Books on Estonia
Update No: 293 - (27/05/05)
The Estonian miracle
All the Baltic states are doing very well, growing by 6% per annum or more for
years now. The leader of the pack here is Estonia. The small country's 1.4m
residents appear to have successfully switched from a Soviet-style command
economy to a new IT and high-tech hub with the region's trade, boosted by its
closeness to the rich Scandinavian countries.
About 26% of Estonian households now have internet access, broadband connections
are expanding at 50% a year and the nation's electronics sector is growing by
between 40 and 45% a year. "Its like Scandinavia without socialism,"
said Lars Christensen, senior economist with Danske Bank in Copenhagen.
Nevertheless, there are always difficulties. Not everyone has benefited and the
ruthless pro-market policies pursued since independence in 1991 have left behind
a swathe of social problems, just as in other 'Thatcherite' societies.
Pressure on Estonia to boost government services spending
More than a decade after it spearheaded Central and Eastern Europe's flat-tax
revolution, Estonia is facing growing pressure to boost spending on government
services and consequently to slow the pace of planned tax cuts.
Just weeks after taking power, the centre-left government of Prime Minister,
Andrus Ansip, is struggling to piece together a new budget against the backdrop
of growing friction in his three-party ruling coalition and the prospects that
he may preside over the end of a string of budget surpluses with the nation
forced to report a deficit this year.
"The battle is quite bloody," said Evelin Ahermaa, an economist with
the Estonian Institute of Economic Research in Tallinn. "It is quite hard
to see how the government can fulfil its promises and cope with the tax
cuts," she said.
In particular, with opinion polls pointing to growing concern about the state of
Estonia's healthcare system, the government needs to find money to boost
salaries to head off the brain drain of medical staff from Estonia to high-wage
nations. There also is need for public investment in Soviet-era hospitals.
"The health sector is a very sensitive issue," said Maris Lauri,
economist with Hansabank in Tallinn.
Under the tax-cut timetable overseen by a string of centre-right governments,
Estonians could look forward to annual 2% reductions in their income tax. The
plan was for Estonia's single tax rate would drop to 22% next year and to 20% by
2007. But with pressure growing for increased government spending and raising
the tax bar for low-income earners, Ansip has been forced to accept that the
flat tax, which currently stands at 24%, should be trimmed by only 1% a year.
Burdened by expensive welfare states and unable to move quickly to compete with
the new low-tax regimes, leading politicians in nations such as Germany and
France have sharply criticised nations such as Estonia. Under the Estonian
flat-tax system, both individuals and companies are taxed at the same single
rate. While dividends are taxed, companies are not taxed on income that they
reinvest in their businesses.
This has left the nation's hefty 18% value-added tax (which includes virtually
no exemptions) as the principal source of tax revenue. While revenue raised from
the flat income tax represented 4.7% of the country's GDP in 2004, revenue
raised from the VAT came in above 8% last year.
Since the flat tax was launched in 1994, tax revenue as a percentage of
Estonia's GDP has been growing with the tax take at one point surging by 80%.
Although for statistical reasons the size of the increase in tax revenue has
levelled out in recent years it still grew at 17% in 2004, helped along by a
robust 6% growth rate in the nation.
The uncomplicated nature of the tax also means that signs have emerged that the
country's black economy has been contracting. Corporate investment also appears
to be increasing with investment in the nation growing at 8% last year and
Estonia attracting the lion's share of the foreign investment flowing into the
However, the arrival of the social-democratic Centre Party as a member of
Ansip's ruling coalition has changed the political mood in the country. Apart
from having previously argued the case for replacing the flat tax with a
three-tiered tax system, the Centre Party has also been keen to carve out
increased political support in Estonia's growing army of pensioners by pushing
for a significant jump in pensions.
But with the Centre Party having abandoned its drive for a proportional tax
system in order to join the ruling coalition, no one in Estonia is expecting the
new government will attempt to water down or to drop the flat tax.
Of more concern is just how long the Ansip government will be able to hang on to
power. It is known in Estonia as the Christmas government with many commentators
predicting that it will be out of office by Christmas.
TeliaSonera's Eesti Telekom to buy Estonia IT provider MicroLink
Eesti Telekom subsidiary Elion Enterprises Ltd said it is to buy 95 per cent of
IT services provider MicroLink Estonia, Forbes.com reported.
The deal is valued at under 6.4m Euro, Elion said in a statement.
MicroLink's Baltic-wide operations posted full year sales of 52.4m Euro and net
profit of 22.4m.
Trading in shares of Eesti Telekom - which is more than 50 per cent owned by
TeliaSonera - were suspended at the opening but resumed after the announcement.