It is possible that in ten years, Mart Võrklaev will experience enormous positive emotions when he drives his Ferrari past the slums that replace the lifestyle of the wealthy middle class.
Since the beginning of 2020, the Estonian economy has gone from one crisis to another. Of course, we are not alone in this concern – in today’s world, crises do not usually happen to each country separately.
Thanks to globalization, Estonia is affected by both the crash of the US home loan market and a poorly cooked bat in China. However, each country’s approach to crisis management is different, and here Estonia can sometimes choose its own unique path, as much as integration with the world economy allows it.
The effectiveness of one or another approach can be assessed by comparing your results with your neighbors. The International Monetary Fund predicts a 1.2 percent economic decline for Estonia by 2023, and if this turns out to be true, we will end the year as an outsider in the ranking of European Union countries. And this is not the first time – last year we were also in the top three worst countries in the EU.
The situation is similar with inflation – it is forecasted at the level of 9.7%, which (like last year) is one of the worst results in the European Union. Peasant common sense says that the Reform Party, which has been leading the country in various coalitions for three years, is doing something wrong.
Tax increases exacerbate inequality
However, it is worth noting that low places in the ratings do not always mean failure. For example, Latvia was able to take advantage of the 2008 crisis to restructure its economy, and after a colossal recession, it was able to pick up momentum. And not only Latvia – let’s remember Estonia in the early 90s, when the government decided to carry out a series of painful reforms. The reforms brought an immediate decline in the economy, but enabled Estonia to become the most successful of the former Soviet Union republics. Maybe all our sufferings of the last few years are subordinated to some higher purpose? The question is which one.
I am trying to help the Reform Party.
An analysis of the main economic decisions of recent years helps to answer this question. The catalyst for the economic downturn was last year’s energy crisis, where the government led by Kaja Kallas decided to stop supporting companies.
In other words, the Reform Party made a bet on market mechanisms, but this move did not bring success. Simply because the whole of Europe played by different rules – all countries supported their own companies and as a result Estonian companies lost export markets and as a result some factories simply had to be closed. The surviving companies were forced to reflect energy costs in the price of their products, which led to record inflation, while in other countries the state budget took part of the burden of the price increase and prices increased less.
After the elections, the Reform Party decided to fulfill its most expensive election campaign promise, which costs half a billion euros a year. That’s how much the tax breaks cost the wealthiest sections of the population.
This money is not in the budget, and what can’t be hidden here, the budget would be in the red even without this reform. In order to find two billion euros in four years, the government will increase taxes, especially VAT from 20 percent to 22 percent. This decision hits the poorest people in Estonia the hardest, who spend most of their salary on food. In other words, the Reform Party has largely returned to the ultra-liberal economic model that brought success to our country 20-30 years ago.
But the problem is that the world has changed a lot over the years. What was Estonia’s competitive advantage in 2000 has become a stone around the neck of the Estonian economy in 2023.
The withdrawal of business subsidies during the energy crisis led to the loss of export markets, record inflation and rising unemployment. Tax breaks for the wealthy, together with the abolition of extraordinary pension indexation and the increase in VAT, will lead to an unprecedented increase in inequality in society. Even now, 5% of the Estonian population owns 48% of the resources. After the new coalition’s tax reforms, the already huge gap between the rich and the poor will become even wider.
The rich get richer and the poor get poorer
The growth of inequality in society is obviously a conscious choice of the Reform Party. Finance Minister Mart Võrklaev, answering my question at the Riigikogu console, said that the proposed tax reforms will indeed make the rich richer and the poor poorer, but the state will stop punishing people for success.
In fact, the Reform Party today chooses the direction of the development vector for Estonia, and this choice is very important. The country makes a choice between Sweden and the economic model of third world countries. Indeed, the Swedes “punish” success with higher taxes, but the benefits far outweigh the “punishment”. Taxing the rich makes Sweden a country of equal opportunity and benefits all residents, rich and poor alike.
It is possible that in ten years, Mart Võrklaev will experience enormous positive emotions when he drives his Ferrari past the slums that replace the lifestyle of the wealthy middle class. I do not want such a future for Estonia. The election result of the Reform Party leaves no room for maneuver – in the next four years, the social and economic achievements of our country will be destroyed using outdated recipes from the last century.
We hope that the voters will be able to turn our country on the right path in the next Riigikogu elections. Yes, the damage caused to Estonia in four years is enormous, but hopefully it is not too late to save our economy.
