The government's fiscal policy is a slippery slope. Hiking taxes with little consideration and ignoring sharp social issues hardly bode well. If we cannot find ways to work together, we will fail at managing future risks, politician Jüri Ratas writes.
The World Economic Forum Global Risks Report 2024 suggests we are still living in a world of great risk. We are surrounded by many dangers: pandemics, social instability, wars, terrorism, financial crises, growth collapsing, fragmenting global cooperation, massive earthquakes and supervolcanoes.
Many of those risks have already materialized as serious shocks or even crises. We have been hit by a pandemic and Russia's war of aggression in Ukraine, rapid inflation and a resulting cost of living crisis.
It is hardly surprising that these shocks have proved destabilizing and resulted in considerable economic damage. We cannot avoid another shock hitting us in the future as they are not dependent on what we want. It is Estonia's task to make sure we can handle such shocks better in the future. The latter largely depends on our strengths and weaknesses. But it also depends on political will and the ability to propose solutions.
There is a lot more we can do domestically
We can see more hostility and a polarizing society today. This is caused by economic disappointment, failed political choices and major social change.
On top of all that, we also experienced a crisis of trust in the government and prime minister, culminating in a tour de force in arrogance. It has worked to undermine trust in politicians and legitimize populist demagogy. Unfortunately, it is rendering our politics fragile and weakening society. We will not be able to manage future risks if we cannot find a way to work together. Major future shocks will become even likelier and more difficult to handle.
Our main choice needs to be toward a more cohesive society, plugging weaknesses, crisis management, mapping out risk and understanding political factors. Unfortunately, it is difficult to imagine achieving those things in the near future.
Prime Minister Kaja Kallas' shortsightedness, confusing communication and inflated self-opinion will not get us there. It is not a good idea to insult people who work with or for you, just as it doesn't pay to pit different social groups against one another. If you trust someone with no background in music or conducting with heading up a philharmonic orchestra, it makes no sense to blame the violinists or play them off against the cellists. The one holding the conductor's baton needs to take responsibility.
Teachers did the work of politicians
Estonian teachers, in their growing anxiety, had to take to the streets to protest against the government's treachery, demagogy and deceitful policy. Kaja Kallas has always painted herself as a pro-reforms leader, while the teachers at least found her credibility past its use-by date.
The government's obstinacy in refusing to resolve the teachers' salary issue took teachers from in front of the class and to Toompea Hill for nine days. There is a lot of mistrust. I hope that those in power will do everything they can to really find the money they have now promised teachers. A collective agreement needs to be signed that would see the average salary of a teacher grow to 120 percent of the national average by 2027. The opposition will keep a close eye on relevant progress.
Forecasts taking a turn for the negative
We also have a lot of problems in need of solutions in economic policy. Consensual forecasts for 2024 have changed quite a lot since last fall.
If as recently as in September, when the state budget was being put together, decisions were based on the Finance Ministry's forecast, according to which the economy was supposed to shrink by no more than 2 percent last year and this morph into growth of 2.7 percent this year, forecasts by the Bank of Estonia in December and commercial banks (SEB and Swedbank) in January paint a far less encouraging picture.
The latter forecasts suggest that the recession in 2023 was deeper (at 3.5 percent) as well as that it will continue into this year (0,4 percent), unemployment will grow to around 10 percent and the growth of tax revenue will slow considerably.
While the forecast back when the state budget was being put together suggested GDP should grow to €41.4 billion, more recent prognoses offer a much more modest figure (€38.9 billion in 2024). The difference of €2.5 billion also means tax revenue falling some €800 million short. The government's desire to counter this through tax hikes and painful austerity measures is deeply misguided.
I want to emphasize the need for many structural reforms for the purposes of increased productivity and improving the competitive ability of Estonian companies. Fiscal and tax policy decisions taken by the government must not work to exacerbate the recession.
The government's fiscal policy is a slippery slope. While a greater deficit creates problems and can result in more public debt, hiking taxes with little consideration and ignoring sharp social issues hardly bode well either. Carefully considered spending can help compensate for major economic damage in part in a situation where it can help avoid negative symptoms cascading. We need to make an effort to strike that balance.
Editor: Marcus Turovski