Estonia

   

Economic Policies

#11
Key Findings
With a strong focus on fiscal discipline, Estonia scores well overall (rank 11) with regard to economic policies. Its score in this area has declined by 0.1 points since 2014.

Growth rates have been positive but moderate, echoing upturns in the global economy. However, high tax rates on labor and strict immigration have remained major obstacles to attracting needed foreign labor. Labor-market reforms have helped boost employment and decrease unemployment.

Addressing low wages is a next priority, primarily through tax credits and a rising minimum wage. One major reform is intended to bring a significant share of the country’s disabled population into employment, while another aims to help low-skilled workers upgrade their qualifications.

Companies pay income tax only on non-reinvested profits. The proportional income tax is being updated with income-related exemptions. Budgetary discipline is strong, with public debt consequently very low. However, pension funds and the health-insurance fund have accumulated long-term debt. R&D expenditures are declining, with outcomes comparatively poor.

Economy

#23

How successful has economic policy been in providing a reliable economic framework and in fostering international competitiveness?

10
 9

Economic policy fully succeeds in providing a coherent set-up of different institutional spheres and regimes, thus stabilizing the economic environment. It largely contributes to the objectives of fostering a country’s competitive capabilities and attractiveness as an economic location.
 8
 7
 6


Economic policy largely provides a reliable economic environment and supports the objectives of fostering a country’s competitive capabilities and attractiveness as an economic location.
 5
 4
 3


Economic policy somewhat contributes to providing a reliable economic environment and helps to a certain degree in fostering a country’s competitive capabilities and attractiveness as an economic location.
 2
 1

Economic policy mainly acts in discretionary ways essentially destabilizing the economic environment. There is little coordination in the set-up of economic policy institutions. Economic policy generally fails in fostering a country’s competitive capabilities and attractiveness as an economic location.
Economic Policy
7
As an EU member state, Estonia forms its economic policy in accordance with EU strategies and has adopted a reform program, “Estonia 2020,” that describes a set of objectives intended to improve the national economy’s competitiveness. Its two central objectives are the increase of productivity and employment. The implementation of economic and innovation policy is the responsibility of the Ministry of Economic Affairs and Communications. In parallel, the Ministry of Education and Research develops and coordinates implementation of the national R&D strategy. These two strategies are supposed to be complementary but duplication and lack of synergy between ministries have been continuous problems. A clear example of lacking coordination is the labor policy. The Ministry of Economic Affairs analyses the current and prospective need for labor, the Ministry of Education implements initial and in-service training policy, and the Ministry of Social Affairs is responsible for employment policy. Additionally, due to growing labor shortages, the Ministry of Interior, responsible for immigration, has also become an important actor in economic policy. The Ministry of Economic Affairs holds the overall responsibility for the development and implementation for 13 strategic documents, which suggests that fragmentation and duplication of priorities is a continuous issue.

The global economic climate has been quite optimistic in the period under review. This trend is echoed in improved performance of the national economy. Yet, high tax rates on labor and strict immigration policies are major obstacles to attracting the foreign labor urgently required as a consequence of Estonia’s aging population.

Labor Markets

#12

How effectively does labor market policy address unemployment?

10
 9

Successful strategies ensure unemployment is not a serious threat.
 8
 7
 6


Labor market policies have been more or less successful.
 5
 4
 3


Strategies against unemployment have shown little or no significant success.
 2
 1

Labor market policies have been unsuccessful and rather effected a rise in unemployment.
Labor Market Policy
8
Labor market reforms have brought several positive results. Main labor market indicators such as general employment and unemployment rates, youth unemployment, and long-term employment have improved.

The unemployment insurance fund (UIF) is in good financial shape, having accumulated significant reserves over last years. This has been possible due to the relatively high contribution rates, strict eligibility criteria and low level of actual benefits paid. Contribution rates have been fixed for the period 2017 to 2020 (0.8% of an employer’s payroll and 1.6% of an employee’s wages), which provides some stability to labor demand. UIF resources are used to extend active labor market policy measures and implement activation reforms such as the 2016 Work Ability Reform (WAR), which aims to bring at least 10% of the country’s disabled population into employment (about 100,000 people currently receive disability benefits). At the time of writing, it remains too early to evaluate the success of WAR. A new set of proactive measures introduced in 2017 aims to aid workers with low or outdated skills to upgrade their qualifications.

Tackling low pay is a government priority as it is significantly above the OECD average, with about one-fifth of workers earning less than two-thirds of the country’s average salary. Since 2017, government is aiming to alleviate poverty via tax credits for low paid workers, with additional measures beginning in January 2018. In-work poverty is not tackled via strategic labor market policies, although minimum wage regulations exist and the wage level has steadily increased. According to regulations, the minimum wage should be about 40% of the average salary.

Taxes

#23

To what extent does taxation policy realize goals of equity, competitiveness and the generation of sufficient public revenues?

10
 9

Taxation policy fully achieves the objectives.
 8
 7
 6


Taxation policy largely achieves the objectives.
 5
 4
 3


Taxation policy partially achieves the objectives.
 2
 1

Taxation policy does not achieve the objectives at all.
Tax Policy
7
Estonia is internationally recognized for its straightforward and transparent tax system. The individual income tax is proportional and corporations only pay income tax on profits that are not reinvested. Beginning in January 2018, the personal income tax will be radically altered as the basic exemption will depend on annual income. Low earners will benefit from generous exemptions whereas high earners will have no exemptions at all. Neoliberal opponents of this reform claim that it marks a veiled move from a proportional to progressive income tax.

The Estonian welfare system is financed almost entirely through social insurance contributions. This Bismarckian principle has both advantages and weaknesses. First, high labor costs may weaken the country’s economic position and sometimes lead to labor-relations abuses. Second, social-insurance contributions alone cannot provide sufficient financing for social services given Estonia’s shrinking labor force. Pension funds have persistently accumulated debt, and the health insurance fund is under long-term financial austerity. Major reforms of both health and old age financing are being discussed.

Budgets

#10

To what extent does budgetary policy realize the goal of fiscal sustainability?

10
 9

Budgetary policy is fiscally sustainable.
 8
 7
 6


Budgetary policy achieves most standards of fiscal sustainability.
 5
 4
 3


Budgetary policy achieves some standards of fiscal sustainability.
 2
 1

Budgetary policy is fiscally unsustainable.
Budgetary Policy
9
Estonia has followed a strict fiscal policy for decades. As a result, the country has Europe’s lowest public debt as a percentage of GDP and is able to meet future financial obligations without placing extra burdens on future generations. Although a small budget deficit has appeared in recent years, it will disappear by 2020 according to current forecasts. The overall tax burden has remained constant over the years.

Government transfers to municipal budgets, which were substantially cut during the economic recession, are being step-by-step restored. Combined with the merger of small and fiscally fragile municipalities, this contributes to a broader range and higher quality of public services at the local level. However, the long-term debts of the health insurance and public pension funds pose significant future challenges to the government’s ability to secure citizens’ welfare while adhering to the principles of fiscal sustainability.

Research and Innovation

#22

To what extent does research and innovation policy support technological innovations that foster the creation and introduction of new products?

10
 9

Research and innovation policy effectively supports innovations that foster the creation of new products and enhance productivity.
 8
 7
 6


Research and innovation policy largely supports innovations that foster the creation of new products and enhance productivity.
 5
 4
 3


Research and innovation policy partly supports innovations that foster the creation of new products and enhance productivity.
 2
 1

Research and innovation policy has largely failed to support innovations that foster the creation of new products and enhance productivity.
R&I Policy
6
Research, development and innovation (RDI) have been national development priorities, reflected in a sophisticated set of strategies and action plans. The outcomes, however, are very poor. Formerly stable levels of governmental and non-governmental RDI expenditures have been declining since 2015. This is partly explained by EU programming periods as well as the need to increase military expenditures but, crucially, also by the government’s lack of a clear policy vision.

R&D policy measures have been much more successful in developing scientific research, as indicated by an increased number of highly ranked international publications and the improved international rankings of Estonia’s major universities. Advances in the development of patents, high-tech products and services are noticeable but less prominent. Personnel engaged in research and development is increasingly concentrated in higher education and cooperation with businesses remains limited. Recent changes in research funding policy strongly motivate universities to establish R&D contracts with the private sector. However, this approach discriminates against the social sciences and humanities, which typically serve public and non-profit sector institutions.

Global Financial System

#2

To what extent does the government actively contribute to the effective regulation and supervision of the international financial architecture?

10
 9

The government (pro-)actively promotes the regulation and supervision of financial markets. It demonstrates initiative and responsibility in such endeavors and often acts as an international agenda-setter.
 8
 7
 6


The government contributes to improving the regulation and supervision of financial markets. In some cases, it demonstrates initiative and responsibility in such endeavors.
 5
 4
 3


The government rarely contributes to improving the regulation and supervision of financial markets. It seldom demonstrates initiative or responsibility in such endeavors.
 2
 1

The government does not contribute to improving the regulation and supervision of financial markets.
Stabilizing Global Financial Markets
8
Estonia actively participates in developing and securing financial stability and transparency in global financial markets. Two measures are particularly notable. First, the government has taken action in the prevention of money laundering. Estonia has signed major international agreements and is a member of the Moneyval. It has also established several domestic bodies to combat money laundering, such as the Governmental Committee for the Coordination of Money Laundering Prevention, the Financial Intelligence Unit and others. The Estonian Financial Intelligence Unit (FIU) is an independent unit of the Estonian Police and Border Guard Board. The FIU analyses and verifies information in case where money laundering or terrorist financing are suspected, taking measures where necessary and forwarding materials to the competent authorities upon detection of a criminal offence. The Anti-Money Laundering and Terrorist Financing Prevention Act was amended in 2017, extending to all companies the obligation to declare the effective beneficiaries of financial transactions.

Estonia has also been actively involved in euro zone bailouts, but the government plays only a limited role in addressing international financial-market failures, due both to the fact that most banks are foreign-owned, and to its own neoliberal policy outlook.
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