Key Challenges

Prudent spending
record, but risks ahead
Estonia is recognized internationally as maintaining a balanced budget and low government debt. However, the current government is actively stimulating the economy via large-scale infrastructure projects, which according to the Bank of Estonia may have negative effects. One negative effect could be increasing labor shortages, leading to a decline in private sector investment and slow productivity growth. The government should avoid fast and simple solutions, such as allowing low-skilled labor migration from third countries. The introduction of risk-sharing measures, which are intended to encourage private sector investment and promote a more cooperative organizational culture, will provide more sustainable results. Furthermore, R&D activities in universities must be better linked to the country’s economic and social priorities, and benefit SMEs. Stable and sufficient funding for research and higher education institutions needs to be secured to facilitate knowledge transfer and the supply of high-skilled workers for the country’s economy.
Tax system needs
updating; piecemeal
reform led to
reduced revenue
The Estonian tax system, designed in the early 1990s, is straightforward and transparent, but poorly suited to today’s work and lifestyle patterns. The current government has proposed several measures to diversify revenues and increase the vertical equity of the tax system. While the 2017 income tax reform was aligned with these targets, having introduced regressive tax exemptions, it will also affect higher income groups, and may alter employment patterns and labor contracts. The ongoing pension reform, which will make contributions to second-pillar pension schemes voluntary and allow people to withdraw existing assets early may have substantial effects on capital markets and household income security. Consequently, the budgetary and social effects of reforms associated with tax policy must be carefully monitored and negative effects must be addressed. The sharp increase in the excise tax demonstrated that, in a small open economy, tax hikes can reduce rather than increase tax revenue. Reform of social insurance systems, based on standard employment, is needed in order to provide adequate protection to the digital sector and non-permanent workers, and to secure sufficient government revenue to finance the welfare system. Thus, a systemic and comprehensive reform of the tax system remains crucial.
Strategies poorly linked
to decision-making; pace of innovation should be increased
The institutional governance framework is well established. Consequently, policymakers can focus on increasing executive capacity by firmly following democratic principles of checks and balances, and public accountability. In modernizing governance, Estonia must revise the current conception of knowledge-based governance, which has led to an overproduction of strategies and analyses that are poorly linked to decision-making. To overcome this fragmentation and excessive reporting, the government should consider four measures. First, the government must critically review the numerous small-scale strategies (most of which will end in 2020) and maintain a small number of important targets aligned with the Estonia 2035 strategy. Second, the government must improve coordination between ministries, and between ministries and the Prime Minister’s Office (PMO). Third, the government must significantly improve policy evaluation, including the appraisal of regulatory impact-assessment results. Fourth, instead of commissioning studies with exhaustive explanatory analyses, the government should promote open data use and secondary analysis. To remain a pioneer in e-governance, the pace of innovation needs to be increased and the quality of e-governance tools improved. Contemporary governance requires appropriate capacities both centrally and locally. The process of municipal mergers, finalized in the fall of 2017, must be complemented by a clarification of local government tasks, guarantees of adequate funding and support for citizen involvement in local governance. The improvement of citizens’ quality of life must be prioritized over efficiency gains.
Media, judiciary independence
remain crucial
Democratic institutions and principles have become well established in Estonia over the last 28 years, but must not be taken for granted. Constant attention must be paid that all four powers remain autonomous and legitimate. Politicians, civil society and journalists’ associations should closely monitor media outlets to protect freedom of expression and plurality of opinions. Government must promote measures that guarantee affordable access to print and digital media for people living in remote areas. The nomination of senior judges and prosecutors must remain independent of party politics. It is crucial for democracy that all civil society organizations are treated equally by the government regardless of their ideology and value orientations.

Party Polarization

Consensus difficult
in current coalition
Estonia uses a proportional representation electoral system, which has produced a multiparty system with four to six parties represented in recent parliaments. Two to three parties usually form a coalition government. The current coalition government, which has held office since spring 2019, includes the prime minister’s social-liberal Estonian Center Party and two conservative parties – Isamaa and the Estonian Conservative People’s Party (EKRE). EKRE holds radical-right positions on all major policy issues. The entry of EKRE into the government coalition was the biggest surprise of the March 2019 elections, since most political parties had ruled out forming a coalition with EKRE prior to the elections. In contrast to previous coalitions, the current coalition partners frequently struggle to reach a consensus, especially on European and foreign policy issues. EKRE ministers often make statements that contradict the dominant government position. (Score: 6)
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