Economic Sustainability
#7Key Findings
Estonia performs well in international comparison (rank 7) in the category of economic sustainability.
Nonbinding circular economy initiatives are in place, but binding indicators come from the EU level. Efforts to update and coordinate strategic infrastructure are fragmented. A climate plan aims to reduce greenhouse gas emissions to net zero by 2050, but lacks sector-specific indicators and penalties for failing to meet targets.
A new law has increased labor-market adaptability. Recent reforms have sought to integrate disabled individuals and youth into the job market. Immigration policies remain strict, with a focus on high-skilled workers. Unemployment insurance is compulsory, but excludes self-employed and gig workers.
Individuals pay a simple income tax rate of 20%, with deductions making it slightly progressive. A frugal state has produced Europe’s lowest debt-to-GDP ratio for years, but debt has recently been rising. Growing financial challenges have made tax reform a major issue.
Nonbinding circular economy initiatives are in place, but binding indicators come from the EU level. Efforts to update and coordinate strategic infrastructure are fragmented. A climate plan aims to reduce greenhouse gas emissions to net zero by 2050, but lacks sector-specific indicators and penalties for failing to meet targets.
A new law has increased labor-market adaptability. Recent reforms have sought to integrate disabled individuals and youth into the job market. Immigration policies remain strict, with a focus on high-skilled workers. Unemployment insurance is compulsory, but excludes self-employed and gig workers.
Individuals pay a simple income tax rate of 20%, with deductions making it slightly progressive. A frugal state has produced Europe’s lowest debt-to-GDP ratio for years, but debt has recently been rising. Growing financial challenges have made tax reform a major issue.
Graph View
Graph View
How committed is the government to driving the transition toward a circular economy?
10
9
9
The government is clearly committed to transitioning to a circular economy.
8
7
6
7
6
The government is largely committed to transitioning to a circular economy.
5
4
3
4
3
The government is somewhat committed to transitioning to a circular economy.
2
1
1
The government is not at all committed to transitioning to a circular economy.
On the initiative of the Ministry of Environment, the Circular Economy White Paper was drafted in 2022. It sets out the vision and development goals for the circular economy, and supports various stakeholders – the state, municipalities, entrepreneurs and individuals – in integrating the principles of circularity in the areas of production, consumption, lifestyle, culture and values. The white paper is nonbinding and relies on the creation of an enabling environment, environmental awareness, widespread cooperation and the involvement of all stakeholders. There is also a circular economy roadmap that breaks the policy down into specific areas of action such as waste and packaging. Binding regulations and target indicators in waste and packaging management come from EU directives. The National Circular Economy Action Plan is at a very early stage, with only one of six programs (website development) in the implementation phase.
The Principles of Green Public Procurement initially began as nonbinding recommendations but have gradually evolved into binding requirements established by the decree of the minister of climate. Starting in 2022, environmental criteria will be applied to the purchase of furniture, cleaning services, office IT equipment and copy paper. In 2023, these requirements will extend to motor vehicles.
Public procurement is managed by the Ministry of Finance, which coordinates green economy principles with the Ministry of Climate (MoC). The MoC is the leading entity in governing the circular economy. Unlike many other policy areas in Estonia, numerous executive agencies are not involved; only the Environmental Board is engaged, administering waste management policy and monitoring municipal compliance with existing regulations.
Citations:
Keskkonnaministeerium. 2022. “Ringmajanduse valge raamat.” https://ringmajandus.envir.ee/sites/default/files/2022-10/Ringmajandus%20valge%20raamat%20%282%29.pdf
The Principles of Green Public Procurement initially began as nonbinding recommendations but have gradually evolved into binding requirements established by the decree of the minister of climate. Starting in 2022, environmental criteria will be applied to the purchase of furniture, cleaning services, office IT equipment and copy paper. In 2023, these requirements will extend to motor vehicles.
Public procurement is managed by the Ministry of Finance, which coordinates green economy principles with the Ministry of Climate (MoC). The MoC is the leading entity in governing the circular economy. Unlike many other policy areas in Estonia, numerous executive agencies are not involved; only the Environmental Board is engaged, administering waste management policy and monitoring municipal compliance with existing regulations.
Citations:
Keskkonnaministeerium. 2022. “Ringmajanduse valge raamat.” https://ringmajandus.envir.ee/sites/default/files/2022-10/Ringmajandus%20valge%20raamat%20%282%29.pdf
Graph View
How committed is the government to updating and protecting critical infrastructure?
10
9
9
The government is clearly committed to updating basic technical infrastructure.
8
7
6
7
6
The government is largely committed to updating basic technical infrastructure.
5
4
3
4
3
The government is somewhat committed to updating basic technical infrastructure.
2
1
1
The government is not at all committed to updating basic technical infrastructure.
Estonia employs several strategies to keep its strategic infrastructure updated and functional. The Transport and Mobility Development Plan 2021 – 2035 (TMDP) covers roads, railroads and water and air transport, with the goal of making the transport system smarter and greener. Based on the TMDP, three sectoral agencies were merged into one institution, the Transport Administration, to increase governance efficiency. To monitor progress, the development plan includes the creation of a transport technology scoreboard, which is not yet in place. The TMDP is divided into sector-specific action plans, one of which is the National Plan of Road Maintenance (THK). Despite the strategic objective of building synergy among different modes of transport, the THK considers only road infrastructure, excluding the railroad network, for example.
The financial plan for road renovation and construction is a crucial part of the THK. It is created based on sectoral needs assessments and the National Budgeting Strategy (RES). RES, a document reflecting a conservative fiscal policy, has led to the underfunding of THK for 2023 – 2026. By some estimates, the funds available to maintain the roads at their current level cover only about half of the necessary expenses (ERR 19.12.2023). Moreover, the failure to complete a four-lane Via Baltica motorway by the 2030 deadline risks incurring a fine from the European Commission (ERR 04.08.2023).
An important area of critical infrastructure is the electricity and telecommunication network. Elering is an electricity and gas transmission system operator responsible for connecting producers, network operators and consumers into a unified system. In addition to physical electricity and gas networks, Elering develops the energy sector’s IT infrastructure, creating opportunities for smart production and consumption solutions. The smart grid enables energy producers and consumers to analyze generated data, increasing efficiency in energy production and consumption.
Elektrilevi is the company responsible for delivering electricity to all customers. The company has a clear investment plan that considers the number of customers connected to power lines and substations, suppliers of essential services, the condition and malfunction risk of power lines, natural conditions, and other infrastructure upgrade plans. In 2023, Elektrilevi’s investments totaled €6,651,439 (Elektrilevi 2023). Despite these efforts, rural areas regularly suffer from supply disruptions caused by extreme climate conditions such as snow and storms. The same problems exist with the telecommunications network.
Despite existing strategies that include elaborate governance and coordination mechanisms, as well as benchmarks and monitoring tools, the system has largely remained fragmented and subordinated to the overall goal of fiscal orthodoxy.
Citations:
ERR. 2023. August 8. “Tallinna-Pärnu Maantee Välja Ehitamata Jätmine Võib Tuua Trahvi.” https://www.err.ee/1609053344/tallinna-parnu-maantee-valja-ehitamata-jatmine-voib-tuua-trahvi
ERR. 2023. December 19. https://www.err.ee/1609199182/uues-teehoiukavas-on-teede-olukorra-sailitamiseks-pool-rahast
The financial plan for road renovation and construction is a crucial part of the THK. It is created based on sectoral needs assessments and the National Budgeting Strategy (RES). RES, a document reflecting a conservative fiscal policy, has led to the underfunding of THK for 2023 – 2026. By some estimates, the funds available to maintain the roads at their current level cover only about half of the necessary expenses (ERR 19.12.2023). Moreover, the failure to complete a four-lane Via Baltica motorway by the 2030 deadline risks incurring a fine from the European Commission (ERR 04.08.2023).
An important area of critical infrastructure is the electricity and telecommunication network. Elering is an electricity and gas transmission system operator responsible for connecting producers, network operators and consumers into a unified system. In addition to physical electricity and gas networks, Elering develops the energy sector’s IT infrastructure, creating opportunities for smart production and consumption solutions. The smart grid enables energy producers and consumers to analyze generated data, increasing efficiency in energy production and consumption.
Elektrilevi is the company responsible for delivering electricity to all customers. The company has a clear investment plan that considers the number of customers connected to power lines and substations, suppliers of essential services, the condition and malfunction risk of power lines, natural conditions, and other infrastructure upgrade plans. In 2023, Elektrilevi’s investments totaled €6,651,439 (Elektrilevi 2023). Despite these efforts, rural areas regularly suffer from supply disruptions caused by extreme climate conditions such as snow and storms. The same problems exist with the telecommunications network.
Despite existing strategies that include elaborate governance and coordination mechanisms, as well as benchmarks and monitoring tools, the system has largely remained fragmented and subordinated to the overall goal of fiscal orthodoxy.
Citations:
ERR. 2023. August 8. “Tallinna-Pärnu Maantee Välja Ehitamata Jätmine Võib Tuua Trahvi.” https://www.err.ee/1609053344/tallinna-parnu-maantee-valja-ehitamata-jatmine-voib-tuua-trahvi
ERR. 2023. December 19. https://www.err.ee/1609199182/uues-teehoiukavas-on-teede-olukorra-sailitamiseks-pool-rahast
Graph View
How committed is the government to fully decarbonizing the energy system by 2050?
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9
9
The government is clearly committed to transitioning to a decarbonized energy system.
8
7
6
7
6
The government is largely committed to transitioning to a decarbonized energy system.
5
4
3
4
3
The government is somewhat committed to transitioning to a decarbonized energy system.
2
1
1
The government is not at all committed to transitioning to a decarbonized energy system.
The General Principles of Climate Policy (GPCP), which look forward to 2050, were first adopted as a Riigikogu resolution in 2017. Regular updates every four years were established as a part of the GPCP process, and in 2022 the renewed document was adopted with minor changes. As a Riigikogu resolution, the document is binding on the executive. At least once every four years, the government submits a report to the Riigikogu on the progress made in implementing the cross-cutting and sectoral strategies. The first report, which was published in 2022, covered the period 2017 – 2021.
The GPCP 2022 includes an overarching target to reduce greenhouse gas emissions to zero by 2050. It provides sectoral policy guidelines for energy and industry, transport, agriculture, forestry and land use. However, there are no defined indicators for these sectors, meaning ministers who fail to demonstrate progress will not face consequences. The lead agencies are logically the Ministry of Environment/Climate and the Ministry of Economy and Communications, although the GPCP 2022 does not specify any ministries, specific responsibilities or an interministerial coordination mechanism. This omission is because the GPCP functions as a “vision document,” with its goals meant to be implemented through various sectoral development plans.
The country’s low enforcement capacity is illustrated by the Energy Scoreboard 2021 – 2040, prepared by TalTech University and the Rohetiiger Foundation. This 60-page document includes analysis, models, and some concrete targets and timelines. However, since it is not a government document, it remains only a proposal.
Several sectoral targets are derived from EU documents, such as the goal to achieve the status of zero or near-zero energy consumption (ZEB status) for all buildings by 2050. Estonia is progressing toward this objective, and some categories of buildings, like schools and government buildings, may attain this standard within the current decade. However, detached private houses, many of which are old and lack energy labeling, face greater challenges (Volkova et al. 2023). Interestingly, the Ministry of Economy and Communications is more skeptical about the possibility of meeting the EU ZEB target than are scientists and experts in the field (ERR 17.05.2022).
Citations:
Rohetiiger. 2022. “Energy Roadmap 2021-2030-2040.” https://rohetiiger.ee/valjaanne/energy-roadmap-2021-2031-2040/?lang=en
Volkova, A et al. 2023. “Estonian Energy Roadmap to Carbon Neutrality.” International Journal of Energy Planning and Management. https://doi.org/10.54337/ijsepm.7568
ERR. 2022. “Eestile ei meeldi Euroopa pakutav elamute renoveerimise kiirplaan.” May 17. https://www.err.ee/1608595498/eestile-ei-meeldi-euroopa-pakutav-elamute-renoveerimise-kiirplaan
The GPCP 2022 includes an overarching target to reduce greenhouse gas emissions to zero by 2050. It provides sectoral policy guidelines for energy and industry, transport, agriculture, forestry and land use. However, there are no defined indicators for these sectors, meaning ministers who fail to demonstrate progress will not face consequences. The lead agencies are logically the Ministry of Environment/Climate and the Ministry of Economy and Communications, although the GPCP 2022 does not specify any ministries, specific responsibilities or an interministerial coordination mechanism. This omission is because the GPCP functions as a “vision document,” with its goals meant to be implemented through various sectoral development plans.
The country’s low enforcement capacity is illustrated by the Energy Scoreboard 2021 – 2040, prepared by TalTech University and the Rohetiiger Foundation. This 60-page document includes analysis, models, and some concrete targets and timelines. However, since it is not a government document, it remains only a proposal.
Several sectoral targets are derived from EU documents, such as the goal to achieve the status of zero or near-zero energy consumption (ZEB status) for all buildings by 2050. Estonia is progressing toward this objective, and some categories of buildings, like schools and government buildings, may attain this standard within the current decade. However, detached private houses, many of which are old and lack energy labeling, face greater challenges (Volkova et al. 2023). Interestingly, the Ministry of Economy and Communications is more skeptical about the possibility of meeting the EU ZEB target than are scientists and experts in the field (ERR 17.05.2022).
Citations:
Rohetiiger. 2022. “Energy Roadmap 2021-2030-2040.” https://rohetiiger.ee/valjaanne/energy-roadmap-2021-2031-2040/?lang=en
Volkova, A et al. 2023. “Estonian Energy Roadmap to Carbon Neutrality.” International Journal of Energy Planning and Management. https://doi.org/10.54337/ijsepm.7568
ERR. 2022. “Eestile ei meeldi Euroopa pakutav elamute renoveerimise kiirplaan.” May 17. https://www.err.ee/1608595498/eestile-ei-meeldi-euroopa-pakutav-elamute-renoveerimise-kiirplaan
Graph View
To what extent do existing labor market institutions support or hinder the transition to an adaptive labor market?
10
9
9
Labor market institutions are fully aligned with the goal of an adaptable labor market.
8
7
6
7
6
Labor market institutions are largely aligned with the goal of an adaptable labor market.
5
4
3
4
3
Labor market institutions are only somewhat aligned with the goal of an adaptable labor market.
2
1
1
Labor market institutions are not at all aligned with the goal of an adaptable labor market.
In 2022 – 2023, Estonia made substantial changes to the regulatory framework governing labor market policies. A new Labor Market Measures Act, effective in 2024, provides general principles for measures implemented through public employment services. The detailed description of services is defined in the Employment Program (EP), which is a government decree. This arrangement allows for greater flexibility in adapting labor market measures to specific labor market situations and target groups.
The latest EP (2024 – 2029) lasts longer than the previous three-year EPs, and is aligned with the state budget planning process and EU funding mechanisms. The biggest changes concern labor market training. The Unemployment Insurance Fund (UIF) will primarily fund training courses that prepare workers for regions with a labor shortage. The areas and professions are defined based on reports on workforce needs (OSKA Reports), sectoral development plans and labor market statistics. Training courses will be longer and must end with an evaluation of learning outcomes. It is hoped that these measures will facilitate improved employability and upskilling of service users. Employed, unemployed and inactive persons are all eligible for UIF-funded training; however, employed persons must have at least 12 months of contributions to the UIF.
Estonia’s upskilling policies are quite statist, with employers not playing a central role. The organization of training is voluntary. Although employers must provide paid leave for employees in graduate studies, they can also receive subsidies from the UIF to cover training for individuals with lower employability, including young workers.
The Estonian Public Employment Service (PES) does not make a special effort to promote worker mobility across industries or borders. Immigration policy is strict and only a limited number of work permits are granted to foreign workers each year. Priority is given to high-skilled professionals; for example, IT specialists are excluded from the immigration quota. In 2022, the number of recipients of first-time temporary residence permits for employment purposes increased by 9% compared to 2021. The number of residence permits issued for the employment of top specialists increased by 14%, and the number of residence permits issued for employment in startups increased by 82% (EMN 2023). The number of short-term seasonal workers, in contrast, decreased by 46% compared to 2021 due to the war in Ukraine and the changed geopolitical situation with the country’s eastern neighbors.
There are some profession-specific government programs designed to encourage young professionals, such as teachers and doctors, to move to remote regions. The brown industry-dominated northeast of the country deserves special attention because of the challenges in making a green and fair transition. To facilitate a transition to a green economy, a special EU-funded just transition program is being executed in the northeast region. However, retraining the workforce is given less prominence in the program instruments than the creation of new firms and investment in existing companies (Ministry of Finance 2024).
Citations:
EMN. 2023. “Migration Statistics, 2018–2022.” https://www.emn.ee/wp-content/uploads/2023/08/migration-statistics-2023-eng-uus.pdf
Ministry of Finance. 2024. “Ida-Virumaa õiglane üleminek.” https://www.fin.ee/ida-virumaa#ulevaade
The latest EP (2024 – 2029) lasts longer than the previous three-year EPs, and is aligned with the state budget planning process and EU funding mechanisms. The biggest changes concern labor market training. The Unemployment Insurance Fund (UIF) will primarily fund training courses that prepare workers for regions with a labor shortage. The areas and professions are defined based on reports on workforce needs (OSKA Reports), sectoral development plans and labor market statistics. Training courses will be longer and must end with an evaluation of learning outcomes. It is hoped that these measures will facilitate improved employability and upskilling of service users. Employed, unemployed and inactive persons are all eligible for UIF-funded training; however, employed persons must have at least 12 months of contributions to the UIF.
Estonia’s upskilling policies are quite statist, with employers not playing a central role. The organization of training is voluntary. Although employers must provide paid leave for employees in graduate studies, they can also receive subsidies from the UIF to cover training for individuals with lower employability, including young workers.
The Estonian Public Employment Service (PES) does not make a special effort to promote worker mobility across industries or borders. Immigration policy is strict and only a limited number of work permits are granted to foreign workers each year. Priority is given to high-skilled professionals; for example, IT specialists are excluded from the immigration quota. In 2022, the number of recipients of first-time temporary residence permits for employment purposes increased by 9% compared to 2021. The number of residence permits issued for the employment of top specialists increased by 14%, and the number of residence permits issued for employment in startups increased by 82% (EMN 2023). The number of short-term seasonal workers, in contrast, decreased by 46% compared to 2021 due to the war in Ukraine and the changed geopolitical situation with the country’s eastern neighbors.
There are some profession-specific government programs designed to encourage young professionals, such as teachers and doctors, to move to remote regions. The brown industry-dominated northeast of the country deserves special attention because of the challenges in making a green and fair transition. To facilitate a transition to a green economy, a special EU-funded just transition program is being executed in the northeast region. However, retraining the workforce is given less prominence in the program instruments than the creation of new firms and investment in existing companies (Ministry of Finance 2024).
Citations:
EMN. 2023. “Migration Statistics, 2018–2022.” https://www.emn.ee/wp-content/uploads/2023/08/migration-statistics-2023-eng-uus.pdf
Ministry of Finance. 2024. “Ida-Virumaa õiglane üleminek.” https://www.fin.ee/ida-virumaa#ulevaade
To what extent do existing labor market institutions support or hinder the transition to an inclusive labor market?
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9
9
Labor market institutions are fully aligned with the goal of an inclusive labor market.
8
7
6
7
6
Labor market institutions are largely aligned with the goal of an inclusive labor market.
5
4
3
4
3
Labor market institutions are only somewhat aligned with the goal of an inclusive labor market.
2
1
1
Labor market institutions are not at all aligned with the goal of an inclusive labor market.
Recent labor market reforms have focused on enhancing the employability of disabled individuals as a means of expanding the labor supply and controlling social security expenditures. Young people, particularly those not in education, employment or training (NEET), have also been a key focus of active labor market policies. Several measures are available for employers that hire people with reduced work abilities, including wage subsidies, reimbursement of training costs and social insurance contributions by the Unemployment Insurance Fund (UIF), hiring support personnel, and adapting workstations. A special “My First Job” support package is available for employers who hire young people with little or no work experience.
A balanced “stick and carrot” approach is used for job seekers, who are required to actively seek employment, participate in training and fulfill an individual employment plan to avoid losing their benefits (LMMA 2024). Registered unemployed individuals can take mini-jobs (up to 40% of the monthly minimum salary) without losing their unemployment benefits.
The UIF provides modest seed money and consultations to start businesses and coordinates the provision of labor market training. The quality and efficiency of training courses, however, have been subjects of criticism, prompting the government to revise labor market training provisions and set stricter rules regarding the quality and content of the courses.
The current government, which has been in power since March 2023, shifted responsibility for labor market policy from the Ministry of Social Affairs to the Ministry of Economic Affairs and Communications. This change has further increased the pro-work orientation of employment policy. The nudging approach formerly favored by the Ministry of Social Affairs is no longer on the agenda. The new Labor Market Measures Act (LMMA), passed in February 2023 and effective as of January 2024, clearly reflects this tougher orientation.
Work-life balance, such as through remote work arrangements, is regulated by the adoption of the EU Work-Life Balance Directive in 2021. The incidence of working from home significantly increased during the COVID-19 pandemic. In 2022, about one-third of employees aged 25 to 49 made use of such practices. Families with children, particularly mothers, are particularly prone to do so. Discussion of a possible Right to Disconnect Directive has not taken root in Estonia, but the Employers’ Union (ETKL) has called this unnecessary overregulation.
Citations:
Praxis. 2022. “Nudging the unemployment beneficiaries back to work (in Estonian)” https://www.praxis.ee/en/tood/nudging-unemployment-benefit/
Praxis. 2022. “Impact of Subsistence Benefits and Debts on Labour Market Activity and Socio-Economic Coping.” https://www.praxis.ee/en/tood/subsistence-benefit-debt/
Labor Market Measures Act. 2024. https://www.riigiteataja.ee/en/eli/515112023002/consolide
A balanced “stick and carrot” approach is used for job seekers, who are required to actively seek employment, participate in training and fulfill an individual employment plan to avoid losing their benefits (LMMA 2024). Registered unemployed individuals can take mini-jobs (up to 40% of the monthly minimum salary) without losing their unemployment benefits.
The UIF provides modest seed money and consultations to start businesses and coordinates the provision of labor market training. The quality and efficiency of training courses, however, have been subjects of criticism, prompting the government to revise labor market training provisions and set stricter rules regarding the quality and content of the courses.
The current government, which has been in power since March 2023, shifted responsibility for labor market policy from the Ministry of Social Affairs to the Ministry of Economic Affairs and Communications. This change has further increased the pro-work orientation of employment policy. The nudging approach formerly favored by the Ministry of Social Affairs is no longer on the agenda. The new Labor Market Measures Act (LMMA), passed in February 2023 and effective as of January 2024, clearly reflects this tougher orientation.
Work-life balance, such as through remote work arrangements, is regulated by the adoption of the EU Work-Life Balance Directive in 2021. The incidence of working from home significantly increased during the COVID-19 pandemic. In 2022, about one-third of employees aged 25 to 49 made use of such practices. Families with children, particularly mothers, are particularly prone to do so. Discussion of a possible Right to Disconnect Directive has not taken root in Estonia, but the Employers’ Union (ETKL) has called this unnecessary overregulation.
Citations:
Praxis. 2022. “Nudging the unemployment beneficiaries back to work (in Estonian)” https://www.praxis.ee/en/tood/nudging-unemployment-benefit/
Praxis. 2022. “Impact of Subsistence Benefits and Debts on Labour Market Activity and Socio-Economic Coping.” https://www.praxis.ee/en/tood/subsistence-benefit-debt/
Labor Market Measures Act. 2024. https://www.riigiteataja.ee/en/eli/515112023002/consolide
To what extent do existing labor market institutions support or hinder the mitigation of labor market risks?
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9
9
Labor market institutions are fully aligned with the goal of protecting individuals against labor market risks.
8
7
6
7
6
Labor market institutions are largely aligned with the goal of protecting individuals against labor market risks.
5
4
3
4
3
Labor market institutions are only somewhat aligned with the goal of protecting individuals against labor market risks.
2
1
1
Labor market institutions are not at all aligned with the goal of protecting individuals against labor market risks.
Estonia has compulsory unemployment insurance with contributions shared between the employee and the employer. Legislative changes in summer 2023 made the unemployment benefit system more adaptive to the labor market situation. If the unemployment rate increases, the duration of benefits is extended. The adjustment mechanism is automatic, based on labor market statistics, and thus keeps administrative burdens low while providing timely relief to unemployed households.
Besides this improvement, some issues remain or are only partly resolved. Social protection does not cover platform workers, who are in most cases registered in Estonia as self-employed and thus not eligible for unemployment benefits. All self-employed individuals are responsible for paying the social tax, which covers health insurance and old-age pensions, meeting at least a set minimum (€215 monthly in 2022). This can be problematic if the individual’s business is not doing well.
Estonia has a very low union density, with only 6% of workers covered by collective agreements – the lowest such rate in Europe (ETUI, 2023). Thus, exercising bargaining power in negotiations with the neoliberal government is quite a challenge. For example, the government opposes the proposed EU Platform Work Directive. According to Minister of Economic Affairs and Information Technology Tiit Riisalo, the directive may risk subjecting most gig workers to work contract regulations that may not be compatible with the platforms’ business models (MKM, 2023).
As a member of the EU, Estonia ensures the portability of social rights through EU legislation. Additionally, Estonia has bilateral agreements on pensions with several non-EU countries.
Citations:
ETUI. 2023. “Wages and Collective Bargaining: Fighting the Cost-of-Living Crisis.” https://www.etui.org/sites/default/files/2023-03/Benchmarking_3.%20Wages%20and%20collective%20bargaining%20fighting%20the%20cost-of-living%20crisis_2023.pdf
MKM. 2023. “Platvormitöö direktiivi esialgne kokkulepe ei leidnud EL liikmesriikide toetust.” https://www.mkm.ee/uudised/platvormitoo-direktiivi-esialgne-kokkulepe-ei-leidnud-el-liikmesriikide-toetust
Besides this improvement, some issues remain or are only partly resolved. Social protection does not cover platform workers, who are in most cases registered in Estonia as self-employed and thus not eligible for unemployment benefits. All self-employed individuals are responsible for paying the social tax, which covers health insurance and old-age pensions, meeting at least a set minimum (€215 monthly in 2022). This can be problematic if the individual’s business is not doing well.
Estonia has a very low union density, with only 6% of workers covered by collective agreements – the lowest such rate in Europe (ETUI, 2023). Thus, exercising bargaining power in negotiations with the neoliberal government is quite a challenge. For example, the government opposes the proposed EU Platform Work Directive. According to Minister of Economic Affairs and Information Technology Tiit Riisalo, the directive may risk subjecting most gig workers to work contract regulations that may not be compatible with the platforms’ business models (MKM, 2023).
As a member of the EU, Estonia ensures the portability of social rights through EU legislation. Additionally, Estonia has bilateral agreements on pensions with several non-EU countries.
Citations:
ETUI. 2023. “Wages and Collective Bargaining: Fighting the Cost-of-Living Crisis.” https://www.etui.org/sites/default/files/2023-03/Benchmarking_3.%20Wages%20and%20collective%20bargaining%20fighting%20the%20cost-of-living%20crisis_2023.pdf
MKM. 2023. “Platvormitöö direktiivi esialgne kokkulepe ei leidnud EL liikmesriikide toetust.” https://www.mkm.ee/uudised/platvormitoo-direktiivi-esialgne-kokkulepe-ei-leidnud-el-liikmesriikide-toetust
Graph View
To what extent do existing tax institutions and procedures support or hinder adequate tax revenue flows?
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9
9
The tax system is fully aligned with the goals of ensuring adequate tax revenues.
8
7
6
7
6
The tax system is largely aligned with the goals of ensuring adequate tax revenues.
5
4
3
4
3
The tax system is only somewhat aligned with the goals of ensuring adequate tax revenues.
2
1
1
The tax system is not at all aligned with the goals of ensuring adequate tax revenues.
There is a wide consensus that the current tax system needs revision due to a long-term trend of decreasing tax returns, an aging population and environmental pressures. The Russian war of aggression in Ukraine has made the forecasts even more pessimistic. Tax reforms are one of the major issues in political debates in 2022 – 2023.
One of the main and lasting challenges comes from the Estonian welfare system, which is financed almost entirely (80%) through social insurance contributions. High labor costs may weaken the country’s economic position and lead to labor relations abuses. Even more importantly, social insurance contributions alone cannot provide sufficient financing for social services, given an aging population and changing work patterns, which destabilize social tax receipts. In addition to public pension funds that are persistently accumulating debt, there are serious concerns about the financial sustainability of the national health insurance fund (EHIF).
According to forecast reports by Arenguseire Keskus (2020) and the Estonian Health Insurance Fund (2022), EHIF will enter conditions of deep and increasing debt within two to three years. If the funding principles remain unchanged, maintaining the availability of public healthcare at the current level will be impossible. Despite the urgency, two government coalitions (2022, 2023) led by the neoliberal Reform Party have neglected the issue, including proposals offered by the Social Democrats, a coalition partner.
Government rigidity with regard to social protection revenues may harm employers’ incentives to create low-paid and part-time jobs, as these are subject to the standard rate of social security contributions. Small and medium-sized businesses often prefer to pay dividends instead of fair wages as a means of “optimizing” tax expenditures. In the debate on the EU Platform Work Directive, the Estonian government clearly sided with platforms and voted against the planned regulations. However, starting in 2024, platforms such as Uber, Bolt and Airbnb will be required to send information about their service providers and their earned income to the Tax and Custom Board.
Advanced digital tax declaration systems contribute to the administrative capacity of tax collection and minimize tax avoidance. The challenge is that the current tax legislation in some cases allows individuals to avoid paying adequate social security contributions and income tax.
Citations:
Arenguseire Keskus. 2020. Eesti Tervishoiu Tulevik. Stsenaariumid aastani 2035. https://arenguseire.ee/uudised/tervishoiu-rahastamise-probleem
ERR. 2022. “Prognoos: haigekassa eelarvet ootab paarisaja miljoni eurone miinus.” https://www.err.ee/1608699778/prognoos-haigekassa-eelarvet-ootab-paarisaja-miljoni-eurone-miinus
One of the main and lasting challenges comes from the Estonian welfare system, which is financed almost entirely (80%) through social insurance contributions. High labor costs may weaken the country’s economic position and lead to labor relations abuses. Even more importantly, social insurance contributions alone cannot provide sufficient financing for social services, given an aging population and changing work patterns, which destabilize social tax receipts. In addition to public pension funds that are persistently accumulating debt, there are serious concerns about the financial sustainability of the national health insurance fund (EHIF).
According to forecast reports by Arenguseire Keskus (2020) and the Estonian Health Insurance Fund (2022), EHIF will enter conditions of deep and increasing debt within two to three years. If the funding principles remain unchanged, maintaining the availability of public healthcare at the current level will be impossible. Despite the urgency, two government coalitions (2022, 2023) led by the neoliberal Reform Party have neglected the issue, including proposals offered by the Social Democrats, a coalition partner.
Government rigidity with regard to social protection revenues may harm employers’ incentives to create low-paid and part-time jobs, as these are subject to the standard rate of social security contributions. Small and medium-sized businesses often prefer to pay dividends instead of fair wages as a means of “optimizing” tax expenditures. In the debate on the EU Platform Work Directive, the Estonian government clearly sided with platforms and voted against the planned regulations. However, starting in 2024, platforms such as Uber, Bolt and Airbnb will be required to send information about their service providers and their earned income to the Tax and Custom Board.
Advanced digital tax declaration systems contribute to the administrative capacity of tax collection and minimize tax avoidance. The challenge is that the current tax legislation in some cases allows individuals to avoid paying adequate social security contributions and income tax.
Citations:
Arenguseire Keskus. 2020. Eesti Tervishoiu Tulevik. Stsenaariumid aastani 2035. https://arenguseire.ee/uudised/tervishoiu-rahastamise-probleem
ERR. 2022. “Prognoos: haigekassa eelarvet ootab paarisaja miljoni eurone miinus.” https://www.err.ee/1608699778/prognoos-haigekassa-eelarvet-ootab-paarisaja-miljoni-eurone-miinus
To what extent do existing tax institutions and procedures consider equity aspects?
10
9
9
The tax system is fully aligned with the goal of ensuring equity.
8
7
6
7
6
The tax system is largely aligned with the goal of ensuring equity.
5
4
3
4
3
The tax system is only somewhat aligned with the goal of ensuring equity.
2
1
1
The tax system is not at all aligned with the goal of ensuring equity.
Estonia has a simple and transparent tax system. The income tax rate for individuals is low, with a standard rate of 20%, and is only slightly progressive. More precisely, the deductible amount for individuals with a monthly income of €1,200 – €2,100 decreases incrementally, and individuals with a monthly income above €2,100 receive no exemptions at all. Introduced in 2018, the system was intended to benefit low- and medium-income earners, but with the increase in the average salary (to €1,812 in 2023), it fails to deliver the expected effect.
The current government coalition, which has been in power since March 2023, intends to return to the pre-2018 fully proportional income tax system starting in 2025. This decision is set in the Coalition Agreement 2023 – 2027. Despite intense political criticism from the opposition, the minister of finance (Reform Party) has insisted that this debate will not be formally reopened.
Following recent policy reforms, Estonia has returned to the fully proportional income tax system, which is more favorable for high-income classes.
Retained and reinvested profits are exempt from corporate income tax in Estonia. Dividends, taxable at the corporate level at a 14% tax rate, are subject to a 7% withholding tax. Taxing dividends instead of corporate profits complicates national budget planning, as firms can decide the amount and timing of dividends, which do not necessarily occur every year. Capital is not taxed at all, except for a very marginal land tax, further violating the principle of horizontal equity.
Tax exemptions for raising children currently exist, and taxpayers can also deduct their mortgage interest up to 50% of their taxable income. However, both measures will be abolished in 2024. Heated debates have continued throughout 2023 about introducing a car tax, with the main controversies revolving around balancing equity and environmental goals. Parliamentary parties have not yet reached a consensus.
Citations:
Coalition agreement 2023-2027. https://valitsus.ee/en/coalition-agreement-2023-2027#majandus
The current government coalition, which has been in power since March 2023, intends to return to the pre-2018 fully proportional income tax system starting in 2025. This decision is set in the Coalition Agreement 2023 – 2027. Despite intense political criticism from the opposition, the minister of finance (Reform Party) has insisted that this debate will not be formally reopened.
Following recent policy reforms, Estonia has returned to the fully proportional income tax system, which is more favorable for high-income classes.
Retained and reinvested profits are exempt from corporate income tax in Estonia. Dividends, taxable at the corporate level at a 14% tax rate, are subject to a 7% withholding tax. Taxing dividends instead of corporate profits complicates national budget planning, as firms can decide the amount and timing of dividends, which do not necessarily occur every year. Capital is not taxed at all, except for a very marginal land tax, further violating the principle of horizontal equity.
Tax exemptions for raising children currently exist, and taxpayers can also deduct their mortgage interest up to 50% of their taxable income. However, both measures will be abolished in 2024. Heated debates have continued throughout 2023 about introducing a car tax, with the main controversies revolving around balancing equity and environmental goals. Parliamentary parties have not yet reached a consensus.
Citations:
Coalition agreement 2023-2027. https://valitsus.ee/en/coalition-agreement-2023-2027#majandus
To what extent do existing tax institutions and procedures minimize compliance and collection costs?
10
9
9
The tax system is fully aligned with the goal of minimizing compliance and collection costs.
8
7
6
7
6
The tax system is largely aligned with the goal of minimizing compliance and collection costs.
5
4
3
4
3
The tax system is only somewhat aligned with the goal of minimizing compliance and collection costs.
2
1
1
The tax system is not at all aligned with the goal of minimizing compliance and collection costs.
Estonia has implemented two key strategies to minimize compliance and collection costs effectively. First, it employs a simple tax system with few exemptions or tax brackets. Second, it has established a well-developed digitalization of tax and customs declarations.
As the first public e-service, eMTA – the online tax declaration service – is regularly updated and highly popular among citizens and enterprises. By 2021, 97% of income declarations were filed using the digital eMTA system. Based on available financial data, the eMTA pre-fills declarations for individuals, making the process fast and easy for citizens. Various authentication methods are available including via ID card (including digital ID, residence permit card, e-Resident digital ID, and diplomatic card), mobile IDs, Smart IDs and EU e-IDs.
As the first public e-service, eMTA – the online tax declaration service – is regularly updated and highly popular among citizens and enterprises. By 2021, 97% of income declarations were filed using the digital eMTA system. Based on available financial data, the eMTA pre-fills declarations for individuals, making the process fast and easy for citizens. Various authentication methods are available including via ID card (including digital ID, residence permit card, e-Resident digital ID, and diplomatic card), mobile IDs, Smart IDs and EU e-IDs.
To what extent do existing tax institutions and procedures internalize negative and positive externalities?
10
9
9
The tax system is fully aligned with the goal of internalizing externalities.
8
7
6
7
6
The tax system is largely aligned with the goal of internalizing externalities.
5
4
3
4
3
The tax system is only somewhat aligned with the goal of internalizing externalities.
2
1
1
The tax system is not at all aligned with the goal of internalizing externalities.
Environmental taxes have been on the political agenda for many years, and both tax rates and total revenue from these taxes have increased. However, environmental taxes as a share of overall tax revenues remained stable or slightly decreased in 2021 compared to 2019 (6.8% and 9.6%, respectively) (Eurostat 2023). Compared to the European Union average, Estonia has higher excise duties on fuel, pollution and raw resources such as oil shale mining. Excise duties from fuel alone comprise more than 6% of all tax revenues (ASK 2021). The government program for 2023 – 2027 includes a planned increase in fuel excise duties in May 2024.
Pollution and mining levies are most substantial in northeastern Estonia, and since these funds go to municipal budgets, they can represent significant revenue for local governments. In Alutaguse municipality, such levies have composed about one-third of the budget. However, experts warn that relying on environmental taxes is not sustainable in the long run. As the economy becomes greener, the income from these taxes will diminish (ASK 2021). The electricity excise duty is applied equally to both fossil and green energy. Additionally, the tax rate is substantially lower – nine times lower – for big enterprises as a means of making Estonia more attractive to large businesses.
Taxes on transport, such as those on heavy vehicles and road tolls, are very marginal. Estonia has been the only EU country without a car tax; however, the introduction of such a levy has been specified in the coalition agreement for 2023 – 2027. The principles of the car tax were intensively debated throughout 2023. The right-wing Isamaa, which publicly opposed the introduction of the car tax, became the most popular political party largely because of this anti-tax campaign. At the moment, it is not clear when the car tax will be introduced, and with which calculation formula. However, one of the clear principles is to encourage people to opt for newer and greener vehicles.
The government already supports purchases of electric vehicles and electric bikes with grants of $1,700 and $700, respectively. According to Bank of Estonia expert Kaspar Oja, this measure lacks social equity because it supports better-off urban people and enterprises that do not need the support (ERR 27.02.2003).
In 2022 – 2023, VAT for printed and digital media outlets was reduced from 9% to 5%. Starting in 2024, this rate will return to the former level. According to the government, Estonian media houses are strong enough, and media consumption will not suffer because of this change. However, increases in VAT, coupled with higher prices for home delivery of newspapers, impair access to media for low-income and rural households.
Citations:
Arenguseire Keskus. 2021. Keskkonnahoidu mõjutavad maksud Eestis 2021. https://arenguseire.ee/wp-content/uploads/2021/09/2021_maksustruktuur_keskkond_luhiraport.pdf
ERR. 2023. “Elektriautode ostu toetamine tekitab vastakaid arvamusi.” February 27. https://www.err.ee/1608898838/elektriautode-ostu-toetamine-tekitab-vastakaid-arvamusi
Pollution and mining levies are most substantial in northeastern Estonia, and since these funds go to municipal budgets, they can represent significant revenue for local governments. In Alutaguse municipality, such levies have composed about one-third of the budget. However, experts warn that relying on environmental taxes is not sustainable in the long run. As the economy becomes greener, the income from these taxes will diminish (ASK 2021). The electricity excise duty is applied equally to both fossil and green energy. Additionally, the tax rate is substantially lower – nine times lower – for big enterprises as a means of making Estonia more attractive to large businesses.
Taxes on transport, such as those on heavy vehicles and road tolls, are very marginal. Estonia has been the only EU country without a car tax; however, the introduction of such a levy has been specified in the coalition agreement for 2023 – 2027. The principles of the car tax were intensively debated throughout 2023. The right-wing Isamaa, which publicly opposed the introduction of the car tax, became the most popular political party largely because of this anti-tax campaign. At the moment, it is not clear when the car tax will be introduced, and with which calculation formula. However, one of the clear principles is to encourage people to opt for newer and greener vehicles.
The government already supports purchases of electric vehicles and electric bikes with grants of $1,700 and $700, respectively. According to Bank of Estonia expert Kaspar Oja, this measure lacks social equity because it supports better-off urban people and enterprises that do not need the support (ERR 27.02.2003).
In 2022 – 2023, VAT for printed and digital media outlets was reduced from 9% to 5%. Starting in 2024, this rate will return to the former level. According to the government, Estonian media houses are strong enough, and media consumption will not suffer because of this change. However, increases in VAT, coupled with higher prices for home delivery of newspapers, impair access to media for low-income and rural households.
Citations:
Arenguseire Keskus. 2021. Keskkonnahoidu mõjutavad maksud Eestis 2021. https://arenguseire.ee/wp-content/uploads/2021/09/2021_maksustruktuur_keskkond_luhiraport.pdf
ERR. 2023. “Elektriautode ostu toetamine tekitab vastakaid arvamusi.” February 27. https://www.err.ee/1608898838/elektriautode-ostu-toetamine-tekitab-vastakaid-arvamusi
Graph View
To what extent do existing budgetary institutions and procedures support or hinder sustainable budgeting?
10
9
9
Budgetary institutions and policies are fully aligned with the goals of sustainable budgeting.
8
7
6
7
6
Budgetary institutions and policies are largely aligned with the goals of sustainable budgeting.
5
4
3
4
3
Budgetary institutions and policies are only somewhat aligned with the goals of sustainable budgeting.
2
1
1
Budgetary institutions and policies are not at all aligned with the goals of sustainable budgeting.
Estonia has maintained a strict fiscal policy for decades, resulting in the country having Europe’s lowest public debt as a percentage of GDP. This enables Estonia to meet future financial obligations without placing extra burdens on future generations. Although the overall tax burden has remained fairly stable over the years, the need to finance increasing demands – including the direct and indirect costs of the Russian war in Ukraine – poses a serious threat to Estonia’s excellent fiscal balance. While Estonia’s government debt is still the lowest among OECD nations, it more than doubled between 2015 and 2023. The government now faces tough choices between borrowing, increasing taxes and cutting spending. As expected, the incumbent government has opted for the latter.
Despite government rhetoric about reducing bureaucracy, these cuts may in practice lead to inefficiencies in the provision of public goods. When the government broke its promise to raise the base level of teachers’ salaries to the national average, teachers’ unions organized a nationwide strike that paralyzed schools in January 2024. Emergency services have repeatedly voiced concerns about understaffing and underfunding. Despite vocal criticism from advocacy groups and opposition parties, the government – headed by the Reform Party – adheres to principles of fiscal orthodoxy, applying rules of fiscal balance to public investments and RDI expenditures.
Annual budgets must align with the Strategy of National Budgets (RES), a government decree. Although designed for a four-year period, it is revised annually based on macroeconomic and geopolitical forecasts. In today’s turbulent environment, RES does not serve well as a medium-term strategic instrument. In reality, the coalition agreement likely has a more profound effect on budgeting.
The budgetary process is de jure and de facto dominated by the government, and parliamentary proceedings can make only minor changes, if any. In addition to the general government budget, Estonia has social insurance funds – the Health Insurance Fund and the Unemployment Insurance Fund – governed by tripartite boards. Both funds lost portions of their budgetary autonomy when their reserves were merged with government liquidity reserves in 2011 – 2012. Moreover, both funds require additional government transfers because social security contributions are insufficient to balance the budgets.
Despite government rhetoric about reducing bureaucracy, these cuts may in practice lead to inefficiencies in the provision of public goods. When the government broke its promise to raise the base level of teachers’ salaries to the national average, teachers’ unions organized a nationwide strike that paralyzed schools in January 2024. Emergency services have repeatedly voiced concerns about understaffing and underfunding. Despite vocal criticism from advocacy groups and opposition parties, the government – headed by the Reform Party – adheres to principles of fiscal orthodoxy, applying rules of fiscal balance to public investments and RDI expenditures.
Annual budgets must align with the Strategy of National Budgets (RES), a government decree. Although designed for a four-year period, it is revised annually based on macroeconomic and geopolitical forecasts. In today’s turbulent environment, RES does not serve well as a medium-term strategic instrument. In reality, the coalition agreement likely has a more profound effect on budgeting.
The budgetary process is de jure and de facto dominated by the government, and parliamentary proceedings can make only minor changes, if any. In addition to the general government budget, Estonia has social insurance funds – the Health Insurance Fund and the Unemployment Insurance Fund – governed by tripartite boards. Both funds lost portions of their budgetary autonomy when their reserves were merged with government liquidity reserves in 2011 – 2012. Moreover, both funds require additional government transfers because social security contributions are insufficient to balance the budgets.
Graph View
How committed is the government to utilizing research and innovation as drivers for the transition to a sustainable economy and society?
10
9
9
The government is clearly committed to utilizing research and innovation as drivers for the transition to a sustainable economy and society.
8
7
6
7
6
The government is largely committed to utilizing research and innovation as drivers for the transition toward a sustainable economy and society.
5
4
3
4
3
The government is somewhat committed to utilizing research and innovation as drivers for the transition toward a sustainable economy and society.
2
1
1
The government is not at all committed to utilizing research and innovation as drivers for the transition toward a sustainable economy and society.
Research, development, and innovation (RDI) are national priorities in Estonia, as reflected in the Estonian Research, Innovation and Entrepreneurship Strategy 2021 – 2035 (TAIE). This strategy aims to bring research closer to the economy, where outcomes have so far been modest in terms of patents and high-tech exports. Total RDI expenditures have remained stagnant at about 1.8% of GDP.
TAIE 2021 – 2035 highlights five focus areas based on smart specialization, each with a clear sustainability-oriented focus: all-sectoral digital solutions, health technologies and services, valorization of local resources, smart and sustainable energy solutions, and a viable Estonian society. Each focus area has a roadmap, which is updated regularly every three to four years to adjust activities and financing according to the area’s needs. These roadmaps were developed in 2022 – 2023 in cooperation with ministries, higher education institutions and business representatives.
TAIE has measurable objectives and a regular monitoring mechanism. Reporting will be done by programs and through needs-based evaluations. An annual performance report will be jointly prepared by the Ministry of Education and Research (HTM) and the Ministry of Economic Affairs and Communications (MKM), who also hold responsibility for the specific focus areas. The report is presented to the TAIE Steering Committee, composed of representatives from various ministries and executive agencies.
There are two executive agencies in the RDI – the Estonian Research Council (ETAG) and the Estonian Business and Innovation Agency (EAS KredEx). The latter emerged from the merger of Enterprise Estonia and KredEx in January 2022 to unite financing and consulting services for enterprises and startups. ETAG, which previously mainly funded academic research, now places a much greater focus on knowledge transfer and applied business innovations.
Estonia is one of the few countries worldwide that does not have tax exemptions for enterprise-led R&D activities, nor is there any R&D-related risk-sharing between the public and private sectors. High costs and high risks undermine private sector motivation for investing in R&D. The government’s policy toward this problem has been to encourage innovation and the transfer of scientific knowledge to enterprises via special grant schemes (NUTIKAS, SekMO) and by building the RDI planning capacity of professional associations (RITA 7).
As a result of these efforts, private sector RDI expenditures now exceed those of the public sector (1.01% versus 0.66% of GDP, respectively). R&D personnel in the private sector have continually increased, in contrast to a decrease in the public sector, changing the total balance of researchers by 2022 – 53% are employed in the private sector and 47% in the public sector (ETAG 2022).
Nevertheless, recent studies show that cooperation between research institutions and enterprises is still mainly ad hoc. Expectations and work methods of the parties are different; enterprises are seeking better access to top-level labs at higher education institutions and international RDI networks. Both research institutions and enterprises would like to see long-term financing schemes that allow them to undertake more ambitious product development projects (ETAG 2023).
Citations:
ETAG. 2022. “Eesti TA statistika.” https://etag.ee/wp-content/uploads/2023/12/Eesti-TA-statistika_detsember-2023.pdf
ETAG. 2023. “https://etag.ee/wp-content/uploads/2023/03/Liitude_TAI_vajaduste_kaardistuste_koond.pdf”
TAIE 2021 – 2035 highlights five focus areas based on smart specialization, each with a clear sustainability-oriented focus: all-sectoral digital solutions, health technologies and services, valorization of local resources, smart and sustainable energy solutions, and a viable Estonian society. Each focus area has a roadmap, which is updated regularly every three to four years to adjust activities and financing according to the area’s needs. These roadmaps were developed in 2022 – 2023 in cooperation with ministries, higher education institutions and business representatives.
TAIE has measurable objectives and a regular monitoring mechanism. Reporting will be done by programs and through needs-based evaluations. An annual performance report will be jointly prepared by the Ministry of Education and Research (HTM) and the Ministry of Economic Affairs and Communications (MKM), who also hold responsibility for the specific focus areas. The report is presented to the TAIE Steering Committee, composed of representatives from various ministries and executive agencies.
There are two executive agencies in the RDI – the Estonian Research Council (ETAG) and the Estonian Business and Innovation Agency (EAS KredEx). The latter emerged from the merger of Enterprise Estonia and KredEx in January 2022 to unite financing and consulting services for enterprises and startups. ETAG, which previously mainly funded academic research, now places a much greater focus on knowledge transfer and applied business innovations.
Estonia is one of the few countries worldwide that does not have tax exemptions for enterprise-led R&D activities, nor is there any R&D-related risk-sharing between the public and private sectors. High costs and high risks undermine private sector motivation for investing in R&D. The government’s policy toward this problem has been to encourage innovation and the transfer of scientific knowledge to enterprises via special grant schemes (NUTIKAS, SekMO) and by building the RDI planning capacity of professional associations (RITA 7).
As a result of these efforts, private sector RDI expenditures now exceed those of the public sector (1.01% versus 0.66% of GDP, respectively). R&D personnel in the private sector have continually increased, in contrast to a decrease in the public sector, changing the total balance of researchers by 2022 – 53% are employed in the private sector and 47% in the public sector (ETAG 2022).
Nevertheless, recent studies show that cooperation between research institutions and enterprises is still mainly ad hoc. Expectations and work methods of the parties are different; enterprises are seeking better access to top-level labs at higher education institutions and international RDI networks. Both research institutions and enterprises would like to see long-term financing schemes that allow them to undertake more ambitious product development projects (ETAG 2023).
Citations:
ETAG. 2022. “Eesti TA statistika.” https://etag.ee/wp-content/uploads/2023/12/Eesti-TA-statistika_detsember-2023.pdf
ETAG. 2023. “https://etag.ee/wp-content/uploads/2023/03/Liitude_TAI_vajaduste_kaardistuste_koond.pdf”
Graph View
How committed and credible is the government in its activities to guide the effective regulation and supervision of the international financial architecture?
10
9
9
The government is clearly committed to ensuring the stability of the global financial system.
8
7
6
7
6
The government is largely committed to ensuring the stability of the global financial system.
5
4
3
4
3
The government is somewhat committed to ensuring the stability of the global financial system.
2
1
1
The government is not at all committed to ensuring the stability of the global financial system.
Estonia actively participates in developing and maintaining financial stability and transparency in global financial markets. Estonia is a member of the Council of Europe’s MONEYVAL monitoring body, and the head of the Estonian Financial Intelligence Unit (FIU), Madis Mäerker, was elected vice chair of MONEYVAL in 2023. Several domestic bodies have been established to combat money laundering, such as the Governmental Committee for the Coordination of Money Laundering Prevention, the FIU and the Estonian Financial Supervision Authority (FSA).
The FIU is an independent unit of the Estonian Police and Border Guard Board, and the FSA is an independent body that supervises all financial sector participants. In recent years, the FSA has played a prominent role in combating money laundering in the Estonian financial sector. Due to money laundering cases involving the Estonian branches of Danske Bank and Swedbank – the largest bank in the country – the Estonian government introduced several measures to prevent similar cases in the future. One key proposal is to make clients fully responsible for proving the legality of their funds.
In cases of suspected money laundering or terrorist financing, the FIU analyzes and verifies information, taking measures where necessary and forwarding materials to the competent authorities upon detecting a criminal offense. In the Danske Bank money laundering case, Estonian authorities closely cooperated with the United States to settle a long-running investigation involving billions of dollars in illicit payments (ERR 2023). In December 2022, Danske Bank pleaded guilty in a U.S. court. The trial of six ex-Danske Bank Estonian branch employees started in Harju County Court in November 2023.
Currently, the key topic is the regulation of cryptocurrency companies registered in Estonia. Estonia was one of the first countries to establish minimum regulations for registering a crypto company. A significant number foreign-owned cryptocurrency companies subsequently registered in Estonia. The current government policy aims to reverse the initially lax regulatory requirements to avoid potential damage to the national financial system and reputation. As a result, the number of licensed cryptocurrency companies has decreased from thousands to approximately 70 licensed companies in 2023. Estonia has set a clear priority of adopting the EU Markets in Crypto-Assets Regulation (MiCA) directive in 2024.
Citations:
ERR. 2023. “Estonia May Get $50 Million from US for Cooperation in Danske Bank Case.” https://news.err.ee/1609131395/estonia-may-get-50-million-from-us-for-cooperation-in-danske-bank-case
The FIU is an independent unit of the Estonian Police and Border Guard Board, and the FSA is an independent body that supervises all financial sector participants. In recent years, the FSA has played a prominent role in combating money laundering in the Estonian financial sector. Due to money laundering cases involving the Estonian branches of Danske Bank and Swedbank – the largest bank in the country – the Estonian government introduced several measures to prevent similar cases in the future. One key proposal is to make clients fully responsible for proving the legality of their funds.
In cases of suspected money laundering or terrorist financing, the FIU analyzes and verifies information, taking measures where necessary and forwarding materials to the competent authorities upon detecting a criminal offense. In the Danske Bank money laundering case, Estonian authorities closely cooperated with the United States to settle a long-running investigation involving billions of dollars in illicit payments (ERR 2023). In December 2022, Danske Bank pleaded guilty in a U.S. court. The trial of six ex-Danske Bank Estonian branch employees started in Harju County Court in November 2023.
Currently, the key topic is the regulation of cryptocurrency companies registered in Estonia. Estonia was one of the first countries to establish minimum regulations for registering a crypto company. A significant number foreign-owned cryptocurrency companies subsequently registered in Estonia. The current government policy aims to reverse the initially lax regulatory requirements to avoid potential damage to the national financial system and reputation. As a result, the number of licensed cryptocurrency companies has decreased from thousands to approximately 70 licensed companies in 2023. Estonia has set a clear priority of adopting the EU Markets in Crypto-Assets Regulation (MiCA) directive in 2024.
Citations:
ERR. 2023. “Estonia May Get $50 Million from US for Cooperation in Danske Bank Case.” https://news.err.ee/1609131395/estonia-may-get-50-million-from-us-for-cooperation-in-danske-bank-case