Central bank: Estonia needs a debate about taxation system

Rasmus Kattai, an economist of the Bank of Estonia. Photo: Eesti Pank

Rasmus Kattai, an economist of the Bank of Estonia, said in an interview to Postimees that a debate over taxation is inevitable, since the expenses of the state have been exceeding revenues for a long time already.

How unusual is the Estonian government’s 60-million cut compared with the activities of other governments in the euro area?

Every country of the euro area decides its budget according to the country’s situation and necessities. The budget of Estonia’s government sector runs deficit for two reasons: because of the crisis and because of the constant gap between expenses and revenues, inherited from the pre-crisis period. Next year there will be no need to support the private sector additionally from the state budget, i.e. the crisis spending will be done by that time and we shall face the question of how to make the expenses and income meet in a normal situation.

Unfortunately this is a more than 60 million euro question because net year’s deficit in the state budget strategy is more than 1.1 billion euros and still above one billion in 2023 when the economy will return to normal situation and a government not increasing the debt burden should, in ideal case, respond with a balanced budget.

The stability programmes of the EU countries show that approximately half of the countries plan a three-percent of even lower budget deficit for next year, while Estonia’s deficit is 3.6 percent and the improvement rate is also among the lowest, although the crisis has harmed Estonia’s economy to a lesser extent than elsewhere in Europe.

What is the attitude towards balanced budget in the rest of the euro area? What would you say about the claim that the time of striving for balanced budget is irreversibly over in the euro area?

Stable and sustainable financing of the state is an important precondition for uninterrupted operation of the monetary union. The corona crisis has increased the need for state support all over the world and this is reflected by budget deficit. The economic loss in Europe is the greatest of recent decades and surpasses that of the great financial crisis a dozen years ago.

Due to the enormity of the crisis the EU countries may temporarily and exceptionally exceed the limits of deficit agreed upon earlier, but it is true that the deeper is the budget deficit, the longer it generally takes to exit from it.

Tax burden is rapidly declining. What are the opportunities for imposing new taxes?

Overcoming the gap between income and expenses and stopping the increase of debt requires a principal change in the state’s budget policy.

The tax debate will apparently become inevitable in the near future because tax revenues cannot meet the state’s spending for a number of years already. If we want to avoid the increasing of debt or a reduction of services provided by the state, we have to find a social consensus regarding the type of taxation system we want to have. Considering that a significant share of the state expenses are financed by the EU funds, the reduction of the EU support in the future will make the need to update the taxation system even more urgent.