Last week, there were two economic forecasts. (Ministry of Finance and the Bank of Estonia's – ed.) To start, should people be told plainly that the situation is complicated and that the hope life will improve immediately will not be realized?

It has already happened — life is improving. The first months have been very good. The tax relief has been quite significant, so net wages are projected to grow by 10 percent. There have also been smaller improvements, such as an increase in the minimum wage and a higher subsistence threshold, so in fact real incomes should improve.

But what the question was really about was not the government's achievements, but what is happening in the world. That is, of course, concerning, because the forecasts are somewhat unclear in that regard. Donald Trump and Vladimir Putin continue to create unease globally. The risks lie in supply disruptions and overall uncertainty and I would consider these security concerns more serious than the issue of prices.

We'll get to both of those, but I wanted to point out that even the Ministry of Finance's own forecast is 0.8 percent. That would still be a very sour outcome.

It's still in the black. So it's not all that bad.

Some scenarios also allow for negative growth.

People who have seen real life know that our GDP has dropped by 40 percent in a short period — and it also fell sharply during the last global recession, by around 14 percent in a year. Inflation was over 1,000 percent when I was raising my children. So I would say that if growth materializes under the current international conditions, there's no need to overreact. It's more important to think about how to restore peace and a sense of security, rather than worrying that we're in serious trouble with 0.8 percent economic growth.

Your opponents have likely read both economic forecasts quite thoroughly and concluded that the country's finances have been allowed to spiral out of control, with Jürgen Ligi largely to blame. [Isamaa chair] Urmas Reinsalu is calling for your resignation. What do you say to Urmas?

I haven't even heard what Reinsalu is saying. But taxpayers should be very concerned if Reinsalu were to take charge of public finances, because I can explain why certain things are reasonable. He can only demonstrate popular rhetoric.

Our public finances are still being dictated by the war in Ukraine and the related security challenges, as well as sharply increased defense spending. At the start of the war, it was 2.1 percent of GDP; now it is 5.4 percent. That 3.3 percent of GDP is essentially the additional deficit. On top of that, we also have internal security issues, so this cannot simply be covered by spending cuts. Public finances really started to go off track at the end of 2016.

But you're leaving out one major cost of nearly half a billion. You promised and delivered something to people that you didn't actually have the money for: eliminating the so-called tax hump. (Estonia recently eliminated its gradual income tax reduction scheme in favor of a universal €700 monthly exemption – ed.)

Yes, but we made a very forward-looking decision. At a time when everyone is talking about price adjustments, the intelligent response to the overall rise in the cost of living is tax relief. It doesn't focus on any specific good. With this tax relief, people won't spend it all on fuel and push fuel prices down — it spreads across the entire basket of consumption.

One of the biggest problems with promises of price controls, and with politicians in general, is that they drive up demand for specific goods instead of supporting lower incomes. This year, we have made very good decisions — much smarter than the instincts of politicians in most countries.

It's easy to push back against politicians' accusations. The Bank of Estonia says it is concerned about the continued growth of debt and does not see a plan for how to get out of it.

Absolutely — I'm concerned as well. I'd say it weighs on me personally, because my standard has always been budgets with a structural surplus. Right now, I'm in a situation where public finances were first allowed to slip, then crises and rising defense costs were added on top of that and there is a prevailing sense of indifference. In a democracy, politicians now say outright — something they didn't used to say so bluntly — that no one really cares about the budget anyone.

From all sides?

Across the entire political spectrum.

Including your party colleagues?

It's certainly the least pronounced among my party colleagues and the ruling parties in general (Reform and Eesti 200 – ed.). That's partly due to how responsibility is distributed, but the overall assessment is still yes. Views like mine are no longer the basis for decisions; instead, people move on to the next issue. In reality, resisting the growth of spending is a daily challenge.

Listen, we're approaching a deficit of 5 percent of GDP and the finance minister says he can't manage and no one is listening. What happens then?

People are listening. In that sense, European allies deliberately relaxed fiscal rules so that everyone could increase defense spending and respond to a changing world. But getting back out of that situation is inevitable, and in fact it is already laid out in our state budget strategy.

Of course, everything depends on the political situation, because we can't make promises on behalf of future governments about how much effort they will make. But as far as I'm concerned, the condition of the budget will improve.

This year as well, my preference and proposal is that we don't fully reach the 4.5 percent deficit, but we will assess the situation, because there are items in the budget that have clearly been overlooked and may not be possible to replace under tight conditions — meaning compromises may be necessary.

What does that mean? Will we forgo some acquisitions or make a negative supplementary budget?

At the moment, we're on track, and if we continue with this determination, we'll manage.

Are you counting on inflation?

No, I'm not counting on inflation. I'm talking about the overall outlook for economic growth and inflation, along with the budget we've already adopted. It's not as if we're only now discovering how the world works — these are decisions that have been thought through well in advance. But I don't know what will happen with political compromises, because I am trying to prevent any increase in spending in every case.

At the moment, I feel that the prime minister is backing me — I've felt that in the past as well.

Who isn't backing you?

Every minister has things they hope to move forward more quickly within the budget and I wouldn't want to single anything out right now. Some issues are very sensitive if it turns out they won't happen — we need to discuss those among ourselves.

So, cuts after all?

No, we're currently on track. I'm simply concerned that things that have been overlooked — not because of the finance minister — will put pressure on the budget, along with the expectation to once again cater to voters in elections. The pressure to eliminate taxes is so intense that I have to push back against it every day.

There's a rumor going around that the Ministry of Finance is quietly preparing a positive supplementary budget. Is that true or not?

We have a long list of wishes, as always. I'm certainly not preparing one. As far as it's within my power, I'm holding the line that additional requests should be covered by reallocating existing funds. We're very close to the limit and negative scenarios could definitely push us over it.

Let's take a step back and look at the bigger picture. Donald Trump's deadline for Iran expires in a few hours and Kharg Island was bombed today. What happens if the Strait of Hormuz is closed for a longer period and we see that feared $150 or even $200 per barrel price?

It was already clear that you can't just act recklessly in the Strait of Hormuz. Donald Trump seems to have only one person left who occasionally dares to challenge him cautiously. It's a very tragic situation. History has seen this before — when someone becomes such a dominant hegemon that no one dares to speak up anymore.

But what happens then? Fuel has been relatively much more expensive for us before, even compared to a $200-per-barrel price. In the recent past, we've been significantly poorer relative to fuel prices. The reaction is the same as always: when goods become expensive, saving becomes people's natural response. The same applies to the state. What we have already done is release strategic fuel reserves onto the market.

Is that reasonable?

Very reasonable. That's exactly why the International Energy Agency was created. At the last meeting of finance ministers — I don't want to sound arrogant, but my position, along with those of the International Energy Agency, the European Central Bank and the European Commission, were essentially identical in substance.

You must not stimulate demand for a specific commodity; instead, you need to address low incomes where the real hardship lies. Not everyone can claim to be suffering and expect the state budget to compensate for that — it's simply not possible. You can address the causes, but those causes are largely external to us. Demand needs to be kept in check.

That was also the main recommendation of that meeting: price signals must be preserved, not covered up or artificially suppressed. Governments are often tempted to do just that. My role is to remind people of expert advice and I don't care if that costs me votes. Price signals must not be hidden, nor should demand be artificially stimulated.

Income policy should focus on lower incomes and we have done that to a greater extent than many other countries. Net wages are projected to grow by 10 percent due to the increase in the tax-free allowance. The minimum wage and the subsistence threshold have also been raised. This approach avoids concentrating demand on a specific good or making it artificially cheap. Instead, each consumer decides, based on their own budget, whether it makes sense to change their driving habits, reduce trips or continue as before.

But not everyone can choose. If you run a rural tourism business and have a diesel vehicle, diesel costs €2.29 per liter. Alan Vaht has calculated that with oil at $200 per barrel, diesel would cost €3.50. That's not sustainable, is it?

No, but we're not sustainable as a whole when it comes to fossil fuels. One of the dominant recommendations in this debate is that we must not fund despots. Fossil fuels are largely in the hands of non-democratic countries, or the U.S. — and even there, we're no longer entirely certain, talking about major exporters.

Renewable energy should not be dismissed. This is all part of the broader energy market. We need to move past our fear of renewable energy. According to surveys, we are among the most climate-indifferent nations in Europe and that is depressing. Popular parties are fueling this — they want us to cover the cost of fossil fuels, but they don't allow for alternatives.

But the issue isn't fossil fuel costs per se. We know that high consumption taxes hit lower-income people the hardest. Would the world order really collapse if we lowered the diesel excise tax for three months?

That's a typical kind of hypocrisy that experts do not recommend. It hides the price signal, while the share of excise in the price actually becomes smaller as prices rise. A free society does not impose taxes in order to manipulate prices. That means there is no surplus and there is no room for it in the budget.

If we were to reduce the excise to the European Union minimum level, it would — hopefully I'm not mistaken off the top of my head — save less than one euro per 100 kilometers. But for the budget, it would mean €50 million per year. The cost of such a measure for the budget is enormous, while the effect on prices is barely noticeable. Prices do not really depend on that small, fixed excise component; it's not proportional to the price and effectively gets absorbed as prices rise.

The state still has to be funded and we ourselves have additional costs related to that. The budget becomes problematic if economic growth slows due to energy prices. Looking at household finances, fuel costs make up on average less than 10 percent and excise is less than half of that. We're talking about percentages of people's income, but for the budget, it's €55 million a year. That is a very large sum that should instead be used to support the most vulnerable — raising the subsistence threshold, increasing single-parent benefits or boosting the base pension. Targeting support at the lower end of the income scale is very much on the agenda.

Let's talk about food, because fuel prices also feed into food prices. Helsingin Sanomat recently wrote that Sweden's reduction in food VAT has reached store shelves and, according to the government's calculations, amounts to about €600 per family per year. Should we try something similar?

We allocated €1,800 per taxpayer, not per family. That's many times more. You can look up what the International Monetary Fund and the OECD say about the relationship between prices and food VAT. Statistics show that in countries where it is lower, other taxes and the overall tax burden tend to be higher. In fact, food prices in countries with reduced VAT rates are even slightly higher.

It's 5 percent in Poland and prices are like a fairy tale.

Yes, Poland is a phenomenon where the overall price level is very low, but that's a completely different matter — they are also poorer than we are when you look at people's incomes.

Germany has 7 percent and the food basket is also cheaper.

Yes, it's a very large and efficient market. We have a low overall tax burden and one of the most competitive tax systems, which some now want to dismantle in favor of specific interest groups. All expert analyses say the same thing: reducing VAT on food reaches prices only temporarily and partially and even that benefit is mostly captured by those with greater purchasing power. OECD studies show that lowering food VAT often doesn't reach consumers at all, but instead gets absorbed within the supply chain.

In our conditions, it would mean maintaining an overly costly supply chain. We also have more retail chains than Finland, Latvia or Lithuania — for our level of wealth, there are simply too many stores per capita.

As of today, there's one less. Prisma Eesti stores have been sold to Coop.

The retail space will remain. Our turnover per square meter is too low and the supply chain is expensive. That's not the only reason — the market is also small. But prices don't really depend on how much VAT, income tax or excise there is. The overall tax burden has an effect, but VAT, somewhat surprisingly, does not.

However, you will not be regulating that, right? Tell Coop what their margins should be?

Of course not. There are two countries I can name off the top of my head where food has a zero percent VAT rate — Ireland and Malta — and in both, food prices are higher than ours. In most countries with higher VAT, food is also more expensive. Denmark is the only exception.

Of course, increasing the overall tax burden raises prices, but VAT on its own does not have such a clear impact on price levels — while at the same time, it is extremely costly for the budget.

By the way, do you support the privatization of [national mail carrier] Omniva? People are worried they'll get less service at a higher cost.

I do. This stagnation has to end — people simply don't send letters anymore. I can't even remember the last time I sent one, though you shouldn't draw conclusions from my personal habits. That's what the statistics show. In government discussions, everyone understands that parcel delivery is not something the state needs to handle — it should be done by the private sector.

The issue is home delivery of periodicals and the universal postal service. The regional affairs minister has been tasked with dealing with those. In my view, that's actually the most serious issue — surprisingly so. We've long known these problems exist, but they haven't been resolved yet. We need to move forward on how the state will continue to ensure that mail and periodicals are delivered.

--

Follow ERR News on Facebook and X and never miss an update!