Thursday, July 07, 2011

Making the Best Better

Estonia is a model for many economic policies. A pioneer in simple taxation and the open economy, there is much for other countries to admire and to emulate. Yet there remain several issues in the micro economy that hurt Estonian competitiveness.

The relative isolation and northern geographical location of the country is something that will always place limits on the Estonian economy, but there are clearly things that can be done to improve the transport links. However one of these is not a high-speed rail line. Even if the billions could be found to fund a high speed line to Warsaw, it would still be a journey of three-four hours. This is never going to be competitive with flying. While freight rail links could be improved, the fact is that the existing line to Riga makes a giant dog-leg via Tartu and Valga and thus passenger traffic will tend to prefer the direct route by bus, which at present takes three hours to get to Riga. It would be quicker, of course if the road were upgraded, and it is quite clear that the vision of the via Baltica as a multi-lane highway should now be realized. The highway to Narva is already being upgraded, and Tallinn Tartu should also be a priority, but for the competitiveness of the country, the international road links should clearly receive priority in future transport planning.

Then there are various tax issues. The fact is that the burden of taxation is falling disproportionately on the poor- the tax threshold needs to be raised in order to reduce the burden on the poor. Furthermore the burden of social taxes- at 30%, a significant cost to entrepreneurs- needs to be reduced. The combination of 21% flat income tax and 30% social tax, makes Estonia a relatively highly taxed nation. The original plan to cut income taxes to 18% should now be progressively reintroduced too.

The great advantage of Estonia, despite being a relatively expensive place for entrepreneurs, is that the process of taxation calculation and collection is pretty simple, but there are clear exceptions. Taxing hotel stays and other travel expenses above a very low cost threshold is not only expensive in terms of the cost of taxation, but also in terms of administration. Either a much higher threshold should be introduced, or better, these legitimate business costs should be made fully deductible.

Since Estonia joined the EU, the administrative burdens on companies have increased: this year new statistics collection has added further work for companies to report new information. There is a growing attitude that the state has a right to impose these burdens, but if Estonia does so, without significant reform elsewhere, it will quickly lose its competitive edge.

As the country comes up to the twentieth anniversary of the restoration of independence, it is clear that politicians on all sides should not be resting on their laurels: Estonia still has much to do if it is to be able to achieve its declared goal of one of the highest living standards in the EU. Increasingly tired and jaded, the politicians are losing their focus on reform, and some political figures are more interested in their own personal political point scoring than in advancing the cause of the country. Estonia should not have time for that kind of political immaturity. The task remains immense and even these relatively small changes will take significant political will. It will be the acid test for the government and the wider political process to ensure that the country continues to move forward.

No comments: