What did Estonians do wrong and what decisions should be avoided in Lithuania?
Lithuania surpasses Estonia in terms of real GDP per capita
In recent years, the nominal GDP per capita in Estonia is still higher than in Lithuania, but the (real) GDP per capita adjusted for purchasing power is higher in Lithuania. The main reason for this is that goods and services are cheaper in Lithuania than in Estonia, therefore, despite the fact that the GDP is lower, the purchasing power of Lithuanians is higher. Estonia’s real GDP has been falling even more for the last few years, and economists predict that similar trends will continue in the future – Estonia’s GDP will continue to shrink, while Lithuania’s will grow the fastest in the Baltic countries.
What mistakes did Estonia make?
There is almost no discussion about the main reasons for the decline of the Estonian economy – it is a changed tax system and increased basic taxes:
- in 2024 Estonia increased the VAT rate from 20 percent. up to 22 percent, from 2025 24% plan to raise it;
- from 2025 it is planned to raise the personal income tax (from 20% to 22%) and again from 2026. – up to 24 percent;
- 2024-2026 period, about 5 percent annually. excise duties on alcohol and tobacco products are also increased;
- in 2026 – in 2028 during the period it is planned to introduce 2 percent corporate income tax.
The increase in VAT had the greatest influence on the growth of inflation. Without it, inflation in Estonia would be somewhat higher than in other Baltic countries, but the difference would be much smaller. Most of the other tax changes haven’t come into effect yet, but the economy is driven by the expectations that operate within it, so just knowing what’s coming is what makes Estonia’s economy tick. The most painful is the expected introduction of the corporate profit tax, because so far in Estonia, corporate profits are not taxed if they are not paid out as dividends. This provision has often been considered an advantage of the Estonian tax system, giving it an edge around the world.
Lessons for Lithuania
The economy works in cycles. When the economy is growing, the government should save and accumulate reserves for the future, and when the economy is down, the government should use those reserves to promote the recovery of the same economy. Unfortunately, despite neither this economic theory nor the time-tested examples in practice, politicians are still very keen to raise taxes when the country is experiencing an economic recession and, as a result, tax revenues are falling. Estonia also makes this mistake.
It is interesting that Estonia has made tax mistakes in the past, but then it was able to recognize and correct them. For example, in 2017 After Estonia drastically increased alcohol excise taxes, businessmen rushed to set up shops on the Latvian-Estonian border (on the Latvian side), and the Estonian Parliament and Government, seeing how drastically the budget income from alcohol excise collection fell due to the price increase, admitted that they had gone too far and 40 percent. reduced the established excise duties.
Lithuania’s economy is currently growing, but its growth rates are not particularly high, so the worst thing that could be done is to completely suppress this growth. And this does not mean that there is no need to make any tax decisions in Lithuania. Tax reform is needed in Lithuania, but it should not be about increasing existing taxes, but about those taxes that all international organizations – OECD, IMF, EC – have been reminding us about for more than 20 years – these are environmental protection and property taxes.
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2024-09-27 00:01:10
