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Tsahkna and Läänemets: State budget strategy agreement has gone out the window

Lauri Läänemets, Mart Võrklaev and Margus Tsahkna.
Lauri Läänemets, Mart Võrklaev and Margus Tsahkna. Source: Siim Lõvi /ERR

Eesti 200 leader Margus Tsahkna and SDE chair Lauri Läänemets said that Finance Minister Mart Võrklaev's proposal to cancel unspecified tax hikes worth €400 million means that the Reform Party has walked back a part of an agreement between the partners, meaning that the government will need to go back to the drawing board with the next four years' fiscal strategy.

Minister of Finance Mart Võrklaev (Reform) said during the government press conference Thursday that society has reacted painfully to recent tax changes. He added that the decisions were made in anticipation of economic growth returning next year and in 2025.

"When we were putting together the state budget strategy and the 2024 state budget in the fall, we concluded that we had achieved quite a lot for 2024 in improving the fiscal position by €500 million and that we need to stay the course. We planned additional tax increases for 2025 and wanted to make the relevant decisions (which taxes to hike and by how much – ed.) by July 2024 to have a six-month transitional period," the finance minister said.

He added that additional tax hikes were to land on the government's agenda once the car tax bill had been sent to the parliament. But Võrklaev said additional tax hikes no longer seem realistic in the current situation.

"I have made it a task for myself to cover those missing €400 million through other measures, concentrating primarily on austerity, including by going over indexed spending, how to make tax collection more efficient and plug gaps in tax receipt." The minister emphasized that canceling the tax hikes does not mean the deficit needs to be covered using loan money.

Tsahkna: Decisions cannot be swept under the rug any longer

Margus Tsahkna, Estonia's foreign minister and leader of the Eesti 200 party, said that Võrklaev's statement still means that the summer's state budget strategy has been reopened.

"We can debate whether it has been opened formally or not – it makes no difference. What we agreed on for the next four years in Vihula no longer exists."

The Eesti 200 chair added that no one likes hiking taxes. "Our economy is in recession, people are finding it increasingly difficult to cope. The question today is how to exit this crisis stronger than we were going in."

Tsahkna suggested that piling on taxes might cause a situation where companies start going under. "The other side of it is whether we have run out of political will to make difficult decisions. I very much hope that is not the case because the numbers are not about to get better by themselves," the politician added.

"What we have believed and said at Eesti 200 is that the state budget strategy (RES) is a living document and needs to be part of our broader economic policy approach. Let us be honest in admitting that more than a few governments have lacked a common understanding of what our future economic policy path should be," Tsahkna said.

He sees reopening the fiscal strategy as an opportunity to look at the big picture in terms of what to do to give the Estonian economy new momentum.

"We are no longer a cheap labor country. That we would arrive here has been clear for years. It is a real problem. What is more, crucial export markets are down through no fault of our own, owing more to economic downturn in Europe. We need to react. And we need to go beyond looking at fiscal balance, to how we will shape our business environment, how the government can help. We need to look at our energy and IT investments policy, actual investment policy. We need to understand that the kind of economy we've had cannot yield enough value added for us to be able to maintain this country," Tsahkna said.

The Eesti 200 leader added that Minister of Economic Affairs Tiit Riisalo is working on an outline of what should be Estonia's business environment and labor policy.

Additional tax hikes are off the table as per what Mart Võrklaev has said, Tsahkna suggested. "If the finance minister, as a representative of the leading coalition partner, says it, I really do not see a way for us to enforce it. It is a political decision. My question is where do we go from here?"

The foreign minister said the government will have to sit down and take a look at the big picture in January by which time Eesti 200 will come up with its proposals.

"The current RES mentions the unemployment insurance premium matter (whether to hike it for employees – ed.), which is practically impossible, nor would it make much economic sense. It also includes environmental fee receipt forecasts, which are likely unrealistic today," he said.

Tsahkna said that Estonia is looking at an annual deficit of €600 million or more.

"We will also likely see teachers go on strike come January 22, even though their salaries will grow next year. But there is no long-term agreement. The leader of the Social Democrats has expressed similar concerns regarding public sector salary advance."

Tsahkna said that it is no longer possible to sweep decisions under the rug, as has been done in the past. "If we keep living on credit, the deficit will only become worse. The government needs to take responsibility and say it. We will not see economic development, the next leap. We need to invest. Not just in roads, buildings or reforms but also to have a smarter, more effective economy and more exports."

Läänemets: Government no longer understands where it's headed

Lauri Läänemets, Estonia's minister of the interior and chair of the Social Democratic Party, said that the recent budget strategy no longer exists.

"As concerns reopening it – great, I say. If one side arbitrarily takes out its part in a three-way agreement, the others will do the same," Läänemets remarked.

Läänemets also said the hole in the budget will exceed €400 million as recent forecasts suggest tax receipt will fall short of targets. "We are not talking about €400 million but rather €600 million, €800 million or a billion."

"We are back to square one. The state budget strategy does not exist in – well, it exists physically and needs to be complied with, but it does not exist in recent form for the government."

The SDE chairman said he has not heard proposals for covering the deficit yet. "But we don't need to be talking about further VAT hikes. We could introduce progressive income tax. It's honest, reduces inequality and helps level out society. There are other options. We should not threaten people with a VAT hike, more so as the Social Democrats would not have agreed to a bigger hike in the first place (Estonia will hike its VAT rate from 20 percent to 22 percent from 2024 – ed.)," he said, adding that he is not afraid to make more difficult decisions.

"The government lacks a common understanding of where we're headed because the RES is gone. The latter also concerns investments, the expenses side of things. It is not just a matter of revenue. Because it's gone, we have the opportunity to invest the coming weeks or months in having something good," Läänemets noted.

He added that the government will not be waiting for the April economic forecast before tackling these issues.

Läänemets also said that SDE wants to see how the government plans to sort out the €200 million funds shortage of the Health Insurance Fund and teachers' salaries.

"The question is how to make the math work out. Right now, I cannot see it happening without tax changes or dropping the plan to abolish Estonia's gradual basic exemption reduction scheme," Läänemets said.


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Editor: Barbara Oja, Marcus Turovski

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