estonia's efforts in making improvements to its anti-money laundering/combating the financing of terrorism (AML/CFT) systems, but noted that they are in need of further improvement as well.

The IMF found that Estonia's policy mix needs to be recalibrated to support a more sustainable recovery. According to the report, a much less stimulative fiscal policy should be considered. Alongside targeted financial policies to underpin financial stability and structural reforms to raise productivity, address labor market shortages and promote the green and digital transition, such a policy mix would help Estonia achieve sustainable and inclusive growth over the longer term.

A delegation from the IMF was in Estonia from May 9-23, where members of the team met and discussed Estonia's economic situation and economic policy steps with representatives of Estonia's public and private sectors, including from the Ministry of Finance, the Bank of Estonia, the Finance Committee of the Riigikogu, business associations, trade unions, banks and academia.

Click here to access the IMF's full 2023 Article IV report for Estonia.


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Editor: Aili Vahtla

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