On Thursday, Prime Minister Kristen Michal and Finance Minister Jürgen Ligi (both Reform) sharply criticized the claims made by Peeter Raudsepp, director of the Estonian Institute of Economic Research (EKI), regarding the cost of living in Estonia, accusing him of creating economic uncertainty.

On Tuesday, Raudsepp had presented a fresh overview and forecast of Estonia's economic situation, stating that Estonia is on its way to becoming one of the five most expensive countries in Europe.

"Newly implemented taxes, including the new VAT rate, will have a significant impact. Where are we heading? We are moving towards being one of the five most expensive countries in Europe," said the head of the Institute of Economic Research.

Prime Minister Michal said that Raudsepp was mistaken with the facts and that his statements were creating economic uncertainty.

"If we stir ourselves up and talk down the market and economy, making life more uncertain, then this will likely come to be. Talking down the market and creating uncertainty in the economy cannot be a goal," Michal said at the government press conference.

"The head or director, or whatever his title is, of the Institute of Economic Research announced that we are about to be among the five most expensive countries in Europe. However, the facts show that in the European economic area we lie in 15th place; 12th in the EU," the prime minister went on.

On Friday, Raudsepp responded, saying he does not have the power to talk up or down the Estonian economy.

"Such an accusation from the prime minister is erroneous in that, considering the context, I was not talking about the current situation but about the direction we are heading. It is defining a trend," Raudsepp said.

"This means that our previous rapid price increases have been taken into account, based on last year's data from Eurostat. We know that our price increase this year has been one of the fastest among European countries, and we know that this has been partly caused by the increase in the VAT rate implemented at the beginning of the year. If we now consider that such trends continue, with the analysis taking into account significant upcoming tax increases, which will act as expenses in the profit statements of many companies, then yes, unfortunately, it must be acknowledged that the conditions for further price increases are being created again," Raudsepp explained.

"This means that such price increases do not accompany a corresponding growth in wealth but rather an economic downturn that has been ongoing for a long time and will continue for some time," he added.

But, according to Raudsepp, the worst trend would be if prices suddenly started to fall. "We experienced this during the recession when we lived in deflation for some time. It actually caused a lot of problems for our companies. They were overcome with great difficulty over a long period. At that time, our international competitiveness also suffered. We managed to restore it over many years," Raudsepp said.

The EKI director noted that in some categories of goods, price levels are already among the top five most expensive. "We see that with the upcoming VAT rate, our food will have one of the highest VAT rates in Europe. So yes, we are heading in that direction," he said.

He welcomed the thorough discussion about economic matters that has emerged.

"This should have started much earlier. Such discussions and addressing the root causes of problems are the only way to find solutions that lead to economic growth and, through that, an increase in our wealth," Raudsepp said.

Raudsepp emphasized that tax increases hinder economic growth and prolong economic downturns in Estonia's context.

"Tax increases and bringing more money into the budget do not ensure certainty, for instance, that we are protected. I believe that activities and the results of those activities bring certainty. For example, we implement higher taxes, the budget gets larger sums for defense expenditures, and concrete activities are carried out. Successful activities are always those that create satisfaction and a sense of security," Raudsepp said.

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