Minister of Finance Mart Võrklaev (Reform) believes that Estonia will need to drop plans for an unspecified €400 million tax hike planned for 2025 and borrow more instead.
Võrklaev said that Estonia's economic outlook and recent tax debate suggest that it will be impossible to execute the government's planned €400 million tax hike the year after next.
"Hiking taxes by another 1 percent of GDP, even though it would help our fiscal position, would likely slow down economic recovery further," the minister said.
"It cannot be done in planned volume in 2025, looking at the economic situation and people's coping."
The minister added that while minor tax changes are possible in the coming years, large-scale tax hikes would add to economic uncertainty and might not yield the expected revenue.
Võrklaev also pointed out that canceling tax hikes will bring the need to borrow more and increase the fiscal deficit.
Canceling the unspecified tax hike might worsen Estonia's fiscal deficit from the current forecast of 1.7 percent to 2.7 percent of GDP by 2025.
Võrklaev said that the deficit will certainly fit inside the Maastricht criterion of 3 percent of GDP and that it is still Estonia's plan to reduce the deficit, which might simply take longer. Asked whether lower than anticipated tax receipt might force the government to put together a supplementary deficit budget, Võrklaev said it will probably not come to that.
The Bank of Estonia on Tuesday published its recent economic forecast according to which the Estonian economy will continue shrinking and unemployment will climb to 9 percent. The Bank of Estonia forecast growth for 2024 as recently as this fall.
The current state budget strategy for 2024-2027 includes an unspecified tax hike of €400 million. Its cancelation would not affect the looming VAT hike in 2024 and the arrival of a car tax the year after.
Center MP: Number of state officials needs to be slashed
Lauri Laats (Center), deputy chair of the Riigikogu Economic Affairs Committee, said that the recent economic forecast leaves no choice but to put together a package of stimulus and cut the number of public service jobs.
He said that the extent of the crisis cannot be overlooked any longer. "The government must finally make the economy and stopping recession its priority."
"Inevitably, the public sector needs to be dialed back now and the number of public servants cut. While these are inconvenient decisions for the government, the situation calls for forceful measures. The Estonian Chamber of Commerce and Industry has proposed cutting 2,000 public officials – we need a debate for what that figure could be," Laats said.
Reinsalu: Võrklaev should resign
Urmas Reinsalu, chairman of Estonia's most popular opposition party Isamaa, said that the Bank of Estonia's forecast shows that the government's policy is compounding the economic crisis and has failed in all indicators.
"Minister Võrklaev needs to resign. No one finds his rhetoric credible anymore. It would give the government the opportunity to adjust its policy."
The Isamaa leader said that the 2024 state budget is unrealistic as tax receipt is sure to fall short of forecasts.
"The government did not heed warnings to dial back the budget and rein in government bureaucracy," he added.
"The Estonian economy is in crisis. Panicking, Võrklaev promises to cancel a planned €400 million tax hike. It's too little too late. Not a word on opening a dialogue with entrepreneurs, state reform, investments, canceling the car tax, energy or competitive ability."
Reinsalu said that the government must admit its policy has failed and fundamentally change its approach, including by canceling tax hikes and revisiting existing ones.
Editor: Huko Aaspõllu, Marcus Turovski