Estonia's new government promises to promote fairer growth

By bne IntelliNews April 9, 2015

Wojciech Kość in Warsaw -


Estonia’s new rainbow coalition government was sworn in on April 9, after five weeks of negotiations following the March 1 general election.

The centrist Reform Party, which topped the polls, leads a coalition that includes the Social Democrats and the liberal-conservative IRL. Reform has worked with both of these junior partners in previous governments.

On April 8, Prime Minister Taavi Roivas unveiled an outline of his cabinet’s programme that prioritises national security and promises to widen the benefits of economic growth to all.

The latter priority is clearly the influence of the Social Democrats, whose impact on the government’s programme as a whole is considered bigger than in previous cabinets they took part in.

According to some observers, it may also be a prelude to tensions within the government because of the Social Democrats’ larger position than seems merited purely from the number of mandates they won in the parliament.

In the March 1 vote, the Reform Party won 27.7% of the vote, which will translate into 30 of the 101 seats in parliament. The Centre Party came second with 27 seats, followed by the Social Democrats with 15. The conservative IRL secured 14 seats. The new Free Party and Conservative People’s Party took 15 seats between them.

It appears that the slightly more left-leaning orientation of the government’s plan for the next four years may be a plan to defuse those tensions early on.

“There will be many tensions and I predict that the Social Democrats will take a chance to put their foot down sooner or later, because the set-up in the parliament will give them this opportunity. This will place many risks upon the new government,” public broadcaster ERR reported on April 8.

Roivas outlined the priorities for the next four years in a speech in front of parliament ahead of the parliamentary vote on the new government on April 8. Perhaps the least controversial priority is national security, which topped the priority list in Roivas’ speech.

“Russian aggression [is] affecting [Estonian] security not just in the next four years, but, unfortunately, in the long term,” the PM warned. Roivas pledged to keep defence spending at 2% of GDP at the very least, as recommended by Nato. Estonia is one of the few European states to already meet the recommendation.

Boosting economic growth, with a shift towards high value-added products and services oriented for exports, is another policy plank for the new administration, the PM pledged. Estonian growth has stuttered recently, especially in comparison with its Baltic peers. The economy expanded by no more than 2.1% in 2014, and the outlook for 2015 is not much better at 2.3% in the most optimistic forecast right now, which comes from the European Commission. 

To make growth accessible for more people in the 1.3mn state, the coalition plans to increase the minimum wage from 39% to 45% of the average salary of €1,039 per month. It will support increasing the tax-free allowance by 33% from the current €154 to €205 per month. Pensions will be increased in line with wages’ growth – which came in at pretty solid rate of 5.3% y/y in 2014. Children’s allowances will also be increased.

The percentage of Estonians living in relative poverty increased to 22.1% in 2013, while 8% lived below the absolute poverty threshold, recent statistics show. The number of people living in relative poverty grew by 3.4pp and those living in absolute poverty by 0.7pp.

Estonia needs to boost productivity and harness human capital in order to ensure a “steeper, more inclusive and more sustainable growth path”, the Organisation for Economic Co-operation and Development (OECD) suggested in January.

Apart from raising incomes, these measures, the government hopes, will address the demographic crisis facing Estonia. Analysts warn that the shrinking workforce is pushing wages up. The central bank said in a report released on April 8 that this threatens to disrupt investment, while it is also seen as a bottleneck to growth.

However, the new government will need to find a way to balance addressing the social issues with Estonia’s conservative fiscal policy.

“According to the very preliminary information the cost of the promises is around €300mn,” Swedbank said. “Unfortunately, it’s unclear yet how the government is going to finance this ambitious program as they have the objective to keep the state budget in structural balance”.

With debt at mere 10% of GDP, Roivas’ previous government flatly refused to make any larger use of the European Central Bank’s quantitative easing (QE) plans. The QE programme should prove positive for the Estonian economy, but it will not trigger a sovereign bond issue to take advantage of lower borrowing costs, the central bank pledged on March 10.

What may keep these spending plans in check is that the post of finance ministry went to the conservative wing of the government, the IRL party.

The Reform Party took arguably most of the other important posts: foreign ministry, economic affairs and infrastructure, the interior, rural affairs, education and research, and public governance.

The Social Democrats will get defence, culture, health and labour, and foreign trade and entrepreneurship. IRL’s portfolios include environment, finance, social protection, and justice.

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