Economist: Questionable whether decision to cancel excise hikes comes at the right time
Bank of Estonia economist Kaspar Oja said that while energy prices are soaring, Estonia has seen higher prices before and he does not approve of the decision to slash excise duties.
What is the effect of the government's decision to cancel the excise duty increase for consumers?
About four cents per liter.
Is that a lot or a little?
If we consider that prices have risen by about 30–35 cents per liter at the pump in recent weeks, then compared with that the impact of the tax cut is still very small. The main factor shaping fuel prices is what is happening on the commodity markets.
How high could oil prices still rise and for how long?
That is very difficult to predict. If I could foresee that, I would probably be doing something else.
But it could still happen that this lasts for months?
There have been different messages about how long this situation might last. It could also go completely the other way — that at some point ships start moving through there again (the Strait of Hormuz – ed.), the situation on the markets calms down and prices come down.
At that point, however, the excise increases will have been canceled and the opportunity to raise them will have been missed. Temporary reductions like this have been made before. For example, we can recall the diesel excise cut during the coronavirus crisis, which was so large that excise rates have still not returned to that earlier level. In other words, lowering taxes is easy, but raising them again is quite difficult. In the current situation, where the budget deficit is very large, it is indeed questionable whether implementing such tax cuts is really the right move at this time.
More ideas similar to this tax cut could emerge, especially with elections coming up.
It does seem that the measure has fairly broad political support. The issue is not limited to the coalition parties — leaders of various opposition parties have also expressed support for it.
We have not seen this kind of consensus in a long time?
It is difficult for politicians to say they oppose tax cuts when elections are approaching. When it comes to tax cuts or canceling tax increases, it is also worth considering that over the past decade it has somehow become a habit to introduce a tax change and then, after some time, promise to reverse it — or actually reverse it. There is no longer much certainty or predictability in the tax system and that certainly affects companies' plans, their confidence and ultimately investment. And if there is no investment, there is no economic growth.
How high could prices ultimately go? Is this the worst period we have experienced?
I would not want to speculate about how high prices might rise. But we have seen prices higher than the current level only a few years ago, so this is not yet the absolute worst situation. That said, the increase has certainly been very sharp and many people are feeling the impact.
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Editor: Marcus Turovski, Johanna Alvin
