Estonia

   
 

Executive Summary

Strong record with
risk of stagnation
In many respects, Estonia has successfully built a sustainable democracy. Among the 41 countries in the SGI, Estonia ranked seventh in terms of democracy, eighth in terms of policy performance and 18th in terms of governance in 2018. However, Estonia’s policy performance and governance rankings have stagnated, which raises the question of whether the government turn to the center-left at the end of 2016 has made a difference.
 
The government has set itself three main objectives: to make Estonian society more equal, to bring the state closer to the citizens and to help those most in need.
Successful post-
recession recovery
Laying the basis for achieving these objectives, the country’s recent economic recovery has been successful, evidenced by the record high employment level and an annual economic growth rate of 3.6% – 3.8%. Several labor market policy measures to reduce labor shortages, and enhance the employability of disabled people and people with low or outdated skills have been introduced. However, increasing labor shortages and high taxes on labor continue to thwart productivity, and more generally economic growth. The labor market situation has triggered debates about migration policy, the adaptation of regulation to new work patterns and the existing tax system.
Income tax reform
passed
One major accomplishment of the government has been an income tax reform, which introduced a regressive tax exemption. This will positively affect the welfare of low income households and decrease income inequality, which has been comparatively high.
Welfare system faces funding shortfalls
The main elements of Estonia’s welfare system (i.e., the health care and pension systems), which are based on the Bismarckian principle of social insurance, face fundamental problems in financing and coverage. Both issues are acknowledged by the government, yet the solutions implemented so far remain modest and incremental. The government has transferred extra tax revenues to social insurance in order to cover health care expenditures for pensioners and reduce waiting lists for specialized medical care. The PAYG pension pillar is accumulating debt due to the high population dependency ratio and Estonia’s mandatory pension funds continuously perform the poorest of any OECD country. Public opinion and political parties are divided over possible solutions, and – with the looming national and European Parliament elections in 2019 – social insurance reforms risk being put on hold.
Municipal mergers facing growing pains
The promise to bring the state closer to citizens has been limited and yielded mixed results. The main efforts have been at the local level where a long and painful process of municipal mergers has finally been completed. The first local elections for the newly created municipalities were held in October 2017. However, the legitimacy and working routines of the new municipalities still need to be established, and access to public services needs to be improved.
EU presidency distracts from domestic reforms
At the central government level, little progress has been made on policy innovation, quality management and pursuing holistic approaches. This can partly be explained by the Estonia’s presidency of the European Union in the second half of 2017, which did not leave enough time or resources to engage with domestic governance reforms. The current situation presents mixed signals. Non-parliamentary actors voice dissatisfaction with the existing state of affairs, while legal amendments passed by the parliament have so far been of marginal importance.
Moderately polarized but secure democracy
The general public has remained rather silent during the period under review, which can be taken as proof that democracy is well established and secure in Estonia. The political party landscape is modestly polarized and all major political ideologies are represented in the parliament. The campaign for the March 2019 parliamentary elections has so far addressed substantial economic and social issues, and it seems that – first time in Estonia’s recent history – the “Russian card” will not play a central role. Ethnic minorities and young people have become more actively engaged in politics, although progress on gender equality and LGBT rights has remained limited.
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