Key Challenges

Fiscal prudence a defining characteristic. Tax-reform outcomes must be monitored
Estonia is recognized internationally as maintaining a balanced budget and low government debt. The tax system is straightforward and transparent and the overall tax burden positions around the OECD average. The sitting government has offered several proposals to diversify revenues and increase the vertical equity of the tax system. While the 2017 income tax reform aligns to these targets, recently introduced regressive tax exemptions also impact higher income groups and may alter employment patterns and labor contracts. Consequently, the budgetary and social outcomes of this tax reform must be vigilantly monitored and, where necessary, misuses and negative spillovers addressed. Likewise, the government plan to detach public pensions from previous earnings requires meticulous consideration to ensure that employees’ incentives remain optimal. The recent sharp increase in the excise tax demonstrated that, in a small open economy, tax hikes can reduce, rather than increase, revenues. Thus, a systemic and comprehensive approach to tax system reform remains crucial.
Knowledge-based economy a key goal
Beyond recalibrating the tax system, Estonia must move from policy deliberations to tangible action with regard to building a knowledge-based economy. Current innovation policy focuses on leading enterprises, remaining largely detached from the rest of the economy. Policymakers must expand research, development, and innovation (RDI) measures to include small- and medium-sized enterprises and traditional sectors of the economy (e.g., oil shale), enabling RDI to contribute to structural reforms. Furthermore, RDI within universities must be adequately financed and better linked to the country’s economic and social priorities.
Strategic capacity must be built over time. E-governance advances slowing
The institutional framework for governance is well established and stable. Consequently, policymakers may focus on developing executive capacity by firmly following democratic principles of checks and balances and public accountability. However, the executive branch tends to overproduce strategies (a failure of coordination) and analyses, with the latter too often not considered in decision-making. To overcome this fragmentation and excessive reporting, the government should consider four strategies. First, it should merge the numerous small-scale strategies into the national 30-year strategy (i.e., Sustainable Estonia 21). Second, improved coordination between ministries as well as between the Prime Minister’s Office (PMO) and line ministries is required. Third, citizens’ and advocacy groups should be given a much broader role in policy evaluation, including in the appraisal of regulatory impact assessment results. Fourth, instead of commissioning exhaustive explanatory analytical reports, the government should promote open data and encourage secondary analysis. Although Estonia is regarded as a forerunner in e-governance, the pace of innovation has slowed; reforms are often chaotic or fail completely (e.g., the Social Protection Information System). To improve this situation, a ministry with a clear and broad responsibility for advancing e-governance is required.
Citizens’ quality of life should take precedence
Contemporary governance requires appropriate capacities both locally and internationally. Estonia has made impressive gains in the latter (evidenced by the Estonian EU Presidency in the second half of 2017) but not in the former. The process of municipal mergers, finalized in the fall of 2017, must be complemented by a clarification of the tasks of local government as well as guarantees of adequate funding and fostering of citizen involvement in local governance. The improvement of citizens’ quality of life must be prioritized over economizing.
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