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Estonia's new budget strategy debate to test the government and fiscal balance

Government press conference. Kristina Kallas (Eesti 200), Kaja Kallas (Reform), Lauri Läänemets (SDE).
Government press conference. Kristina Kallas (Eesti 200), Kaja Kallas (Reform), Lauri Läänemets (SDE). Source: Priit Mürk/ERR

Eesti 200 are poised to propose cutting social benefits for the well-to-do and the Social Democrats switching to progressive income tax when Finance Minister Mart Võrklaev (Reform) presents tax and austerity plans at next Tuesday's state budget strategy (RES) debate.

Coalition politicians promised an honest tax debate last fall when Estonia's state budget strategy was put on paper. A €430 million hole in the budget for 2025 was supposed to be filled by a so-called national defense tax the details of which the whole of society was supposed to come up with together. To kick off the debate, Minister of Finance Mart Võrklaev (Reform) was tasked with presenting a series of proposals.

This failed to materialize in the fall, with the finance minister promising to deliver once the car tax bill is sent to the parliament. This has now happened, and Võrklaev will have to lay his cards on the table on January 30.

"What I have told coalition partners and the public in the meantime is that the Estonian society is likely not prepared to come up with said €400 million in the form of tax hikes," Võrklaev said. "That means my proposals will rather concentrate on austerity and other ways to make changes."

As the leading government partner, the Reform Party has been sending mixed signals in terms of whether those proposals could include slowing down the pace of returning to fiscal balance or borrowing.

Eesti 200: Investing in the future would justify slower return to balance

Coalition Eesti 200's RES talks delegation member Marek Reinaas encouraged the finance minister to think outside the box and look beyond sums on individual budget lines.

He pointed out that switching to a necessity-based benefits system would cost €200-300 million, also in terms of IT investments.

"If we invest this sum but manage to reduce the total benefits budget by 10 percent, we will be several hundred million in the black annually. And I believe that is where the solutions for fixing up our state budget and public finances lie," Reinaas said.

The Eesti 200 politician suggested that Estonia faces a choice of whether to collect more taxes from the wealthy or cut their benefits.

"Eesti 200 definitely supporters the latter option. In other words, taxes need to be as low as possible," he added.

Social Democrats: Taxes must rise

Reform and Eesti 200's partner in Estonia's ruling coalition, the Social Democratic Party will face next week's talks with nearly opposite expectations.

The party's leader Lauri Läänemets said that more revenue is needed in the budget.

"We believe that a Nordic welfare state can only be achieved with a Nordic tax model. If someone thinks that they can just cut 10 or 20 percent of the state budget, we are happy to explain how that is not possible."

This means the Social Democrats will be proposing the familiar ideas of a progressive income tax and a classic corporate tax.

Läänemets proposed lowering labor taxes while introducing a classic corporate income tax system. "We could raise the money we need through such a combination," he said.

The party chair added that SDE will not propose amending the fiscal balance target, also because hitting it is simply unfeasible unless partners agree to change the tax base.

Talks to test the government

Seriously considering the proposals of Eesti 200 and SDE would amount to opening up the state budget strategy before the RES talks start properly early next fall.

The Reform Party has so far maintained that the current strategy will not be amended, with the finance minister's proposal the only change therein.

Eesti 200 and SDE emphasize that dropping the €430 million tax hike is precisely what opens the door to other kinds of proposals.

Considering that Estonia is unlikely to hike the unemployment insurance premium, while the future of the renewable energy fee reform is also uncertain, the hole in the budget is looking more like €600 million to which ministries' additional funding requests will be added. Recent economic forecasts are no cause for celebration either.

Läänemets said that something needs to change in the current government dynamic for a result to be achieved.

"If we cannot agree on €10 million (the sum it would allegedly take to end the teachers' strike – ed.), how are we expected to find common ground for a billion euros."

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Editor: Marcus Turovski

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