Bank chief economist: New tax increases will hit low wage earners harder
Swedbank chief economist Tõnu Mertsina believes that tax increases proposed by Estonia's incoming new coalition government will chiefly impact those with lower incomes, which will mean slower growth in consumption and therefore lower tax receipts.
"[Eesti 200 chair] Margus Tsahkna claimed on [ETV news broadcast 'Aktuaalne kaamera'] that the tax hike will hit all segments of society equally," Mertsina wrote in a post on social media. "The VAT increase is regressive, meaning it will affect people with lower incomes more severely."
It's essentially the same case with the income tax hike, he continued. "The tax hump persisting next year and, along with its elimination, the likely increase in the income tax-exempt minimum will partly alleviate this," he added.
"All in all, this is likely to result in slower consumption growth than previously forecast, which in turn will slow down tax receipts – which the country needs so badly," he concluded. "Private consumption, however, makes up nearly half of the GDP."
More than tax hikes needed
Speaking to ERR on Sunday, Mertsina said that tax hikes alone aren't enough to move toward a balanced state budget; cuts and reforms are needed too.
"As the tax increases will come gradually – a VAT increase in the middle of next year, followed by an additional income tax hike the year after – then this alone likely won't be sufficient for next year," he said.
"The shift toward budget balance still has to be massive," the economist explained. "Reducing the budget deficit from even the previously forecast more than 5 percent (of the deficit) to 3 percent is a very large sum. That can't be achieved through tax hikes alone, especially since we can't implement new tax increases from the beginning of the year. Thus cuts or additional cuts will need to be utilized as well."
He noted that additional economic reforms are a separate matter.
"Only those additional reforms won't yield immediate results; their results will be gradual, and they likewise need to be implemented," Mertsina said.
According to the new coalition agreement between the Reform Party, the Social Democratic Party (SDE) and Eesti 200 published Friday, the VAT is set to increase to 24 percent from July 2025, and natural persons' income tax likewise to 24 percent starting from 2026. Likewise slated to see an additional increase are alcohol, tobacco and gasoline excise duty rates.
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Editor: Aleksander Krjukov, Aili Vahtla
