Estonian Reform Party (classical liberalism) won Parliamentary elections on 1st March and got the right to establish new government for the period in 2015-2019. The new coalition has been formed between Estonian Reform Party (ESP), Social Democratic Party (SDE, social democracy) and Pro Patria and Respublica Union (IRL, Christian Democracy, national liberalism). ESP gets 7 ministerial positions (including PM), SDE and IRL both 4 positions. President T.H. Ilves appointed the new government yesterday (on 08.04).
Yesterday, PM Rõivas said in Parliament, that the new government will not change the basic principles of economic policy in Estonia, will continue with the simple tax system with few exceptions and with conservative fiscal policy. The new government has promised to keep state budget in structural balance and require that other EU member states would fulfil the Union fiscal rules as well.
The new coalition has agreed to raise households’ income and to improve financial situation of low-paid.Minimum salary will be increased to 45% of average salary (currently 39%) in four years and income tax exemption to 205 euros/month (currently 154 euros). To be precise, the government will support the raising of minimum salary, whereas in practice, representative of employees is behind this proposal. In addition, income support for deprived families will be increased and repayment system for low-paid people will be established by 1 January 2016. Special attention will be paid to the families or single parents with children. Children allowances will be increased.
The new coalition has promised to ensure that pensions will be increased in accordance with wage growth, whereas average pension is exempt of income tax. In addition, they have planned to introduce parental pension by 2018.
Social security contributions will be reduced by 1 pp (currently 33%). Although the government moves on the right direction, this has considerable pressure on state budget, but has minor effect on enterprises. Reduction of social security contributions will be, at least partly, compensated by “consistent“ increase in excise taxes on alcohol and tobacco. The new coalition has promised not to tax investments.
Special ministerial position will be established for conducting state reform. The objective is to increase efficiency of public administration. Therefore, government sector employment will be reduced in accordance with the decrease in working-age population and public sector salaries are increased in accordance with the increase in productivity. However, salaries of several jobs, e.g. teachers, police, tax and customs officers, etc. will be increased faster. Interestingly, these jobs form substantial part of public sector employees. In order to improve labour mobility across Estonia, the program of rental housing will be developed, including development of the market for rental apartments. The new coalition has planned to finalise the protracted reform of local governments: voluntary consolidation of local governments is planned to be finalised before 2017 local elections. Last, but not least, management and ownership of state enterprises will be reviewed thoroughly.
The new government will start with or at least support the development of several large scale infrastructure projects, e.g. Rail Baltic, multimodality transport hub in Tallinn, highways, etc,.
Estonia has been planned to reshape from (net) importer of energy to (net) exporter by 2030 (in 2013, energy dependency in Estonia was 11.9%). Estonian electricity market will be fully untied from Russia and connected it to the continental Europe by 2025. Baltic regional gas infrastructure (connection between Finland and the Baltics, including Baltic Connector) will be developed. The new coalition will analyse the possibilities, whether Estonia could be a competitive place for energy intensive industry. Unfortunately, this idea can encounter to the insufficiency of labour force.
Immigration quota for ICT employees has been planned to expand in order to promote immigration of ICT specialists and their families to Estonia. Actually, the need for imported qualified labour force is wider than only in ICT sector.
State military expenses will remain at least 2% of GDP. In addition to that Estonia finances military activities and expenses as a receiving country for NATO alliance troops. The new government will support development of national defence industry, including access of defence industry to export markets. More attention will be paid on R&D in defence industry. In addition, the objective is to raise total R&D expenditures to 3%, including in private sector to 2%, of GDP.
Coalition is on the position that EU Common Agricultural policy has to remain common and financed from common budget in order to exclude excessive and distorting state subsidies.
The new platform has clearly more social democratic influence compared to the programme of previous governments. According to the very preliminary information the cost of the promises is around 300 million euros. Unfortunately, it’s unclear yet how the government is going to finance this ambitious program as they have the objective to keep the state budget in structural balance.