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Tuesday, 19.03.2024, 06:38
Estonia to reach 85% of Finland's living standard in 20 years
If Estonia's economic growth per person from now on was 3% a year and the
Finnish economy grew at the same tempo it has been growing at for the past 20
years, which is 1.7% a year, then Estonia would reach Finland's standard of
living in approximately 30 years, Oja wrote in the central bank's blog. He said
that a 3% growth as an average for a longer period is an optimistic hope as
Estonia's economic growth will probably decelerate in the future.
Wages in Estonia make up approximately 40% of wages in Finland. At the same
time, the level of prices in Estonia is also lower, 60% compared with Finland.
"Thanks to lower prices, the actual living standard is not so far behind
of Finland as it could be expected from looking at the wages alone," Oja
said.
He said that according to forecasts made by international organizations,
Estonia's living standard will not reach that of Finland for a while. The
forecasts estimate that a fairly fast convergence of income levels will
continue in the next 20 years. The forecasts suggest that in the next 15-20
years, Estonia should reach a level equivalent to approximately 85% of the
living standard of Finland.
"If prices were also harmonized to a similar level, it would mean that
wages in Estonia should be 25-30% smaller than in Finland. But this means that
Estonian wages and prices should increase considerably faster than in Finland.
Estonia might never reach the actual level of Finland," Oja said.
By extending the recent economic forecasts of the Bank of Estonia and
the Bank of Finland with the long-term preconditions of the forecast of
the European Commission, Estonia's GDP per person should reach approximately 80%
by 2025 and approximately 87% of Finland's level by 2035. "From then on,
the convergence of income will decelerate partly due to Estonia's unfavorable
population situation but partly also due to the technical characteristics of
these forecasts - the GDP growth rates of countries harmonize over time,"
Oja said.
Productivity growth will harmonize with the European Union's average
productivity growth in the distant future. As long as productivity in Estonia
remains below the EU average, productivity in Estonia will increase faster than
the EU average due to taking over technology and living standards will
converge in the distant future. The higher the living standard, the slower the
economic growth will be.
The long-term forecast of the Organization for Economic Co-operation and
Development (OECD) takes into account Estonian institutions' development,
openness and capacity for updates and this is probably why the organization is
more optimistic than the long-term forecast of the European Commission.
According to that forecast the convergence of the living standard of Estonia
and Finland will continue for a long time and towards 2050 Estonia's
living standard should reach approximately 90% of Finland's, which means that
the difference in actual living standards is similar to that between Latvia and
Estonia at present.
"In the comparison of long-term forecasts, a large role is played by
the question which growth scenario economic growth will be based on in the next
few years. For example, if OECD's preconditions for long-term economic growth
were to be adapted to IMF's forecast, Estonia should catch up with Finland by
2060 in terms of living standards. That would not happen if OECD's own
short-term forecast is used. However, it must definitely not be forgotten that
forecasts made for ten, twenty or fifty years cannot be that
accurate," Oja said.
The Estonian tax structure compared with the European Union average is
directed more towards growth as consumption is taxed more in Estonia, Mari Parnamae, economist at the Bank of
Estonia, said.
"The Estonian tax system is fairly growth-friendly, is to a great
extent based on taxation of consumption and a lightly progressive income tax
system," Parname wrote in the central bank's blog.
"The tax burden is relatively low compared to other developed
countries, there are few exceptions, a joint tax rate is predominantly in use
and the profit of companies is not taxed," she said.
According to last year's figures, tax burden in Estonia was 35% of GDP,
which is approximately 5 percentage points lower than the European Union
average. In the past few years wages and consumption, which is taxed higher,
have increased faster and this is why part of the increase in tax burden is
linked with the structure of economic growth.
Taxes on products and consumption made up 44% of tax revenue, which is 11 percentage
points more than the average in Europe. As a share of consumption expenses, the
percentage of indirect taxes is higher than the European average. A great part
of the difference comes from VAT and as such, not from the standard rate of
VAT, but from the fact that the reduced rate is used relatively rarely in
Estonia.
Personal income tax made up 17% of tax revenue in 2016, 4%age points less
than the European Union average. Labor taxes and payments along with social
contributions made up 51% of all tax revenue, which is still below the European
Union average.
Even though Estonian companies pay dividends irregularly, the revenue
earned from corporate income tax is comparable to the European Union average,
making up 2% of the whole tax revenue last year, which is 1%age point less than
the average of the European Union. As a share of the profit of the business
sector, the percentage of corporate tax was 2%age points lower than the average
of the European Union.