Executive Summary

Social inclusion a
new focus
In many respects, Estonia has proven successful in building a sustainable democracy. Among the 41 countries in the SGI, Estonia ranks 8th in policy performance and democracy and 18th in governance. As a result of a change in the government coalition in November 2016, the period currently under study (November 2016 – November 2017) includes major adjustments in several policy areas impacting social inclusion. After 12 years of government coalitions dominated by the neoliberal Reform Party, a center-left government led by the Center Party has been installed. This new government has prioritized policies aiming to secure the financial sustainability of the welfare system and increase social inclusion.
Strong growth after recovery from recession
The economy has recovered from the recession, a fact evidenced by the high employment level (matched by low unemployment) and an annual economic growth rate of about 4%. Ongoing reforms aim to extend employment by facilitating the labor market participation of disabled persons and workers with low or outdated skills. However, increasing labor shortages and high taxes on labor continue to thwart productivity and, more generally, economic growth. Debates around reducing employers’ tax burdens are, for the first time, being embedded into larger political debates on social insurance system reform.
Sustainability concerns in welfare system
Estonia’s welfare system is based on the Bismarckian principle of social insurance funds, which faces mounting debt due to population aging. The government proposes to transfer more tax revenues to social insurance in order to cover health expenditures for pensioners and employees with atypical contracts. Reducing the long waiting lists for specialized medical care is another priority of planned reforms.
Income-tax reform will help low earners
One major accomplishment of government has been an income tax reform. Proportionality has been preserved, but a regressive tax exemption will be introduced in 2018. This will have a far-reaching impact on the labor market and welfare of households as the additional income gained by low earners will decrease income inequality, which has been comparatively high. Further antipoverty measures implemented in 2017 include an increase in child benefits for large families and an additional allowance for single-person elderly households.
Little governance
In governance, there has been little progress in terms of policy innovation, quality management and pursuing holistic approaches. Nonetheless, the negative trends of previous years, including a preoccupation with fine tuning and incrementalism, lack of transparency, and poor public communication have been halted. Even more importantly, a prolonged reform of local government has finally accomplished the prescribed municipal mergers, with the first local elections in the new municipalities held in October 2017. In these elections, voting rights were extended to 16- and 17-year-olds. However, the turnout (just 53%) was among the lowest in Estonia’s history, a reflection of the challenging municipality mergers.
Secure democracy,
but gaps remain
Democracy is well established and secure in Estonia. The party financing system is continuously improving, largely thanks to persistent media attention and public interest. Corruption among high-level public officials, however, remains somewhat of a challenge and must be redressed through additional regulation as well as public awareness campaigns. Also, social progress on gender equality and LGBT rights has remained limited.
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