The state of Estonia's economy has required a multifaceted and thorough debate ever since our economic downturn began. Economic issues need deep analysis and consideration of various interacting factors, both in retrospect and when making forward-looking forecasts. Only by doing so can we hope to explain the problems affecting our economy, accurately describe their root causes and consequently find effective solutions.

When presenting the latest economic survey, I commented on the impact of the already implemented VAT rate increase on food prices. I noted, using the examples of food and clothing categories, that considering the rapid price growth and the forthcoming tax hikes, prices will rise even further, putting us on the path to becoming one of the five most expensive countries in Europe.

This is a forecast based on the analysis of current trends and the evaluation of future price-influencing factors, including tax increases. It is essential to clarify that this is a generalized trend description, considering various factors, and Prime Minister Kristen Michal's (Reform) accusation of presenting false information is incorrect.

Estonia is inevitably moving towards being a more expensive country. There is nothing wrong with this if it is accompanied by an increase in wealth. Those who say that an increase in wealth inevitably brings a rise in the cost of living are correct. Therefore, our focus must be on how to become wealthier, not on how to remain cheap.

Whether we reach the top five or ten in terms of expense and when or if it happens is not so important. What matters is that the rise in costs is driven by our wealth growth and not by prolonged economic decline, both surpassing other European countries in pace.

According to Eurostat, Estonia was in twelfth place in the EU and fifteenth in Europe last year regarding price levels. At the same time, our food price level is 109.3 percent of the EU average. Finland's is 110.4 percent, and Sweden's is 105.3 percent. Unexpectedly, our food price level has practically equaled Finland's and surpassed Sweden's, placing us among the eight most expensive countries in Europe for food prices.

Our clothing price level is 117.9 percent of the European average, ranking fifth. Footwear prices are at 117.7 percent, placing us fourth in Europe.

I highlighted these figures because they reflect the most frequent purchases made by our average citizens. The Estonian Institute of Economic Research has been studying the cost of the consumer basket since 1993.

The impending and already implemented tax increases do not allow us to foresee a slowdown in price growth. With the higher VAT rate that came into effect earlier this year, we have already experienced an accelerated pace of price increases. Similar factors indicate that prices will rise again.

Amid rising prices, we must also manage to increase our wealth. Unfortunately, along with tax increases, retail sales volume has continued to decline, coupled with a lack of confidence and economic recession.

Raising taxes in prolonged economic downturn conditions makes it very challenging to create the prerequisites for wealth growth. Expectations for the government are high, and the coalition agreement has given some reason for optimism, although the planned tax increases inevitably do not make anyone happier or perhaps more successful.

The Estonian Institute of Economic Research was established ninety years ago to provide decision-makers in the economic sector with relevant information and a realistic depiction of ongoing events. As an independent organization, the institute's role is to describe economic developments from a realistic perspective, ensuring that entrepreneurs and society have an accurate understanding of current and potential future conditions.

Our capital is credibility, built by experienced employees and a broad panel of experts. We cannot engage in painting an overly rosy or bleak picture. In an economic downturn, we can never be unreasonably optimistic, just as we cannot proclaim pessimism when forecasting economic growth. The claim that the statements of the institute's director significantly influence our economy's development is not credible, as we do not possess such power.

Like the prime minister, I share a personal concern for the state of Estonia's economy and empathize with entrepreneurs and consumers. It is all the more important that we collectively understand and resolve the main problems hindering our economic development. The Estonian Institute of Economic Research has always strived to contribute to this and will continue to do so in the future.

I wish the prime minister and his team resilience and determination, as well as a continued willingness to collaborate. When making difficult decisions that affect us all, favorable winds are rare, and the best solutions always come from cooperation and reasoned dialogue.

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