Minister of Finance Martin Helme has a theoretically brilliant plan: lower the alcohol excise tax, reduce cross-border trade with Latvia, increase the earnings of Estonian retailers and the state budget revenue. Yet the plan may easily fail.
Neighbors undermining Estonia’s excise plan
Some moments after the Estonian parliament initiated the speedy 25-percent reduction of excise tax on beer and vodka, the Latvian minister of finance stepped up and said that they, too, are considering the reduction of taxes on alcohol, possibly this year. The Latvian retailers announced a couple of hours later that the state should lower the excises by 23 percent.
The Latvians’ idea is simple: to maintain the present situation and bring more revenue to the state’s coffers. Since 2015 when the cross-border trade with Latvia picked up, the Southern neighbors’ excise income has increased over 50 percent. Their excise income exceeded that of Estonia for the first time last year, reaching 242 million euros.
Latvia fights for the northern border
Triin Kutberg, representing the interests of hard liquor producers and importers, said that the Latvian reaction primarily shows how highly important is the cross-border trade and its revenue for all countries. “We have been enjoying for years that the Finns buy alcohol here. The Latvians are now making the same effort,” Kutberg said.
Thus the government has found itself in a curious situation where the apparently brave and rational decision to reduce the excises and terminate cross-border trade need not give results. Moreover, it may even deteriorate the situation further.
A recent study by the Ministry of Finance also emphasizes that it is very difficult or even impossible to put the toothpaste of existing cross-border trade back into the tube. The consulting firm PwC cited a case in Scandinavia: when Sweden once wanted to lower the excise by 40 percent, Denmark decided to reduce theirs to the same amount. Once Denmark lowers its excise, Germany will do it as well in order to maintain the price difference.
Accordingly, a major excise cut in one country would release a chain reaction in neighboring countries so as not to lose their positions in cross-border trade. It was confirmed by the statement of the Finnish alcohol producers yesterday, who invited their government to respond to Estonia’s move – they do not want the Finns to return to wheeling cartloads of Estonian alcohol on the Tallinn-Helsinki ferries.
Minister of Finance Helme briefly commented on the neighbors’ moves: “It is interesting to observe how quickly our decision influence political discussion in the neighboring countries”.
“Unfortunately we cannot say that Estonia has always considered the decisions of its neighbors,” Helme added. He did emphasize that before crying wolf Estonia should be certain that Finland and Latvia are actually lowering their excises rather than making mere noise to influence Estonia’s decisions.
Will we soon see free beer?
Some jokers already asked yesterday which country would be the first to offer free alcohol. The joke is actually quite serious, since this backward arms race results in reducing the retail price of alcohol and may eventually boost consumption.
Social Democratic politicians were on their hind legs warning that only the alcohol producers would benefit from the emerging situation, while the state would lose the excise revenue and need to handle the health problems caused by excessive drinking. Various health experts and medics also fear that the excise tax drop would induce Estonian’s residents drink more.
Einar Visnapuu, the trailblazer of the Latvian vodka rush and manager of the Alko1000 chain, is another one to consider the governments excise cut plan complete populism. He does not predict an end to cross-border trade; on the contrary, they would hire more staff. “All this is complete rock’n’roll”, Visnapuu said at first, but became more serious and added that reducing the beer and hard liquor excise by 25 percent is populism and lying to the public. “It may initially seem a large percentage, but it will eventually reduce the price of beer in the shop by some ten cents if at all,” he said.
Talking about the death of cross-border trade is exaggeration and hasty, he said. “Far from that! We are hiring extra hands for the summer. It is all right with us,” he explained happily. “We can keep playing with profit margins”.
So that Alko1000, which manages four outlets right across the Latvian border, could maintain its profitable business, they have promised to revise their pricing policy and profit margins and reduce the latter if necessary.
Moreover, they are negotiating with the Latvian producers, who have also promised to review their prices.
“And the most positive aspect – Latvian politicians want to reduce excises as well”, Visnapuu said. This would result in widening the price gap between the two countries sufficiently to make shopping trips to Latvia as attractive as before.
“I have heard a Latvian politician say that if they [the Estonians – Ed.] want to cut prices, so will we, and let us see, who can last longer,” Visnapuu said.