The main cause of the economic crisis was Russia’s pressure on the European energy market, which began in the second half of 2021. This was followed by Russia’s attack on Ukraine. It is difficult to govern a country in difficult circumstances, and unfortunately Estonia has suffered bad luck here. We could not have chosen a more helpful neighbor. And the choice of the prime minister went as he did – to put it mildly, Estonia is not currently led by a person of the caliber of FD Roosevelt. In fact, every financial policy decision of the government deepens the crisis even more, so Estonia became a red light for the European Union.
Lithuania and Latvia use a bank levy
The International Monetary Fund (IMF) recently pointed out that, in times of crisis, it is not advisable for Estonia to raise taxes, but it should revive the economy. The government led by the Reform Party has done the opposite in recent years: taxes have increased, investment has decreased and social inequality has increased. The IMF emphasized that Estonia’s economic problems are not only caused by global events, that domestic political choices play a larger role.
Estonia’s state budget deficit has crossed the billion euro mark and is growing. Without going into details, two steps would have been enough to fill the hole now – a graduated income tax instead of abolishing the mythical “tax shaft” and bank fee. In Latvia and Lithuania, the graduated income tax has helped the rich to contribute more and support the poor during the crisis. This is more beneficial to the country in the long run than taking money from the poor, which can lead to more social instability and lower tax revenues. In Lithuania, the income tax rate is between 20-32 percent, and in Latvia it is 20-31 percent.
A bank levy was implemented by Lithuania, and it was a real success story for it. There are no banks left there, but Lithuania is already the country with the best standard of living in the Baltics, and its economy continues to grow. At the same time, Estonia’s economy has been in decline for more than two years. By the end of this year, Lithuania will already be well ahead of Estonia.
Latvia is also implementing a tax on financial services, with which they intend to cover social projects. Among other things, they plan to offer housing loan support for cheaper apartments, which should ease the downturn in the property market and allow young families to buy properties. The standard of living of Latvians should surpass that of Estonians by the end of this year, which is a very unusual situation for Estonia. We have been leading among the Baltic states, but now we are firmly moving to last place.
Of course, companies cannot be punished for doing their job well and making a profit – it cannot be welcomed. In the case of banks, however, the situation is so great that the huge profit caused by loan interest, around a billion euros per year, is not related to the creation of additional value. On the other hand, the absence of a bank tax in Estonia means, among other things, that it is more favorable for banks to create jobs elsewhere – in Lithuania, Latvia or Sweden, because that it is more expensive to make a profit there and therefore it makes more sense to make investments.
Last year, all residents of Estonia, including children and pensioners, sent mostly 700 euros to Scandinavia – just because the Euribor rate was very high. Neither they nor the Estonian state have received much in response.
Pre-election pledges are not valid
In their report, the IMF has expressed a general concern about banks. Since the Estonian government’s policy increases the risk of poverty, care must be taken when applying the bank tax. If lending to individuals and companies becomes problematic, it can affect the stability of banks. When implementing the bank tax, it must be remembered that (for banks) good years are followed by more difficult ones. If the banks fall into losses, it must be possible to deduct this loss from the bank’s future tax liability, so that the banks can collect capital again.
Against the background of the developments of the southern neighbors, it is particularly interesting that the Estonian government has only two strong principles left – there will be no graduated income tax (700 million) or bank tax (500 million). There are no principles regarding the remaining fees – all pre-election promises are no longer valid. No tax relief – VAT, income tax exemption for pensions, child benefits, teachers’ salaries, hotel VAT went to goods. The only promise the Prime Minister was able to fulfill was to bank managers that the Estonian state would not interfere with their profits.
