Estonia might grow fast for next 15 years as well

Photo: Raigo Pajula

Prime Minister Andrus Ansip admits that tax changes should have been more thoroughly explained, while claiming the trend is right.

Praising this past year as a success, the Prime Minister admits there are no easy solutions for various problems faced by Estonia. Over and over, the PM keeps repeating: to realise how well we are doing, actually, one needs to look from a distance. 

The year was so-and-so, economically. Starting off well, the situation kept deteriorating; economic growth sharply decelerated in 3^rd quarter amounting to mere 0.7 per cent; exports outlook worsened. How would you characterise the year? 

Seasonally, the figure is corrected to 0.9 per cent.

With an economic growth so meagre, we are not satisfied: even so, as European economy is at a standstill, with many countries in recession, we will have to be satisfied with what we have. A small open economy is greatly impacted by developments on major export markets, and there the developments have not been the best.

Therefore, Estonia’s economic growth – which, exiting from the crisis, mainly relied on export – is now more oriented towards domestic consumption where signs of improvement abound. Wages have grown quite rapidly, and Estonians’ deposits have increased – in near future, this will pull the economic growth.

We should have a more optimistic outlook for the future, the recovery of European economy is a bit late in coming, but it will not fail to come.

But what could a small open economy do, really? Should we detect an iceberg, we could not change course anyway.

We can keep things in order, at home – that will create prerequisites for economic growth. Over these past 15 years, Estonia’s economy has been the fastest grower in the European Union. Why would that be impossible the next 15 years?

Russia, EU’s most important export market, is sending quite contradicting signals. On the basis of this past year, one may have predicted a warming of Estonian-Russian relations, but over the Christmas, we were surprised by a harsh imports ban on Estonian food producers. What’s the actual situation?

Russian economy is not having its best of times; even so, they have never been too stable as a trade partner. We remember how it was not possible to take Finnish daily products or Polish meat produce into Russia, the Lithuanian producers are still under restrictions. One must always consider such sudden moves by Russia. We do not even know, at the moment, if the hindrances faces by Estonian fish and daily industries can be corrected by technological changes or raw materials import documentation – or do we need to go via WTO. But I do not think this would reflect Estonian-Russian political relations.

Let’s talk about salaries. This was a good year, as if; many people got their wages raised. Regrettably, lion’s share of that goes for increased prices.

This past year’s wage rise has been remarkable, clearly exceeding inflation. The last news was about 9 per cent wage rise and 1.5 per cent inflation. There was room enough for real wage rise.

Rather, we should worry whether such fast wage rise is sustainable – so it would not lead us back into the boom years. Already now, employment is on the boom-time levels, almost.

Many entrepreneurs are blaming the state for raising salaries so they have to follow.

Wrong accusations. In the public sector, next year’s wage rise will be 5.2 per cent; in private sector, the wage rise has been twice as large. So the state is definitely pulling the wage rise.

Estonia’s paradox being: no matter how much we raise the wages, we’re still poor when compared to Sweden and Finland!

The difference will be there for quite some time. However, if Estonia remains the fastest growing economy of Europe, wage rise will also continue. Let us never forget that when comparing ourselves with Finland, and Sweden, we are comparing ourselves with absolute tops. From time to time, it would be healthy to compare ourselves with the countries with which we shared the same fate, in times past.

In your latest interviews, both you and President Ilves have emphasised that Estonians are overly critical towards themselves and their state. Why are we overly critical?

Well I guess the comparatively low self esteem is also our driving force. This has forced us to try harder. So has it been always, even in 1930ies.

As opposed to the pre-war Estonia, the borders are now open and people can vote with their feet. Lots of industrial people are moving away. What to do?

They are moving back here as well.

It was our honest goal to ensure free movement of people, we should not now deny that aim. People can choose, where to study and to work, anywhere in the world – this is a great value.

We are depressed, for example, by the studies telling us that 34 per cent of Estonians are ready to work outside of Estonia. Meanwhile, international studies tell us that 70 per cent of Western Europeans are willing to work outside of their homelands.

Increased labour mobility is an ever accelerating process, gaining especially great momentum over this past decade. For countries with lower standards of living, this is a problem; even so, there is no panacea. Only rise of living standards will help. In mid-1970ies, 50,000 people left Finland within a single year; now, many more are returning to Finland versus leavers.

So far, it has not been too bad for Estonia... Altogether, over a million people have left the Baltics. A friend of Estonia’s, Edward Lucas [of The Economist – edit], calls exodus the greatest security threat facing the Baltics. You agree? 

We have to admit that it has been more difficult for our Southern neighbours, with exodus, than for us. Surely this is a serious issue if inhabitants are leaving a country for economic reasons; even so, this cannot be regulated in administrative ways. Neither is this a problem characteristic of our region alone; the entire Central and Eastern Europe has it like that.

When the youth go study abroad, this is only to be welcomed. In almost all Nordic Countries there have been debates, in times past, whether it would be wise to keep the youth home or let them out into the whole wide world to search for knowledge. Always, these debates have reached the conclusion: it is prudent to support studying abroad. As they make it there, surely they will remember the place where they were helped, encouraged and supported. 

In addition to wage differences, Edward Lucas named such motivating factors as poor public services and infrastructure. In other words, life in Baltics – outside the larger cities – does not quite resemble Europe; this, for many, is reason for leaving. What could the state do, here?

Agriculture is doing well all over Baltics. Somehow, unnoticeably, it has come to the farmers being quite happy. It used to be said that Mart Laar destroyed the agriculture. Now, turns out: our agricultural enterprises are doing pretty well, even in Europe. This is reason to rejoice.

Sadly, however, urbanisation is a global trend. With 84 and 85 per cent living in cities, respectively, in Finland and Sweden, the Estonian percentage is only 68. Urbanisation needs to be viewed as a law of nature. Taxpayers’ money should rather be used in view of the probable future, rather than try halting the inevitable.

If we cannot motivate our people to stay, maybe it’s time to allow more immigration?

Over these past years, the numbers of arrivals have been on a steady increase; on account of those who are returning, mostly. All over the world, educated young people are hunted after; even in Estonia, we have taken some steps towards that. We have amended the Aliens Act, and thanks to that, the youth who study here will have a much easier time obtaining a work permit here. 

These steps concern a rather limited amount of people. Do you envision a situation where Estonia is receiving tens of thousands of foreigners?

I do not think that the numbers of people are the determining factor. We have much room for growth in productivity. I would rather try to fill the holes, caused by aging of the population, by faster growth of productivity. Bringing in cheap foreign labour is no solution.

A larger natural growth would also help, of course. Why was your government against increasing child benefit?

On the contrary! (Becomes more animated, in split second.) I would rather counter by asking: why has nobody noticed the start of need based child benefit reform? This is a reform of great principle.

It is not too smart to collect tax money to spread it back, as an even layer, to all. The state’s meagre tax money should go to those who really need it.

Estonia used to be almost the only state in Europe that lacked needs-based benefits. In all other countries, need-based and universal benefits are balanced out, somewhat. Now, thanks to needs-based child benefit reform, Estonia is no longer such an exception.

I am convinced that this will lead to decrease in child poverty and decrease of poverty in Estonia as a whole.

The plan to abolish car VAT differences caused such resistance that Reform Party did not even support its own minister. What went wrong?

Failure in explaining it. The thing was right, in itself.

As a person gets himself a car, buys gasoline, and new tyres, he has to pay Value added tax on all that. (The same order would have been extended to vehicles used for work.)  At the same time, Estonia has 5,600 companies, the sole economic activity of which is maintaining a car. Meaning: very many so-called entrepreneurs are living their personal lives through companies, to pay fewer taxes. It surely is not honest for a system like this to be prolonged.

The proposal was sent to parliament by consensus of the coalition. Yes, the proposal also included the desire to increase tax revenue, but – on the other hand – it lacked not the issue if justice.

This subject is surely not off the agenda; Riigikogu will continue working at the bill next year.

The entrepreneurs expected the state to meet them halfway, as if. But rather the opposite happened – once the VAT debate was over, the state surprised them with a new requirement, that all transactions exceeding €1,000 be declared; causing extra expenses for small enterprises first of all. 

This obviously also was an issue of communication. The government had been assured by Tax and Customs Board management that keeping this requirement would not noticeably increase bureaucracy. Even today, they are checking value added tax returns; even so, they do so randomly. The goal was to provide Tax and Customs Board with more information, to more effectively fight VAT fraud. Due to tax holes, Estonia is missing an estimated €200m a year. Honest taxpayers have to pay this up.

Tightening of tax exemptions is being resisted also because Estonia’s low tax burden is a myth. At the estimation of National Audit Office, in 2007–2011 our tax burden did actually grow by 1.5 per cent.

The reason of increased tax burden was VAT increase in times of crisis. After that, the tax burden has eased again. Estonia’s tax burden is under European average.  

Tax burden is kept low by zero taxation on reinvestment of returns. Many find this is unjust...

Tax exemption on reinvested profits has been a good solution for Estonia and with this we ought to continue. Even recently, there have been the people who claim that direct foreign investments are leaving Estonia, also mentioning the departure of Schibsted.

And there are the other examples; however, the fact remains that the incoming investments substantially exceed the sum that is leaving. Over the last three years, every day has brought over 40 million kroons of foreign investments into Estonia, a little under three million euro. Every day!

The year 2013 was stamped by the local elections. After all the Ice Cellars and People’s Assemblies and what’s-wrong-on-this-picture type questions, people still elect the same old parties. Why?

In Europe, trust towards institutions – governments of nation-states, parliaments, political parties etc – is at the low point of the decade. Not so in Estonia. While we ourselves may also feel that trust is low or lacking, a look at the bigger picture will tell us we are doing quite okay.

Take the media. Even with the complaints over quality of Estonia’s printed media, in Europe we are ranked 7^th, trust-wise. No reason to complain. In the same comparisons, Estonia’s government ranks 8^th. Even with trust towards parties, we are over European average.

Centre Party was accused in all kinds of baseness; even so, they only fortified their power in Tallinn, and no accuser could resist it.

Sad but true. In matters of government, the pragmatic and populist approaches alternate, at times. It feels like, currently, Estonia is in times of expectation of free stuff or free services. Usually, pretty soon the majority will realise that nothing is free.

Was it a bitter pill for Reform Party to swallow: Eerik-Niiles Kross (IRL) single-handedly showed the larger coalition party where it belonged?

That wasn’t competition, between us. In the coalitions formed afterwards, in local governments, Reform Party’s positions have been very strong. The Tallinn campaign may have been somewhat toothless; even so, as a whole we achieved our best results, historically. And that we must consider a good result.

This is the logic of politics: after successful elections, a party’s popularity keeps going up a bit, then going into a decline as no government can meet the expectations of all interest groups. Being in the government will surely war you out.

The campaign by Mr Kross was gutsy – stirring the voter. It was a very good campaign.

Does IRL’s unexpected success cause tensions in the government as well?

The cabinet-tensions are not as freely available as the public claims to know. The usual constructive atmosphere. Tensions are a natural part of it; I cannot imagine a government without tensions. The goal is one for us; it is just that the parties and politicians are of different opinions how to achieve the goal.

No major government overhaul, in near future?

No such tensions in our cabinet. All who understand the way the parliament seats are divided, understand that Reform Party with its 34 seats might form a coalition with any parliamentary party, basically; the rest, however, should form a coalition all of them together. At the same time, Reform Party has no intensions to change coalition partner.

May the government change after European Parliament elections?

That depends on who, of government members, decides to run.

After the European Parliament elections, Reform Party must settle upon its prime minister candidate for next Riigikogu elections. That step will surely be taken; however, it must not mean the government should change.

Will Andrus Ansip become an EU commissioner, next year?

It’s a long road to that ... and, whoever will become European Commission’s president, how will the powers split in the European Parliament – that will only be seen after the elections. And who will be Estonia’s commissioner, it will also be decoded by the government after the European Parliament elections. Right now, it is too early to speculate on that.

Can you imagine yourself working in Brussels, for years?

I am not overly worries about what will become of me, after leaving office as prime minister. I’m sure I will find a place useful for Estonian state. Estonian state has invested quite a lot into me. It would not be right, with all these knowledge and network of relationships, to retire into private business, for instance. I have no such plans. I intend to remain in Estonian politics.

You prophetically said, last year, that politicians and entrepreneurs expect their phones may be bugged. This year, this proved true in a highly scandalous way by Edward Snowden disclosing a huge eavesdropping and surveillance network. Do you think it normal for allies to snoop after one another?

Good allies ought not to snoop one after another.

In my saying back then, there was nothing prophetic. Rather, I was surprised by the reaction to my words. Ever since Internet was created, it is known that the more capable states scan and analyse sensitive data. Obviously, no one has reason to expect that Internet communication will be between the two parties, with no traces left behind.