Finance Ministry says income tax reform the most expensive election promise

Photo: Arvo Meeks

An analysis conducted at the initiative of the Estonian Ministry of Finance into the impact of political parties' election promises on the state budget has revealed that the income tax reform planned by the Reform Party is the most costly promise in this year's parliamentary elections.

Leading analyst at the ministry's fiscal policy department Risto Kaarna said at a press conference that it is the Reform Party's planned elimination of the tax hump that would prove the most expensive for the state with a yearly cost of close to 500 million euros. While Estonia 200, the Center Party and Social Democratic Party (SDE) likewise promise an income tax reform, their versions would be more affordable.

The second most expensive promise is a drop in VAT on foods and medicines, which is being promised by the Estonian Conservative People's Party (EKRE) and the Center Party and would cost the state an estimated 430 million euros per year. The majority of the amount, some 400 million euros, would go towards the VAT decrease on food products.

Third in terms of costs is a pension hike, which is being promised by several parties, and most vigorously by EKRE. Many parties' programs also include mitigating measures for the price of electricity, the most expensive of which were promises by SDE and the Center Party, who pledged to continue the current support scheme and also extend it to businesses. As businesses account for the lion's share of power consumption in Estonia, the cost of the measure would increase significantly to almost 400 million euros per year.

A mechanism promised by SDE geared at increasing the minimum salary would also have a great impact totaling close to 250 million euros. The measure includes compensation from the state for a certain time period. The cost of a promise by Estonia 200 to further increase child benefits as well as that of a pledge by Center to earmark 1.5 percent of GDP for universities are in the same ballpark, according to Kaarna.

The analyst noted that none of the parties stand out in terms of the cost of their election promises -- all of them have major expensive promises and there are also matters that have been included in several parties' programs. At the same time, in the view of the Ministry of Finance, a greater level of detail should be demanded from political parties in their promises, since at the moment a large part of the programs are not formulated precisely enough to provide any assessment as to their cost.

The Finance Ministry pointed out that the sources for covering expenditure in particular are unclear. Several parties are promising to bring order and balance into public finances without getting into the details and specifying which costs their planning to cut or which taxes to increase.

A more concrete source for covering expenditure is being planned by SDE through more uniform taxation of all forms of labor, which could add almost 200 million euros per year into the state budget. The party also wants to introduce a temporary national defense tax and impose an additional tax on dividends.

Estonia 200 and the Right-wingers party promise to bring more money into the state budget by ending the free public transport project. SDE and Center promise to join the system of minimum income tax for large international companies, which is being planned at an international level.

EKRE wants to raise the minimum salary in expedited procedure but unlike SDE, the party has not said that the state should support the increase in any way. Although EKRE's plan has been formulated as a source for covering expenditure, according to the Ministry of Finance, such a strong increase in the minimum wage would cause economic distortion and could put a large number of jobs at risk.

The ministry reviewed in total some 2,400 election promises by Estonia 200, Isamaa, the Center Party, EKRE, Reform Party, Right-wingers and SDE.

The ministry deemed close to 25 percent of the promises as having an impact on the state budget. Promises that are already in the works accounted for some 10 percent of the total number of pledges.