SGI 2022 | Estonia | Key Challenges

Key Challenges

Recent Governments Experts

SGI experts on Estonia

Triin Lauri

Triin Lauri is an associate professor of public policy at Tallinn University School of Governance, Law and Society. She holds a PhD in Government and Politics. From 2020 to 2023, Triin was a postdoctoral fellow at the University of Konstanz, and in 2019/2021, she was a departmental lecturer in Comparative Social Policy at the Department of Social Policy and Intervention at the University of Oxford. Triin’s research is mainly focused on comparative social policy, with a particular interest in education policy and social investment policies. She has an extensive teaching portfolio and publishing record and is actively involved as an expert to facilitate knowledge transfer between academia and policy-making.

Anu Toots

Anu Toots is professor of comparative public policy and director of the Institute of Politics and of Governance at Tallinn University, Estonia. Her research interests include governance of the welfare state, transformations of the post communist welfare regimes, public policy analysis, and educational reforms around the world. She has been extensively engaged in comparative educational research and consulted several national educational reforms. Her research articles have appeared in Journal of Baltic Studies, International, Journal of Social Science Education, Studies of Transition States and Societies and many others.

Allan Sikk

Allan Sikk studied political science at the University of Tartu where he later managed national post-election surveys and taught various subjects in comparative politics. After defending his PhD in 2006, he applied his academic expertise for the benefit of the research service of the Riigikogu, the Estonian parliament. Sikk joined the University College London in 2007. His main research interests are the political impact of country size and electoral and party politics - encompassing subjects such as electoral systems, new political parties, party system change, voting behaviour and cabinet stability.

Daunis Auers (Coordinator)

Dr Daunis Auers is Associate Professor of Comparative Politics at the University of Latvia. He defended his PhD at University College London (UCL) and his MSc. at the London School of Economics (LSE). He has been a Fulbright Scholar at the University of California-Berkeley (2005-2006) and a Baltic-American Freedom Foundation Scholar at Wayne State University in Detroit (2014). He has widely published on Baltic and European politics. His most recent book – The Comparative Government and Politics of the Baltic States: Estonia, Latvia and Lithuania in the 21st Century – was published by Palgrave Macmillan in 2015.

Estonia is internationally known for its low government debt. However, that debt more than doubled between 2015 and 2023, and the government faces tough choices between borrowing, raising taxes and cutting spending. High inflation rats in 2022 – 2023 and the need to increase the military budget have exacerbated the situation.

The Estonian tax system, designed in the early 1990s, is ill-suited to today’s work and lifestyle patterns. The proportional income tax and the corporate tax breaks for reinvested profits undermine equity. High taxes on labor and very low taxes on capital increase wealth inequality and motivate investment in assets rather than job creation. Therefore, a fundamental shift from labor taxes and VAT to taxes on wealth and profits is needed.

In particular, a review of social protection based on regular employment is urgently needed to provide adequate protection for those in nonregular employment and to ensure the generation of sufficient revenues to finance the welfare system. In addition to creating a legal environment that prevents wage dumping – and thus inadequate social security contributions – the government must be prepared to make larger transfers to social security funds. Borrowing to cover the debts of social security funds, as has been done in the recent past, is not sustainable, and needs to be replaced by increased tax revenues.

Overall, a comprehensive tax reform to make the system fiscally and socially sustainable remains crucial, especially in view of growing regional disparities and an increasing share of people at risk of poverty.

The Estonian economy recovered quickly from the Great Recession and the COVID-19 pandemic, but has since contracted for three consecutive years. The recession “will last longer, mainly because Estonia’s export markets are in a poor position and competitiveness has been lost” (EP 2023). Labor markets have remained resilient, but a sharp fall in productivity suggests that workers are underemployed. The government should put more effort into finding new export markets to avoid rising unemployment and bankruptcies in sectors heavily dependent on exports (such as the wood industry and construction). Programs to support the transfer of knowledge to enterprises need to be continued and prolonged to facilitate the development of more sophisticated products.

The institutional framework for governance is well established, allowing policymakers to focus on improving implementation and accountability. Strategic planning and foresight capacity have improved, as evidenced by long-term sectoral strategies and a significant amount of commissioned policy analysis. However, this can lead to overproduction and underutilization. To fully capitalize on knowledge-based governance, all strategies and development plans need to be clearly linked to the Estonia 2035 development strategy, and the results of commissioned analyses need to be integrated into policymaking.

Given the volatile international and domestic environment, 15-year strategies may not adequately reflect real opportunities and future challenges. As a result, adopted indicators and targets are neglected by the government, and strategic documents (e.g., the seven-year budget strategy) are revised annually. The government should adhere to a stable set of key indicators or principles in order to keep policy development predictable, and to facilitate investment planning in both the public and private sectors.

Trimming the bureaucracy has long been a declared goal of all political forces, including the government. The government has responded by merging various ministries and agencies and calling for cuts in ministerial budgets. While the latter seems largely unrealistic due to the entrenched “minimal state” approach, the former approach has failed to reduce bureaucracy. To overcome problems of bureaucratic overload, all state institutions must improve coordination among and between ministries and their administrative agencies. The executive branch must avoid excessive reporting requirements, and the parliament must strive to make legal texts (and explanatory notes) less bureaucratic and easier to understand. Digital e-governance tools – an area in which Estonia is a well-known pioneer – need to be designed to reduce bureaucratic overload and prioritize large-scale usability.

The review period saw a further increase in the dominance of the executive over the legislature. This was caused by the destructive conflict between the opposition and the government and by the growing practice of regulating policy through strategies, development plans and government decrees rather than through parliamentary acts. Constant attention must be paid to ensuring that all constitutional powers remain autonomous and legitimate. This includes regulations to curb the executive agencies’ growing practice of classifying documents and draft proposals for internal use without substantive justification.

Citations:

EP. 2023. “Economic Forecast. The Recession is Dragging On.” Bank of Estonia. 19 Dec. 2023. https://www.eestipank.ee/en/press/economic-forecast-recession-dragging-19122023