What does it mean - economy zero circle in Estonia?

 

The article discusses the Estonian government's new tax plans and their potential impact on the economy. The author points out that the government's fear of mentioning an economic downturn is understandable, as their own policies may lead to zero economic growth. There are plans to enact new taxes totaling over 800 million euros, and in at least one case, it is still unclear how this will be possible.

The article refers to Prime Minister Kristen Michal and Finance Minister Jürgen Ligi's criticism of Peeter Raudsepp, the director of the Estonian Institute of Economic Research, because the government fears that negative economic forecasts could themselves worsen the economy. However, it is noted that the messages of one small institute may not significantly affect the entire economy, but it could be a sign of how close we are to "talking down" the economy.

At the time of writing, the economic situation still appeared to be on an upward trend, with various institutions forecasting over 3% economic growth for the following year in early summer. However, it was already noted that the direction of political decisions was unclear, and the state budget deficit threatened to remain at minus 4‒5% of GDP.

Currently, the direction of political decisions is clearer, but analysts warn that planned tax increases and cuts will significantly reduce domestic consumption, which accounts for about half of Estonia's economic growth. Rasmus Kattai, an analyst at the central bank, pointed out that reducing the budget deficit by about one billion euros, or over 2% of the expected GDP, will reduce next year's economic growth by about 2% compared to previous forecasts.

These same analysts believe that the tightening of fiscal policy was timely and necessary, but its final result, according to the aforementioned forecasts, would be economic growth of 0.8‒1.6%. The 2% improvement in the budget position will mainly come from a car tax (240 million), a 2% increase in income tax, a half-year increase in VAT (116 million), and cuts (123 million euros). All these changes could reduce economic confidence and push the economy towards a downturn, especially considering the uncertainty in retail trade and the inflationary effect of the VAT increase, which could further reduce GDP by 0.8% purely from an accounting perspective.

In conclusion, there could easily be zero economic growth in 2025, depending on the negative sentiment these tax increases create in the economy. However, tax increases may not necessarily lead the economy into recession, as it may grow faster than expected, especially with the support of external demand. Government decisions may slow down Estonia's economic growth, but, for example, those of the Swedish central bank could accelerate it.

The article also addresses the question of who will pay for security, highlighting calculations that show lower-income households will proportionally pay more than higher-income households. Interior Minister Lauri Läänemets criticized these calculations, stating that they only considered the taxation of income without the tax-free minimum and the VAT increase, but things should be viewed comprehensively, considering all tax increases, including the VAT increase implemented this year, the upcoming 2% income tax increase, and the elimination of the tax bracket.

The detailed content of last year's income tax reform showed that people earning between 700‒7700 euros would gain. However, if the tax bracket is indeed eliminated in 2026 and a 2% income tax is added to all income without any deduction, then people earning 700‒1390 euros will pay more. As the Estonian median salary in the first quarter was 1553 euros, the tax increase will affect a significant portion of employees. Conversely, income tax will decrease for those earning between 1400‒4400 euros.

The distribution of the tax burden directly affects domestic consumption, especially for lower wages. A table from the Ministry of Finance showed that the 4% VAT increase would reduce the income of the wealthiest decile by about 1%, but the income of the lower five deciles by 1.5‒4%. Läänemets noted that at the same time, wages, the minimum wage, and pensions are also increasing, although this could still mean a decrease in income for at least half of the people. Without the income tax reform, it would not have been necessary to ask pensioners for this 2%. The car tax and new excise duty increases should also be taken into account.

Finally, the tax package includes a 200 million euro question mark regarding corporate income tax, which is intended to prevent an increase in the tax burden on individuals. However, the problem is that the 2026 profit of companies will not be calculated until early 2027, but the government has already accounted for this tax in the 2026 budget. Äripäev will continue to question the government until this issue is clarified.