Estonian Coalition Party to Block Prime Minister’s Tax Proposal

Estonia’s junior coalition party, Isamaa ja Res Publica Liit, plans to block proposals by Prime Minister Andrus Ansip’s Reform Party to raise taxes or scrap tax exemptions, showing growing splits in the minority Cabinet.

Estonia needs to "speedily" cut its tax burden, which has become the main obstacle to raising the Baltic country’s competitiveness and creating new jobs, Isamaa Chairman and former Prime Minister Mart Laar said at a party convention yesterday, according to an e-mail from his office.

Ansip’s two-party coalition, which commands 50 seats in the 101-member parliament, has been cutting spending at the expense of domestic demand to fulfill its main goal of euro adoption next year.

The government expects the currency switch to spur new investments by eliminating currency risks for companies, helping cut a record-high unemployment rate of 14.6 percent. Even if Estonia joins the euro next year, it won’t solve the economy’s fundamental problem: that its competitiveness has been strangled by an overly strong real exchange rate," Neil Shearing, a London-based senior emerging-markets economist at Capital Economics Ltd.,

Bloomberg questions. The government plans to reduce tax exemptions, according to the convergence program approved by the Cabinet last week and published on Finance Ministry’s Web site. It will continue raising taxes on alcohol and tobacco, it said.

Effective Exchange Rate The real effective exchange rate of the kroon, a measure of competitiveness, probably fell about 5 percentage points last year and will decline the same amount in 2010, the Estonian Employers’ Confederation said.

That compares with a 59.5 percent increase since 2000 and an average 24.5 percent increase in the same period for the EU, according to Eurostat methodology. Isamaa’s Laar cited the World Bank’s Doing Business 2010 survey, published in September, which showed Estonia’s total tax rate was higher than that of its neighbors.

Estonia’s rate of 49.1 percent compared with Latvia’s 33 percent, Lithuania’s 42.7 percent, Finland’s 47.7 percent and Russia’s 48.3 percent, according to World Bank’s Web site. Finance Minister Jurgen Ligi of the Reform Party told Aeripaeev newspaper yesterday that the comparison was flawed as it didn’t take into account Estonia’s social insurance.

Laar’s plans contradict Estonia’s euro aspirations as lowering the tax burden isn’t possible with the budget remaining in deficit, Ligi was cited as saying. Isamaa will "in no case" accept the plan to abolish tax breaks on mortgage interest payments, Laar said yesterday in his speech. The party also plans to push through a draft law in parliament that would reduce mortgage borrowers’ liability to protect them from declines in property values, Laar said.

Source http://businessweek.com/news/2010-02-01/estonian-coalition-p~.html

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