Thursday, July 01, 2010

Ligi on Taxes, Benefits, and the Exchange Rate

Via Urmas Aunin, a link to an excellent interview with finance minister Jürgen Ligi at the Eesti Päevaleht newspaper.

Extracts translated by yours truly.


Q: What will be the ultimate exchange rate between the kroon and the Euro?

A: [...]Do you think I would dare return to Estonia if I announced on July 13th that the exchange rate will not be 15,6466? That we decided to make it cheaper... Do I look suicidal?

Q: When will the pensions start growing? When will the teachers' salaries go up? When will the doctors' salaries go up?

A: When we start earning more.

Q: [...]So teachers and doctors shouldn't hope for raises in 2011.

A: No, they shouldn't. We're actually quite happy that the decline is over, and we'll be licking our wounds for a while.

Q: But are there any cuts coming in these areas?

A: No, there really aren't. I can't see any sensitive cuts coming, those have already been made. Of course, a lot depends on how quickly employment recovers. Too fast a recovery is not good, that would mean that structural improvements have not been thorough.

Q: For ten years, there's been talk of necessity-based social benefits. Any progress there?

A: That's the political process for you, common sense does not prevail. When you talk about [free school lunches], some people will think that it's a fundamental question in education. I say, my child doesn't need it. It's embarassing for me to use it. I didn't get this freebie in my time, we didn't get the freebie during socialism.

Now, some people will cry that saving money on children is unthinkable. Let's just admit that a child is primarily the responsibility of the parent, and the areas where we really do pay out massively are specific services: education, healthcare, after-school activities. But food and clothes... Most parents, taxpayers, should be making that choice for themselves.

That's just one example. Look at the 300-kroon child benefit, that's not very necessary. When we start looking at how much good it's actually doing, the real value is quite modest.

Q: When you talk about unnecessary [tax] exceptions, do you mean VAT discounts as well?

A: Yes. Tax discounts create a potential for corruption. It is an extremely expensive way for politicians to gather popularity. At the same time, they have no social justification, as they benefit those who consume more, and buy more expensive goods. There is no economic justification either.

Tax exceptions are justifiable in the case of medical drugs. These are goods with a controlled usage, and largely paid for by the state anyway. Tourism too, to some degree, since there you are talking about exports, and by definition exports have a zero tax rate, so the discounted rate there is understandable.

[...]This is a Pandora's box, and there are attempts to close it at the European level as well. VAT should be a neutral tax, applied irrespectively of the type of goods, and without scheming for preferences. That's how it was intended, it's just that different countries have historical privileges that are very hard to get rid of.

At the same time, I want to say that in the short term you will not be hearing any news on this issue. Don't misunderstand. To repeat one more time - there are no tax increases planned. I would love to get rid of the exceptions, but I don't have the power to do that. The finance minister does not have the political support.

Q: Are there any realistic opportunities for taxes to go down any time soon? Even people who otherwise have no love for Reform Party policies admit that labour taxes in Estonia are too high.

A: On the one hand I agree that the labour tax burden is too high, but usually the people who speak out about it leave out the hidden tax burden of other states - things such as contributions to various funds.

In terms of competitiveness, we need to reduce labour taxes, and in social terms, the tax-free wage minimum is understandable, but in economic terms what actually matters is the upper limit. Very good specialists cannot be paying the full measure of social tax, as they will never use even a fraction of what they pay in. The social tax ceiling is one issue on which we have to decide.

Q: Understanding is one thing, but I asked about political opportunities: are tax cuts coming?

A: Doesn't look that way. The budget's main priority is cutting costs. We want to lower the labour tax burden and that's one area of discussion, but this will not be resolved before the elections.

These are painful issues. The land of unbridled demagoguery. I think we need the tax changes to settle down on the European level, so we too start to understand that taxing consumption makes more sense than taxing labour. But usually this is where the hysteria begins, that the poor are paying more.

Taxing consumption is a trend. It's a trend that does not damage the economy. What is good for the economy is usually a far more important question for the poor than for the rich, who can get by anyway. In this sense, social democrats are quite one-sided. They look at things in a static way, who to take from and who to give to. If you take from the wrong place, then those who don't have a lot to give, they'll end up giving away the last thing they have - their jobs. [...] For the poor person, what is very important is what makes for a lesser burden on the economy. He doesn't see that the social and income tax is a tax on himself, and if you increase that burden, you increase the likelyhood of him losing his job. But consumption is something that people can control, to some extent. Income and social tax is paid by the company accountant, and the employee doesn't understand that this is part of the cost of a job.

Q: State contributions to the pension pillars - are they coming back?

A: They are absolutely coming back.

Q: Was [pausing the tax for such a short time] a right decision, or a silly one?

A: It was not silly. I was not the one who came up with the idea, but I applaud my predecessor for having the guts to put forward this proposal (to pause the contributions). Bringing that back will have some problems, the 6 and 3, some complicated schematics. I'd have left out the compensation. We'll live to regret it.

Stopping the contributions at the same time as losing the mandatory savings was reasonable. But you can't start compensating for the crisis later. It's a poor compromise, but it's been decided, and the state has made a promise.

Q: What did you think of the slogan "Making Estonia one of Europe's five richest states in 15 years"?

A: I didn't think anything of it.

Q: When this slogan came out, I did a little research online, whether this goal was even statistically possible, and it seemed to me that it wasn't.

A: Theoretically it was actually possible. Yes, there was some fudging involved. For example, when we discussed it, there was the question of whether we should include Norway and Switzerland - they're part of Europe, but not the European Union. But I did not support it, as it depends on quite a lot of external factors that we cannot influence.

Also, politics and campaigning is often quite removed from actual people and reality. I remember walking in the city and seeing Hanno Pevkur on a poster, promising "A better salary for everyone!". I thought to myself, look at that, a young politician and such a populist statement! Then I got to the defense ministry building, and saw the same poster with my face on it.

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