Spending and revenue Fiscal balance

ASSESSMENT AND RECOMMENDATIONS OECD ECONOMIC SURVEYS: ESTONIA © OECD 2017 26 Improving the fiscal framework Because of its vulnerability to external shocks, it is prudent that a small open economy like Estonia keeps a relatively low level of debt and room for manoeuvre for countercyclical Box 1. Draft budget plans The new coalition government appointed in November 2016 puts emphasis on reducing inequality and fighting the population decline. Budget plans for 2018-20 consist of additional spending in education, health, social welfare and public investment that will be partly financed by raising taxes Table 3. The authorities expect the structural deficit to reach 0.5 of GDP in 2018 and progressively return to balance by 2021. Such projections are questioned by the Fiscal Council, in particular the level of tax revenues, as changes in the tax system are likely to take time to materialise and their impact is uncertain. Spending A sizeable investment plan of 1.3 of GDP has been announced and includes large-scale projects in transport infrastructure, development of the broadband distribution network, and investments in a conference centre in Tallinn, defence and public residential housing. A relatively large share of funds will be allocated to the road and railway networks 36 of the total amount. Around 35 of additional spending will be allocated to the education system. Teacher’s salaries are set to increase to 120 of the national median wage, and wages in kindergarten will be aligned to the minimum level in schools. These measures are welcome, as teacher wages were particularly low by international standards. They should improve the attractiveness of the teaching profession among young graduates. Revenues Changes in the taxation system are expected to increase revenues from corporate income tax and indirect taxation, while reducing labour taxes. ● The income tax allowance will be increased from EUR 170 to 500 per month in 2018 and decreased gradually with the income level for those earning more than EUR 1 200. ● Increases in excise duty rates on alcohol and gas will strengthen incentives to reduce alcohol consumption and achieve energy savings. ● The tax rate on distributed dividends will be cut from the current 20 to 14 for mature companies companies that pay dividends for three consecutive years. While this is expected to increase revenue in the short term by encouraging the companies to distribute profits, it will decrease it in the longer term. Table 3. Budgetary and fiscal reforms planned for 2018-20 of GDP 2018 2019 2020 Increase in spending 1.5

1.6 1.4

Education 0.3 0.5 0.5 Public investment 0.5 0.5 0.3 Increase in revenues 1.0 1.1 1.1 Personal income tax reform -0.6 -0.5 -0.5 Corporate income tax reform 0.6 0.4 0.2 Excise duty and VAT measures 0.5 0.1 0.2 Total impact on public deficit -0.5 -0.5 -0.3 Source: Ministry of Finance.