The coalition agreement's title "Confidence for Growth" ("Kindlus kasvuks") sparked interest and hope in me as a growth strategist. Could it finally be happening? Confidence for growth is something all companies want and need, look for solutions to strategic problems and challenges in its name and compile growth strategies for realizing ambitions.

Both words are crucial to the success of growth strategies. And you probably agree that Estonia desperately needs growth and a growth strategy. Let us take a look at the coalition agreement and see what we can find about confidence and growth.

Confidence grows from believing in success

Let us start with confidence, or rather feelings of confidence.

What kind of confidence do we need? That things will work out and the future will be bright. The enemy of confidence resides in the most primordial part of our brain, next to mortal fear and sexual drive. It's called evolutionary negative bias, better-known as "better safe than sorry."

It is why negative news always sells better than positive, why we notice the bad and overlook the good and why we share everything that's negative on social media, thinking we're doing mankind a service by warning our fellow humans of dangers. Like magpies sitting in a tree who cannot tell the difference between a wolf and the neighbor's friendly pooch. In truth, we are doing a disservice to ourselves and others by reinforcing the idea that everything in the world is wrong.

Confidence, or faith that things will work out, plays a very important role in strategies.

The Economist Intelligence Unit has published a study showing that the profitability of companies depends to a considerable extent on its people's faith in and dedication to the strategy, especially that of middle managers, key figures and frontline workers. In other words, for a strategy to work, growth and more profit than competitors, one needs certainty in that the growth strategy is being implemented in the right way and with dedication.

Estonians Europe's top pessimists

The coalition agreement is correct in pointing out that things are poor when it comes to Estonians' feelings of confidence and security. But let us take a step back and look at confidence beyond the recent government's term.

While our confidence was still considerably higher than that of neighbors Latvians and Lithuanians during the 2009 crisis, the situation has by now reversed. The Lithuanians are downright optimistic, while the Latvians and the Finns are a little unsure, slightly below the Eurozone average. At the same time, Estonians are the most worried and depressed in the entire euro area.

It deserves pointing out that the confidence of Estonians started falling in early 2023. And it most certainty was not because of the war, as that would make Latvians and Lithuanians, for whom the war is even closer to home, even more sulky than Estonians.

This means that the reasons for Estonians' very low confidence are domestic in nature. What could be the possible reasons for our shaky confidence? Allow me to propose a few:

• Constant negative news flow on the poor state of the economy – inflation, price advance, new taxes, ailing exports, nine straight quarters of recession. Feel free to add all manner of negative information noise the news offers up on a daily basis to this list.
• The government paying no attention whatsoever to domestic policy and the economy
• The "unexpected" realization that the public sector has less money than it needs, and constant lamentation over the poor state of the state budget
• The prime minister concentrating mainly on and warning of the threat of war, constant complaining about how Estonia is not sufficiently defended.
• Continued arguing, accusations and conflict in the government and Riigikogu.
• Lack of a clear and credible plan for how to kickstart the economy.

By the way, peculiar as it may seem, the Lithuanians are also far ahead of us in the World Happiness Report 2024, occupying 19th place compared to Estonia in 34th. It is very hard to believe that life in Estonia is that much poorer, and one cannot help but think that we tend to bring these shadows into our lives and minds ourselves.

One hardly needs to be inspired to now ask whether the new government and their "Confidence for Growth" includes something that might help Estonians' confidence bounce back to the pre-Covid level.

But in order to effectively do so, we should understand why we felt life was much better in Estonia than in Latvia, Lithuania and the entire Eurozone before the pandemic. As far as I'm aware, no one has asked that question on Toompea Hill, much less tried to answer it and find solutions. Claiming that our lowest-in-the-Eurozone confidence is the result of "several crises, but mostly the cruel war of conquest nearby" is just wrong. As mentioned, said war of conquest is also nearby for the Latvians and Lithuanians, while the economic crisis hasn't spared them either.

Rather, the reason hides in the next claim the coalition agreement makes. "It has become clear that we have failed to take several important decisions in the past decade."

I believe the problem goes beyond the last decade. I would claim that the government has been spared having to manage the Estonian economy for the last quarter century. Why would they in a situation where annual growth came to 4-5 percent, with tax receipt in tow, and the only thing that needed deciding was how to spend the money.

Robust growth that started in the noughties had Prime Minister Andrus Ansip (Reform) declare in 2009 that Estonia would be among the five wealthiest countries in Europe by 2024. Unfortunately, this claim was based on nothing at all as there was no plan, simply faith that the economy would automatically continue to grow.

Growth the result of export and domestic consumption

In order to have a company or a national economy grow, one first needs to understand what exactly needs to improve and on what does growth depend.

It would be pretty interesting to give members of the Riigikogu and government a quick economics test. For example, ask what is GDP and what are its components. It is to be feared that the results would resemble calls to ban dihydrogen monoxide (link in Estonian) as it killed 55 people in Estonia.

GDP or the gross domestic product is the main metric of a country's wealth.

GDP is made up of five main parts and promoting it requires activities in five main fields.

1. Promoting household or private consumption.
2. Promoting corporate consumption.
3. Growing public sector consumption.
4. Promoting exports.
5. Minimizing imports.

What can we expect in connection with promoting private consumption?

Tax hikes hurray! VAT, income tax, profit tax and excise duties are all set to go up. This will result in households and companies having less money for consumption. Describing what that will do to their confidence is probably redundant.

Who stands to benefit from growing taxes? The public sector and the central government in particular. This is a good time to recall the core principle of domestic economy that it is impossible to tax one's way to prosperity. But it seems that politicians and members of the government simply fail to understand that more tax receipt does not render a country richer. In order to do that, one first need to understand the circular flow model.

Lowering and raising taxes does not affect the amount of money circulating in the economy. Money is simply moved from one pocket to another. In order for us to become wealthier as a country, we need to add resources to the model and avoid wealth leaking out again.

How to have a more prosperous country?

Things that add to wealth are export revenue, foreign investments and labor, with export being the fastest way. Alas, the coalition agreement offers up just two vague sentences, for a total of 27 words, on promoting export.

• "We will boost the capacity of attracting foreign investments and make sure the interests of our companies are better represented at foreign markets."
• "To achieve this, we will improve the value proposition of investing in Estonia and ensure better-focused export support for our companies."

The coalition agreement has 3,115 words in all. The part treating with export makes up less than 1 percent.

While foreign investments get more attention, what is meant by "a package of bringing major investments to Estonia" and "the value proposition of investing in Estonia" remains somewhat unclear. Thinking back to recent and spectacular failures in attracting investments – €700 million from Fibenol and €200 million from Skeleton – it becomes clear neither the package nor value proposition are the problem.

The real problem is that ministers, especially the prime minister, have not bothered to address major foreign investments. Instead, they are handled by the Estonian Business and Innovation Agency (EISA) department heads and employees for something like the sixth level of management below the premier. Meanwhile, sitting at the other end of the table are companies' owners and CEOs.

Estonia is short on qualified labor, top scientists, engineers and CNC operators, which message has by now been repeated ad nauseam. The Estonian industrial sector is short 400 engineers annually, whom the existing education system just cannot provide. The coalition agreement makes no mention of attracting engineers.

How wealth leaks out of the economy?

• As taxes – the new coalition's taxes will cause the economy to bleed even more profusely.
• Savings – when the money of people and companies just sits in bank accounts. Things will hardly improve in the short term as there is no confidence for consumption and investments. Rather, they will get worse.
• Imports – everything we buy from elsewhere moves wealth out of the country. Where is the coalition agreement's "Prefer Estonian Goods" program?
• Investments outside Estonia – [business daily] Äripäev praised Infortar's €120 million investment in Latvia when it acquired gas company Gaso. The Estonian economy lost €120 million. With the Fibenol and Skeleton investments going elsewhere, it comes to a cool billion. These things would have boosted GDP by 2.5 percent if all the money had been spent in Estonia.

The final economic competency Toompea Hill seems to be woefully short on is ironically reflected in [former Prime Minister] Taavi Rõivas' criticism of activities-based budgeting. Rõivas remarks, "For example, the National Audit Office in 2016 found that in order to make sense of the state budget, one needs in-depth knowledge of accounting, fiscal and economic terminology, as well as to have a lot of other materials for analysis." Indeed!

Can you imagine a company the management or supervisory boards of which complain of not understanding the budget because they do not know accounting, monetary or economic terminology? Or a chief of medicine who deems it unnecessary to be familiar with medical diagnosis, anatomy, pharmacology and knowledge-based medicine?

I have thirty years experience in finance and management and I claim, based on said experience, that if the state cannot understand how expenses are created – for example, which specific activities are driving salary advance – there is no hope of rendering administration more effective.

In summary, the things we need to concentrate on in order to return to growth are plugging leaks and encouraging input.

1. Boosting exports. To do that, we need to promote development of high-value-added products, research and development and attract engineers.
2. Securing more foreign investments. It needs to be the priority of the prime minister and the new minister of industry. Unfortunately, the coalition agreement makes no mention of the national applied research program RUP that outlines five main industries where priority development is needed.
3. Reducing investments and savings moving out of Estonia by promoting ways to invest the money in Estonia (let it be said as a side note that there is a record amount of money just sitting in bank accounts today).
4. Reducing imports by preferring Estonian goods, even if they are more expensive.
5. Boosting public sector consumption and investments by borrowing from Estonia and abroad.
6. Reducing taxation.

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