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Economist: State wouldn't need budget cuts if it weren't for tax reform

Heido Vitsur.
Heido Vitsur. Source: Ken Mürk/ERR

LHV economic analyst Heido Vitsur said that a rapid recovery of Estonia's economy next year is unlikely, and the planned tax reform will hinder government efforts to encourage economic growth.

Vitsur said that the economic situation is not disastrous because the energy issue is not affecting all sectors of the economy, but it is difficult.

The government cannot do much to manage the economy now – it should have done more to support businesses a year ago, he said. "The government allowed the energy price shock to spill over to wages and prices. That is the only big mistake the government made. We became expensive, very inflationary, and inflation automatically reduced economic growth – there is nominal (growth), but no real growth," he said.

"The second thing that can be blamed on this administration is that the tax reform that is now proposed was in fact not necessary. If things had stayed as they were, it would probably not have been necessary to make such big (budget) cuts and it would have been even possible to support growth a little. Now, unfortunately, this is very difficult," he said.

Vitsur also said, however, that if the government were to backtrack on tax reforms already agreed upon, it would not help. "Flitting around like a sparrow is no good; I think there is no point in reversing what has been decided, because everything has already been written into future prices and taken into account," he said.

What the Estonian economy needs most right now is investment, and for that, it needs a stable investment environment, Vitsur said.

"It is necessary to think about how to get investment into the economy. We need to invest quickly in energy, so that we have our own energy, that it is stable and available on secure terms. These are the main conditions for companies to come here: a stable price environment, or a more stable one than we have now," he said.

Vitsur added that when the decision was made to switch to renewable energy 10 years ago, the development of storage devices should have moved at lightning speed.

Next year will not be much better, he said. "I don't want to be overly pessimistic, but there is not much what could be done next year."

Estonia's gross domestic product (GDP) fell by 2.5 percent in the third quarter compared with the same period a year earlier, the latest Statistics Estonia's flash estimate shows. Annual GDP contractions in the first and second quarters were 3.2 percent and 2.9 percent, respectively.

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Editor: Marko Tooming, Kristina Kersa

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