Raul Parts: Government's decisions contributing to inequality

Unfortunately, recent years have shown that it is difficult to run a country based solely on wishful thinking rooted in ideological tenets, and outdated economic policy dogmas are rather saddling Estonia with Europe's highest inflation combined with its steepest recession, Raul Parts writes.
Prime Minister Kaja Kallas' Independence Day speech contained second-hand rhetoric from Taavi Rõivas and Jüri Ratas but also included, as a new development, hints of martyrdom. How else to interpret a speech a notable part of which was spent on justifying one's choices and decisions in an accusatory tone. Whereas the prime minister found that the responsibility for said decisions lies collectively on everyone's shoulders.
This in a situation where since Kallas' first administration took office in 2021, the consumer price index has increased by 38.3 percent, the economy has been in recession for eight consecutive quarters and, contrary to what the prime minister has claimed, the purchasing power of net salary will not bounce back before early 2025.
The steepest recession in the European Union and the crises that amplify its effects have so far been seen by the government as a tedious winter that will simply end at one point. Minister of Finance Mart Võrklaev, on "Reporteritund" on January 11, parried the Bank of Estonia's negative economic forecast by suggesting that there is no cause to worry and the Finance Ministry will publish realistic figures in its summer outlook.
In truth, recent years' summer economic outlooks have had very little to do with reality. They have failed to forecast broad-based and lasting recession, growth of unemployment or record inflation. It is somewhat peculiar that economic policy decisions are made based on the recommendations of experts who just six months ago suggested the Estonian economy would grow by 2.7 percent in 2024.
Simplicity of the tax system not reflected in growth
The government has been virtually ignoring the opinions of business organizations, entrepreneurs and experts since last spring, and instead of engaging in dialogue, planned decisions and those already made are justified by referring to the previous government's "legacy" and the altered geopolitical situation.
While external factors cannot be ignored, countries next to or near Estonia have been affected by the same factors, and yet they've somehow managed much better in the economic crisis. Meanwhile, the Reform Party's dogma states that one needs to hike taxes and suffocate the economy in a crisis.
No one is contesting the need to boost defense spending, but in a situation where both the finance minister and the premier have explained the necessity of tax hikes through increased defense spending, the Social Democrats' national defense tax idea from 2022 was ridiculed both by their current and former coalition partners. A national defense tax aimed squarely at defense spending would have a much more modest effect on inflation and purchasing power than simply hiking VAT.
Data from Eurostat suggests that income inequality has been growing in Estonia based on the Gini coefficient since 2021 and is also above the EU average, which is why recent and planned tax hikes may exacerbate social inequality further.
While the Estonian government also has no levers with which to stop export markets from contracting, it can use active economic policy to improve the competitive ability of local businesses. Our foreign partners and competitors have decided to support their entrepreneurs using different fiscal and economic policy mechanisms, while the Estonian government still finds that support is either impossible to give, not worth the investment, harmful to the economy, or that the effect of support measures is unclear, with the exception renewables.
Exemptions and economic support schemes have helped develop high-tech manufacturing in Taiwan, South Korea, are currently helping the Americans to restore theirs, while Germany, which Estonia often emulates and sets as an example, also sees exemptions as a way to strengthen its position in the global economy.
Estonia is also among just a few European countries failing to tax windfall profits in energy and banking. The public is intimidated using scenarios that have not manifested in other countries. It is money that could be used to liven up the economy but which the Estonian government lacks the courage to use.
These problems are also reflected in the international competitiveness index IMD. Its recent report saw Estonia drop from 22nd place in 2022 to 26th last year. In the subcategory of economic success, Estonia dropped a whopping 21 places, from 33th in 2022 to 54th last year.
Even though politicians like to point out that Estonia came first in the International Tax Competitiveness Index in 2023, the simplicity and uniformity of the Estonian tax system is in now way reflected in general competitive ability or economic growth.
What is the government's perceived solution?
Based on recent statements, the government primarily sees three solutions: boosting renewable energy output, reducing red tape and having more value added products.
Unfortunately, the ministers forget that even if a company in Estonia can match the added value of Central European competitors, they are still worse off. Why? Because poor [political] choices in Estonia mean their product will still end up costing more than it does in Poland, Czechia, and recently also in Sweden.
Boosting renewables has become a sexy topic for politicians and one that is expected to increase the productivity of the Estonian processing industry not just to the level of the Nordics, but beyond, while attracting foreign investments to Estonia.
To not get bogged down in what is undoubtedly a very complex topic, I recommend reading Andres Noodla's thorough essay (in Estonian) on Estonia's energy economy and how uncompetitive electricity production is the direct result of political decisions.
Talk of reducing red tape as a public policy has been around at least since 2009, followed in 2015 by the zero bureaucracy project. One is tempted to ask that if the public sector has spent 15 years successfully containing red tape, why is it necessary to undertake it again now?
Could it be because bureaucracy manufactures more bureaucracy, often also in the form of European directives, regulations and legal obligations? A problem highlighted by Paavo Nõgene, Ain Hanschmidt and Liisa Pakosta.
Why are the same politicians still making the same foolish mistakes?
This inability to adequately tackle acute problems is probably because being a politician in Estonia no longer has anything to do with expert knowledge in the field, nor does it require proving oneself in other walks of life when pursuing a career in political backrooms is enough.
Unfortunately, recent years have shown that it is difficult to run a country based solely on wishful thinking rooted in ideological tenets, and outdated economic policy dogmas are rather saddling Estonia with Europe's highest inflation combined with its steepest recession.
If politicians are unable to admit their mistakes, listen to experts, entrepreneurs and scientists and instead base decisions on personal views, it is difficult to come out of recession. The solution cannot lie in the collectivization of responsibility or attempts at self-justification. It can only be found working together with the Estonian people and companies who have to pay for every unprofessional decision both indirectly and literally.
Change can only accompany a new political culture and the realization that if policies pursued over several years have failed to yield results and have instead caused the opposite of what was intended, it is time to take political responsibility and pass the torch.
For as long as a politician's only goal is to remain in power and ensure a "bountiful" political food chain without negative and real consequences, we will have the same politicians making the same foolish decisions.
Recent years' fine-tuning and swimming upstream from competitors can no longer be the solution. We need functional solutions, instead of high-sounding political slogans combined with efforts at self-justification.
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Editor: Marcus Turovski