At the food industry annual conference "How to Maintain Competitiveness," Peeter Raudsepp, director of the Estonian Institute of Economic Research, said that for a long time in Estonia, there has been much talk about various crises — be it the healthcare crisis, COVID, the security crisis or the so-called polycrisis. However, today there is no reason to expect that anything will resolve itself, because we have a leadership crisis at the government level. Your presentation at this conference was titled "How to Stop the Decline of Estonia's International Competitiveness." Let's start with the most important question: how can this be done?

The key problems must be addressed. Today, without a doubt, the issue of energy prices is what prevents Estonia from being competitive. Our electricity costs three times more than in Finland, which means it is very difficult to attract investments here. Many existing companies are shutting down; they are being forced to do so and to leave, including relocating to Finland. In words, there may be a solution for the future, but in the near term, no solution is in sight.

How could a solution be found or decision-makers be made to understand that action must be taken?

It is probably not my place to propose a solution, but the situation today is indeed such that we are getting daily news about companies shutting down or leaving. I'll give the example of a candle factory in Viljandi that said it was no longer possible to produce in Estonia with such high electricity prices. Production was stopped, everything was packed up and operations are being moved to Finland. So what can we tell shipping companies operating at a loss — they can still sell one-way tickets, because if our export volumes do not grow, they can at least transport industrial equipment and machinery out one more time.

At the same time, members of the government have pointed out that our economy has quietly emerged from the deepest slump. Experts from the Institute of Economic Research have also assessed that our economic climate somewhat improved, for example, in March. So what is the current situation with the Estonian economy?

It can certainly be said that the situation is bad, but it is improving, and that is how experts have assessed the economic situation for nine quarters in a row now: the situation is bad, but the trend or expectation is toward improvement. It is good to hear that things are not getting worse, but when it comes to what this improvement actually looks like or whether it is reaching our people, the correct answer is that it really is not. Wages are rising, prices are rising, pensions have risen, but overall, people's standard of living has still declined.

If we highlight some numerical indicators, retail sales volumes did start to grow in February, but within that growth, food sales continued to decline. In other words, for the third year in a row, we are buying less food from stores, despite rising prices. This means that, in terms of quantity, we are bringing significantly fewer goods home from stores. We are also buying less from department stores and purchasing fewer clothing items, but there has been significant growth in retail sectors like markets, kiosks and secondhand goods sales.

This actually reflects the current situation in the retail market and in our domestic consumption. Today, about 20 percent of families who responded to surveys said they can no longer cover their daily expenses with their daily income. Last year, that figure was 15 percent and it can be predicted that over the next six months, it will rise to 25 percent — that is, a quarter of all families.

So a quarter of families are essentially unable to make ends meet from one payday to the next?

Yes, they either have to use their savings or take out additional consumer loans.

Or the other option, looking for even cheaper alternatives? In fact, one of the reasons we invited you here today is that same presentation you gave at the food industry annual conference. When we talk about domestic food, food producers are also concerned because consumers are increasingly seeking out foreign — and, let's be honest, cheaper — alternatives.

That is undoubtedly the case. The share of Estonian-origin food products in the assortments of our retail stores has been declining for years, dropping by about 1 percentage point per year. It seems that this decline has now accelerated. We are measuring this and will have results on it soon.

The problem is that high production costs not only hinder the competitiveness of our companies abroad, but they have also become an issue in competition within our domestic market. Naturally, stores are trying to bring in more cheap goods, entire lines of low-cost products, but unfortunately, Estonian producers are unable to compete in that segment.

Naturally, this brings us back to the point that if energy were cheaper, food production would also be somewhat cheaper. But looking beyond that, are there any other measures you could suggest that might help boost domestic food production or consumption?

We have already overtaxed ourselves and, unfortunately, the tax increases are continuing. This year, we will see some additional excise taxes and also a 2-percentage-point increase in the value-added tax rate. So, over two years, the VAT rate will have risen from 20 percent to 24 percent. That means a 4-percentage-point or a 25 percent increase in the tax. Soon, we can say that taxes have grown by a quarter over two years.

In most European countries where they recognize issues with sluggish economic growth, governments — where possible — start compensating businesses for high electricity prices, take measures to stimulate the economy and lower taxes to boost consumption. We have gone the opposite way and raised taxes. This has meant that our domestic market, our consumption market, is under severe pressure and we are adding even more of it. It has placed certain brakes on economic development and these pressures are ongoing.

The problem is that a very large part of economic growth — indeed, of the economy overall — comes from domestic consumption. And today, as I mentioned, domestic consumption is under significant strain. The market has deteriorated and that means our hopes for economic growth can only rest on exports. If we look at export numbers, then although our export volumes have recently begun to grow, looking closer reveals that the growth is not where we would have hoped or wished. It is re-export — meaning the resale of already imported goods — that is growing. The growth in volumes of our domestically produced goods has been quite modest, remaining roughly at the level of inflation.

Speaking of VAT again, as you pointed out, the tax rate will rise further in the second half of the year. Estonian politicians, when examining certain legal provisions, have also argued that VAT exemptions are something we should largely avoid — unlike many other European Union countries. How do you see it? Would it be enough at this point to introduce VAT exemptions in certain areas, such as for food products, or do you feel that the VAT rate is simply too high across all sectors?

Yes, I have expressed my opinion regarding the VAT rate on food. I cannot make recommendations here about how it should or should not be — that is probably not truly within my competence or responsibility. But I have expressed the view that it could be reduced for food products. Eventually, it will happen anyway — who will do it and when is still a question for the future, but it is likely that it will happen.

The point is that there will soon only be a few countries in Europe without exemptions and with such a high VAT rate on food. So, if someone calls the idea of lowering the VAT rate completely foolish, they are automatically calling nearly all European countries foolish as well, since most of them have made such a decision at some point.

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