The Baltic Times, TALLINN
Interview by Kairi Kurm
Feb 08, 2006
After catapulting to the political summit in 2003, the Res Publica party has seen its fortunes tumble after a series of mistakes and debacles, most notably the Lihula monument episode. Now in the opposition, the party is trying to win back its erstwhile reputation of a pro-business force prepared to wage war against bureaucrats and government corruption. The party is currently lead by Taavi Veskimagi, vice president of the Riigikogu (Estonian parliament), who, after two years as finance minister, instilled his libertarian ideology on the party.
Veskimagi argues that Estonia should maintain low taxes and as few exemptions as possible. In order to curtail inflation, which is threatening to derail the country’s hopes to phase in the euro in 2007, he is proposing a temporary VAT exception on food products. He met with The Baltic Times to discuss the party and his vision of Estonia in the future.
How does Res Publica differentiate itself from other parties? What is your message?
Res Publica is a center-right party. The main virtue we stand for is that we want people to have independence and opportunities to arrange their own lives. We are against bureaucracy and over-regulation. We want people to be able to ensure education for their children, engage in business and save for old age. Transparent and honest politics is one of our [most important] values. We are a party that is essentially future oriented. If the economy is doing well today, then we should build a basis for future growth. We believe that people in need should be supported, but it should not be massive support. We believe that those who work more should make more.
What was the secret to Res Publica’s success in the 2002 local and 2003 parliamentary elections? Your party received 15 percent of the votes and 25 percent of the seats in Riigikogu, but in last year’s local elections, Res Publica received only 8.5 percent of the vote.
The key to success was that we promised to act honestly. Our slogan was “choose order.” Looking back to that time, there was a scandal surrounding the privatization of Estonian Railway and an attempt to privatize Narva Power Plants. There was a mess, and people were certainly tired of the not-so-transparent way of politics. In this respect, I can say that while in power we did good things, and we certainly made mistakes, but one thing I can confirm is that we never confused the state wallet with our own.
Regarding the local government elections of 2005, we achieved normal results. We received more votes than the Social Democrats and as many as the Pro Patria Union. Although we both received 8.5 percent of the votes, the results of Pro Patria Union are taken as a big achievement and ours as a loss. This shows what potential the party has. I am glad that we are in power in about 50 local authorities around the country, while in 2002 when the election results were much better, it was 15 municipalities less.
According to professor Rein Taagepera, one of Res Publica’s founders, the party has moved to the extreme right and cares only for those who can succeed by themselves.
When Res Publica came into politics, we said we would conduct our politics differently. We did not define ourselves on a political scale. Today I lead the party and have the support of its members. Of course, from the perspective of Rein Taagepera’s centrist-left views, I am his opposite, and he is entitled to have his opinion. But one person’s views do not define the ideology of the party, and his resignation demonstrates this. It is sad that he left the party right before the local elections, that gesture received more attention than it should have.
As vice president of the Riigikogu, you strongly supported the pay-raise for teachers by prolonging the budget debate.
We are a party that looks into the future, and one thing is very clear – we have to invest in education. We started several programs when we were in power. One of these was to send 100 students every year to study abroad at government expense. We also raised teachers’ wages by 12 percent each year we were in power. Each child should get an education that is appropriate to his or her capability and talent. This way they can manage their lives in the future, as the state should not take care of them.
We have to maximize Estonian surplus value, and a good education is a prerequisite.
Do you see a danger here, where education is provided for free at universities, but —
They leave? I don’t see it as a problem that several young people leave the country. It is good if they leave temporarily for studies and return. There is a lot a government can do here for them to come back.
I have seen few people who leave the country because they do not want to live in Estonia. They leave to find new experiences, better incomes and self-determination. The state should provide opportunities for them here. That is why today’s politics bother me. It’s based on short-term aims. The People’s Union and the Center Party play on elderly people to succeed in elections and actually forget about tomorrow.
You were rewarded by the Estonian Tax and Customs Board as a “friend of the taxpayer.” Why? What are your views in terms of taxes?
It is because I actively supported the tax policies that have brought us success: the liberal economic policy, conservative currency policy and balanced budget policy. I did not give in to the pressures of huge [EU] member states to harmonize corporate income tax and domestic socialist plans to establish tax exemptions and add duties to taxpayers. We should keep low tax rates, a wide tax base and as few exemptions as possible. It has to be clear and transparent.
You proposed a 5 percent corporate income tax starting from 2009 when Estonia can no longer use its system of zero taxation on reinvested profits.
Estonia has a unique taxation system in Europe, where profit is not taxed when it is formed, but when it is taken out. Estonia has to create a new tax system starting Jan. 1, 2009. We want to create an even more attractive corporate income tax system, taxing, for example, profits at a 5 percent rate as they are formed. Here we should not forget that taxes should also have to be applied to dividends payable to individuals. It could be about 15 percent.
Could this leave an impression of Estonia as a tax paradise?
A problem could arise with a 0 or 1 percent rate – 5 percent should be okay, provided that we also tax dividends. A former German minister of finance came out with the same message that Estonia was almost a tax paradise. Estonia’s corporate income tax rate to GDP is higher than in Germany. This shows that, while our nominal rate is low, the actual effective rate is the same or higher because they [the Germans] bring their effective rate down with various accounting tricks and exemptions.
What about the 18 percent value-added tax. Isn’t it too high in Estonia?
Our tax system should be predictable and stable. It should be transparent and understandable for taxpayers, as well as tax collectors. In my opinion, VAT exemptions have never met their aim. It is a good political trick to gain votes. The effectiveness of the approximately 120 VAT exemptions applied in old EU member states is questionable. We should avoid exceptions and support those that need to be supported.
You said Estonia should adopt the euro before Latvia and Lithuania to keep a competitive advantage in exports, for example.
I have not compared this to Latvia or Lithuania. I would be glad if they adopted the euro rapidly. But I want to see that Estonia adopts the euro on Jan. 1, 2007. Why is it an important step for Estonia to adopt the euro? First, Estonia has never used currency policy as an instrument to operate its economic policy. We have a fixed-euro exchange rate at 15.6466, and we are members of the Exchange Rate Mechanism.
Financial markets are counting on Estonia adopting the euro in 2007. As a result, Estonia’s rating has been good, and the cost of money has been low so far. If we postpone adoption by one year, and the government has a plan to control inflation, it will not have a negative impact. But if we prolong this for an uncertain time, we will all pay through higher interest rates. A 1 percent interest rate growth, for example, means that Estonian residents have additional dues to the tune of 800 million kroons. Today we spend 300 million kroons on converting kroons to euros. Adopting the euro is a natural step and should be done as soon as possible.
What can the government do to adopt the euro by next year?
As a politician in opposition, I can do little. But the government has certainly left some things undone. The main Maastricht criterion is that our government does not have problems with public debt. It is almost nonexistent here. We have a surplus state budget. We do not have problems with interest rates. Our only problem is related to inflation, and there is not much our government can do about it – it is largely dependent on world energy prices. Our predictive value for inflation is a little over 3 percent by October this year, when according to Maastricht it should be 2.6 – 2.7 percent. Our state budget increased from 54 to 62 billion kroons last year. Our government could have kept these 8 billion kroons in reserve and not consumed it.
It is against my general principles, but we could have established a tax exemption to halt inflation, a 5 percent VAT on food products, for example. Estonia’s GDP is 52 percent of the EU average, and our economy grows 10 percent compared to the EU’s average 2 percent. It is clear that our inflation will in the long run be higher than the EU average, and we should take some administrative measures.
Secondly, the government should have reduced its expenses and not generated consumption. Thirdly, it was not appropriate to come out with an increase in environmental taxes, which directly affects inflation. I was glad for Lithuanians when their prime minister decided to reduce VAT on heating as a means to meet the inflation criteria.
What are Estonia’s advantages? How can the country improve productivity? The domestic market is very small.
I think Estonia’s future is not in labor-intensive production. There is not enough labor. Education is very important here. There are three breakthrough sectors, such as material technology, biotechnology and user-friendly IT solutions, which, if enough resources are concentrated there, will easily attract commercial financing. Otherwise, Estonia will receive 75 billion kroons from the next EU financial perspective, 52 billion of which it can use at its own discretion. We have to establish one or two remarkable science–research centers. The government should also take care of the general infrastructure. Why not cover the whole country with free Internet connection WIMAX.
What about Estonia’s geographical location, which gives opportunities for transit business?
We should see that Finland communicates with Europe through Estonia, not Sweden. On the other hand, there is St. Petersburg with its huge population. The logistics of these two centers should go through Tallinn. The oil transit we have had so far has become more and more political. The future can not depend on oil transit alone.
Should the government intervene to attract Russian oil transit to Estonia?
I think there is not much we can do here. Business is business. Our task is to create an attractive environment for those who want to conduct honest business. I think the privatization of Estonian Railway was a mistake. Today we are left with only bad and very bad choices. The best of these is to buy back the railway infrastructure to gain control over it. Today it is a historic opportunity to buy back the shares, and it does not really matter whether it costs 2.2 or 2.5 billion kroons. The government had an exclusive opportunity to buy the shares until last week, and it made a mistake in not taking that opportunity. If this results in moving the shares to private hands, whether seemingly into Luxembourg or Sweden, but actually originating from Russia, then the mistake will be one that we will not be able to correct.
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