Mart Võrklaev: Economic recovery cannot be based on mere slogans

Mart Võrklaev (Reform).
Mart Võrklaev (Reform). Source: Priit Mürk/ERR

While diminishing banks' capital would lead to uncertainty for businesses we have to deal seriously with revitalizing the economy, and not weakening it, writes Finance Minister Mart Võrklaev (Reform).

The economy is cyclical. There are good times sometimes, and bad times at others. Sometimes, one person does well, sometimes another does. A proposal to tax those who are doing well at this point in time may be popular as a slogan, but it will not help us out of the difficult situation the state budget faces, and will not resolve the main issues facing the Estonian economy.

On the contrary, ideas like that, done in haste, only serve to increase insecurity with our entrepreneurs. They came for the banks today, but who will they come for tomorrow?

Estonia is a country governed by the rule of law, and our entire business environment rests on that foundation. Tax policy and tax rates can be altered, but this must be done on a certain amount of notice and must not be done retroactively; to do so would run against both our Constitution and the legislation concerning taxation.

At a time when the economy both of Estonia and elsewhere in Europe is declining, when both domestic and foreign demand is weak, and the confidence of entrepreneurs is already low, it is not reasonable to start further worsening the situation for yourself.

Higher taxation of banks will not produce the desired end result

When making decisions like this, you have to take a look at the bigger picture. Bank taxation would directly affect the financing and financial stability of the entire economy. Over the long term, it makes sense to direct banks to store up profits earned during good times as additional capital. 

Should the economy be hit by another deep crisis, with the result that the banks begin to accrue larger loan losses, this stored capital can be pressed into action, to cover these losses. In this way, banks retain their ability to continue to provide liquidity, in support of economic development. 

Entrepreneurs facing difficulties in uncertain times await from the banks a flexible approach, repayment holidays, and support for digital and green transitions. This is what banks should be offering right now, but they can only do so if their own financial situation is strong.

The de-capitalization of banks brings even more uncertainty to business. However, we must be serious about revitalizing the economy, not weakening it. As for the state budget, since the proposed tax would be a temporary one, it would not help us cover our long-term obligations in any case.

Tax burden on banks will rise from 2025

Revenue earned from interest increases banks' profits, whose taxation is due quarterly, and, unlike other businesses, they cannot defer the payment of this tax.

Credit institutions are at present the only sector in Estonia that pays advance income tax. 

In the first half of this year, banks had already incurred more advance income tax than last year in total.

Thus, the budget revenue forecast for 2023 from advance payments stands at around €139 million, compared with €50 million for 2022.

From 2025, the 14 percent preferential rate of income tax is also due to expire. 

Banks will then start paying an advance income tax of 18 percent on current profits, which must be paid in any case, regardless of the distribution of those profits. When they distribute it they will additionally pay what is missing at 22 percent.

Furthermore, up to €28 million extra per annum will accrue from this rate increase, although the main part of the increase in tax revenue will come from the general increase in the profit forecast.

As I have said before (link in Estonian), taxes should be set as high as is required to maintain an efficient and well-protected state, not to cover some populist promises. If we want to be an attractive place to do business, our tax policy must be forseeable, while we must not penalize those who are, according to politicians, currently doing "too" well.

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Editor: Kaupo Meiel, Andrew Whyte

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