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International Internet Magazine. Baltic States news & analytics Friday, 29.03.2024, 12:07

Estonia: Economic policy should not increase uncertainty

Kaspar Oja, Economist at Eesti Pank, 31.05.2019.Print version
Data from Statistics Estonia show that Estonian GDP was up 4.5% in the first quarter over the year, and by 0.5% over the quarter, adjusted seasonally and for the number of working days. Growth in the economy will slow in future and in this case it is important for the government’s economic policy to be sustainable. The government should not allow its activities to increase uncertainty.

Frequent changes in the goals of fiscal policy, the disruption of the pension system, and the increased uncertainty about the use of foreign labour in future make it harder to take strategic decisions, and worsen the economic environment. The state should at present be careful in its spending to leave some space in the budget in case the economy starts to need support. The projects that will be needed to revive the economy should be prepared now so that they can be launched quickly if circumstances deteriorate substantially.


Growth in the first quarter was largely driven by manufacturing, though the growth in manufacturing in many other European Union countries has been modest. This is because of the structure of Estonian manufacturing, as companies in the sector are not as closely linked to the German car industry as those in other Central and Eastern European countries are. The monthly statistics and corporate expectations indicate though that growth will slow in the coming quarters.


An important issue for the sustainability of economic policy is immigration, and fiscal policy in connection with it. Natural demographic changes mean that the number of workers in Estonia is falling by 6000 people a year and without immigration, both the labour supply and the capacity of the economy to grow will be reduced (see Figure). This trend will continue in future. The accommodative fiscal policy of recent years has probably boosted the demand for foreign labour, and immigration temporarily increases the government’s revenue base substantially through labour and consumption taxes. If the economy deteriorates and the amount of foreign labour in it shrinks, tax revenues could decrease sharply. Uncertainty about economic policy could thus bite back several times over.








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