Key Challenges

Pandemic ended period of budget balance; looming economic concerns
Estonia is internationally renowned for its low government debt. However, government debt doubled in 2020 due coronavirus mitigation measures, although it remained very modest by international comparison. Estonia moved quickly from a balanced budget narrative to a steeply negative budget balance. The government basically has two options, either increase taxes or radically cut expenditures. Prime Minister Jüri Ratas’s second government (2019–2021) set its sights on delivering several large-scale infrastructure (e.g., road) projects. However, according to the Bank of Estonia, these projects could have negative effects. For example, the projects could increase labor shortages, leading to a decline in private sector investment and slow productivity growth. Prime Minister Kaja Kallas’s government (2021–present) has adopted a much more conservative, neoliberal approach and all large-scale investments are planned via EU NextGen RRF facilities. Expenditure on human capital development lags far behind other countries, which will harm the country’s competitiveness. The latest twist has been extraordinarily fast inflation – the latest annual CPI growth rate is 12% and the country has plunged into an energy crisis due to extremely high energy prices. The government should implement more inclusive, universal measures to mitigate the energy crisis, instead of the mean and lean approach it has taken so far.
Tax system no longer suitable; changing work patterns require reforms
The Estonian tax system, designed in the early 1990s, is straightforward and transparent, but poorly suited to today’s work and lifestyle patterns. The 2017 income tax reform introduced progressive tax exemptions, which also effect middle to higher income groups. Considering the fast wage increases, tax bracket thresholds may need to be adjusted to ensure vertical equity. The pension reform that made contributions to second-pillar pension schemes voluntary and allowed early withdrawals of existing assets could have substantial effects on capital markets and households’ income security. Consequently, the budgetary and social effects of reforms associated with tax policy must be carefully monitored and negative effects must be addressed. Reform of social insurance systems, based on standard employment, is needed in order to provide adequate protection for the self-employed (e.g., those working in the gig economy and the digital sector) and temporary workers, and to secure sufficient government revenue to finance the welfare system. Furthermore, excises and green taxes require further attention to ensure they comply with Green Deal targets and mitigate poverty given the recent increases in energy prices. Thus, a systemic and comprehensive reform of the tax system remains crucial.
Increasing R&D linkages
R&D support programs that have advanced cooperation between universities and enterprises must be continued, 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.
Plans poorly linked to decision-making; E-governance usability must be improved
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 development plans and analyses that are poorly linked to decision-making. To overcome this excessive reporting, the government should consider three measures. First, the government must improve coordination between ministries, and between ministries, the Prime Minister’s Office and the Government Office. Second, the government must significantly improve policy evaluation, including the appraisal of regulatory impact assessment results. Third, 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 usability of e-governance tools improved both for public administration and citizens. Contemporary governance requires appropriate capacities both centrally and locally. The process of municipal mergers, finalized in 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.
Institutions cannot be taken for granted
Democratic institutions and principles have become well established in Estonia over the last 30 years, but must not be taken for granted. Constant attention must be paid to ensure 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 the plurality of opinions. Government must promote measures that guarantee affordable access to print and digital media for people living in remote areas. 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

Moderate levels of
polarization; right
wing has diminishing
Estonia has moderate levels of party polarization and a comparatively high level of trust in politicians (the highest among the Central and East European countries covered by the SGI). A proportional representation electoral system has produced a multiparty system with four to six parties represented in recent parliaments. Two or three parties are usually needed to form a coalition government. The current coalition government, in office since February 2021, includes the neoliberal Reform Party (of Prime Minister Kaja Kallas) and the social liberal Centre Party. Both belong to the ALDE group in the European Parliament, but domestically often take opposing positions. Two conservative parties – Isamaa and the right-wing populist Estonian Conservative People’s Party (EKRE) – and the center-left Social Democrats form the parliamentary opposition. EKRE members of parliament often vocally contradict mainstream politics, but this has only a minor effect on policymaking since the EKRE moved from government to opposition in January 2021. (Score: 7)
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