According to the spring forecast of the EUROPEAN Commission, the economy of the European Union showed strong resilience in a difficult global context last year. Estonia was the only one among 27 member states where the economy declined last year. This by 1.3 percent. This is twice as deep an economic recession as in the year of the emergency caused by the corona crisis.
At the level of the European Union, it was recognized that thanks to determined efforts to strengthen energy security and the governments’ timely support measures, it was possible to avoid the winter recession. There is even a certain moderate growth this year as well, but this does not apply to Estonia. The winter recession was the deepest in Estonia compared to the last year – in the last quarter of last year and also in the first quarter of this year, we experienced a four percent drop.
Once again, it has been proven that the Reform Party’s vision of an effective economic policy is not valid. By refusing appropriate and temporary support measures, the Estonian economy was dragged from exceptionally high inflation to economic recession. As a result, Estonia’s manufacturing industry, specifically export-oriented, is in a particularly difficult situation. Exporting companies find it increasingly difficult to compete internationally due to rapid cost growth and price increases.
The European economy has been able to contain the negative impact of Russia’s war of aggression against Ukraine. In contrast to Estonia, other countries implemented effective energy support measures. As a result, significantly lower energy prices moved through the economy, reducing production costs for businesses and energy bills for consumers. The European Commission speaks with justified pride about improving this year’s growth forecast, because a better-than-expected start to the year raises the growth prospects of the European Union’s economy to one percent in 2023.
At the same time, Estonia is predicted to continue the economic recession. This year, in addition to Estonia, Sweden will also experience a decline, but the 25 member states of the European Union will continue with economic growth. It is not insignificant that the economies of our closest neighbors – Latvia, Lithuania, Finland – are also growing, which clearly shows that the government has taken the wrong steps in its decisions.
At a time when Estonian people and companies need state support to cope with the general increase in the cost of living, our current ruling coalition repeats its only slogan that “there is no money” and cuts must be made instead. Is this really, according to their understanding, the only way to improve public finances?
As you know, one percent economic growth for Estonia is equivalent to nearly 400 million euros, and if we collect about a third of it as taxes, we are talking about a budget income of about 130 million euros. It is clear that a policy that smooths out the business cycle cannot be implemented by continuing to cut.
In addition to the economic recession, we are also at the forefront of price increases in Europe – during the last two years, i.e. during the ruling period of the Reform Party, Estonian consumer prices have risen by 34.8 percent, which is the largest increase in the eurozone. This is no reason to be proud. Regardless, the governing coalition plans to splash out with tax increases, where the usual rule applies that they have a cooling effect on the economy, not growth.
The increase in sales tax is added to the prices of all goods and services, which then causes an additional increase in prices, and it is likely that the next year’s inflation forecast by Eesti Pank will have to be revised even higher.
Income tax reform favors the wealthy. This raises the question – is it appropriate to raise taxes during the current recession?
It is known that this does not affect the budget deficit much. It is unfortunate that the 200 euros, which the state plans to reduce from next year at the expense of family allowances, does not carry the goal of distributing child allowances more equally. It is, instead, to patch up the Reform Party’s election promises. This is how money is taken from the poorer and families and distributed to the richer ones. How else could you call the income tax reform of the Reform Party, which costs 500 million euros, and gives 700 euros of tax-free income to the wealthier than average people every month?
Considering the country’s demographic situation and the fact that last year’s birth rate was a record low in Estonia – this gives a negative outlook for this year as well – it would be appropriate to implement appropriate family policy measures to turn this around. In so many crises, it has become apparent that people do not want to give birth to children in a difficult and unstable situation, which has caused births to be postponed, but this is where the state would have the opportunity to support and encourage young people to start their own families. Children are certainly not born just for money, but child and family allowances are a welcome support that shows the state’s attitude and enables families to cope better with the general increase in the cost of living.
However, the current government is moving in the opposite direction, cutting key benefits and raising taxes during a recession, further damaging the livelihoods of those most affected by economic headwinds.
