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Finance minister: Removal of 'tax hump' not up for negotiation

Minister of Finance Mart Võrklaev (Reform).
Minister of Finance Mart Võrklaev (Reform). Source: Siim Lõvi /ERR

Eliminating the so-called "tax hump" is a fundamental part of the Reform-Eesti 200-SDE coalition agreement signed in April, meaning waiving it is not up for discussion, Finance Minister Mart Võrklaev (Reform) says.

The "tax hump" refers to a situation whereby rising salaries push more and more wage-earners into the next tax bracket, thus paying more tax in both absolute and relative terms. The phenomenon is also known as bracket creep. Reform's policy, included in the coalition agreement, has been to put in place a €700-per-month income tax-free threshold, which the party says would alleviate bracket creep.

Minister Võrklaev made his remarks in an interview given to ETV news show "Aktuaalne kaamera" Wednesday, which follows in its entirety.

Interviewer Priit Kuusk: Given that today, you had had to correct statements you had made yourself yesterday, do you in fact have a clear picture of what you are doing?

Minister Võrklaev: I absolutely do. This picture is a complex one, the situation is difficult, but having already been in several coalitions (Võrklaev is a former mayor of Rae municipality, and also a former Riigikogu finance committee chair – ed.), being part of the assembly of this coalition, and the Minister of Finance, I know very well the state of the country's finances, and also what should be done to fix them However, whether everyone always sums up the courage and will to do so, is a question one must put to oneself.

Kuusk: Let's take things one at a time. Which matters are now back in the spotlight and which are not? Which [planned] tax increases will materialize, and which ones will disappear?

Võrklaev: At the start of summer, we put in place a number of changes and decisions relating to the tax system, which will come into force in 2024 and 2025. These were needed to enable us to hike our defense spending to 3 percent GDP. This continues to be the case.

We have submitted the motor vehicle tax [bill] to the government, and it is moving towards the Riigikogu; we should accept it.

What we are now discussing is that in the autumn, when we drew up the [four-year] state budget strategy (known in Estonian as the RES – ed.) with a view to moving towards a balanced state budget, we took the decision to enact about €430 million of additional tax hikes in 2025. This is what is under discussion at the moment.

If I understand things correctly, the car tax is coming, while you are completely ruling out any ditching of the tax hump elimination?

The elimination of the tax hump has been decided upon. This is what will give people additional income for 2025.

So it's not even up for discussion?

This is not up for debate. It is also written into the coalition agreement. This would mean that we would be going against the coalition agreement.

What about the teacher wage negotiations?

In 2024, for example, teachers will get a salary increase deriving from the budget. The net wage increase is around €60-€80 per month.

They are going on strike as things stand and in connection with this. Can you still hike their wages?

As a result of the elimination of the tax hump in 2025, a teacher with an average wage of €2,100 (gross per month – ed.) will get €112-113 per month more, net. In other words the teachers know for sure that their salary will increase in two years.

If we cancel the planned, but not in hand, tax hike of €400 million for 2025 (ie. the tax hike which the loan may replace – ed.), what can this slogan do to fix the state's finances? After all, no one is going to raise taxes before the elections anyway (the European Parliament elections take place next June – ed.).

It's not a mere slogan. The state budget for 2024 demonstrates amply that this government has taken some major steps. We will improve the budget position by half a billion euros. And we must continue in the same vein in 2025. The hard work we have done cannot be simply let go of.

This €400 million additional tax increase – in the current economic situation, communicating with Estonian people and entrepreneurs, there is a feeling that this tax increase limit is full. My proposal is to try to fill it with additional savings, increasing the efficiency of tax collection and other such measures. This is what I am making my own proposals for, and I am certainly waiting for the proposals of the coalition partners. And not during the opening of the country's budget strategy, but in the same process where we had to discuss the tax increase.

If the cuts are as easy as you seem to say, why haven't they been enacted yet.

It is not such an easy thing to carry out. Experience has demonstrated that it is more complicated than it often sounds when expressed verbally. But I think it is wise for us to move on from words to actions, and start making these difficult decisions in actuality.


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Editor: Andrew Whyte, Merili Nael

Source: 'Aktuaalne kaamera,' interviewer Priit Kuusk.

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