State finances

During the recent years Estonia's state budget has been in surplus – revenue has exceeded expenditure. Revenue and expenditure have been expected to be equal but for several reasons revenue has exceeded the predicted amount. Such advantageous developments owe primarily to effective tax collection and economic growth that has surpassed the expectations.

Taxes and other revenue of the state budget
The Estonian government gets the majority of its revenue from taxes (84% in 2004), additional revenue is accrued from state holdings in companies, provision of services, state fees and other less important sources. As the privatisation in Estonia has been completed, there is no significant revenue from sale of assets. In addition, significant sums of money have been allocated since 2004 from the European Union budget. As the privatisation in Estonia has been completed, there is no significant revenue from sale of assets.

Estonia's tax burden is often said to be low but this is the case in comparison with the Nordic countries. In comparison with the salaries, taxes relating to the workforce (personal income tax, social tax, unemployment insurance tax) are among the highest in Europe. The excise and value added tax revenue in relation to the volume of economy is very high by European standards.

The most important taxes for the state are social tax, value added tax, personal and corporate income tax and various excises. During the last few years very modest revenue has been generated by customs duties.

Value added tax
The regular value added tax rate in Estonia is 18%, in some cases lower (5%) or does not exist at all. In principle, value added tax in Estonia resembles that of the European Union – minimum rates are uniform with very few exceptions.

Excises
In Estonia, excises apply to tobacco, fuel and packaging. The majority of the excise rates already correspond to EU minimum rates, the only exceptions being tobacco (2007) and fuel (needs harmonising with higher EU norms established in 2004). Compared to Europe and especially to Scandinavia, Estonia has established several lower excises primarily due to the poverty of the population – a rise in excise rates always tends to increase the volume of the black market. As excises are determined as monetary value and not as percentages, the relative level of excise rates is higher for an Estonian citizen compared with other countries (except Finland).

Social Taxes
Estonia has established a social tax, which is divided into two – 20% goes to the social fund for the pensions of the present pensioners (16% in the case of those who opted for compulsory pension insurance) and 13% to health insurance to finance the Estonian health care system. Those sums cover both medical treatment expenses and health insurance benefits. Estonia has also established an unemployment insurance for which a person pays 1% of the salary and the employer pays 0.5%.

Personal income tax
Estonia has a uniform income tax rate of 24%. Deductions can be made of the taxable amount – first the basic exemption, then insurance premiums paid pursuant to a pension insurance contract, housing loan interest etc.

Corporate income tax
In Estonia the rate of the corporate income tax is 24%, but the tax is imposed solely on the amounts collected as profits by the owners (e.g. dividends). Thus the reinvested profits are not subject to income tax.

State Expenditure
The majority of the state expenditure is incurred in the social sphere – for health care, pensions and other benefits as well as for education. State expenditure is modest regarding the support of private companies; in general, subsidies have been paid to agriculture in the case of unusual environmental conditions. Companies have received state aid indirectly – through public procurement contracts. The state has invested primarily into road construction and environmental protection, sometimes through loans. The percentage of military expenditure is under 2% of the GDP which has been the requirement for the Estonian membership in the NATO.

Local Governments
There are 241 local governments, including 39 towns, in Estonia and the majority of them are small and poor. Budgetary revenue of the local governments consists of a percentage of personal income tax (more than a half), land tax, tax on natural resources, some local taxes and, to a great extent, allowances from the state budget. The state allocates funds to the local governments for the performance of some state functions (e.g. for schools of general education, road maintenance, social welfare).

In Estonia, the financial state of the local governments is significantly worse than the state as a whole – on the one hand, small local governments lack major income, especially when the local population is aged and there are no jobs. On the other hand the expenses are quite big even in small local governments. Often there is no money left after the basic needs have been met and thus numerous local governments have taken on loans to renovate heating systems or mend roads. Therefore some local governments have found themselves on the verge of bankruptcy.

Budgetary balance and debts
On the whole, the budgets have nevertheless been in surplus during the recent years. As local governments' borrowing is limited and the central government has not been very active in taking loans, Estonia's debt burden is very low (5% of the GDP), and most of the debts are for a long term.

For hard times the state has accumulated the budget surplus and revenue obtained from privatisation into a special Stabilisation Reserve which can be used in specific cases by a resolution of the Riigikogu and for carrying out important long-term reforms (e.g. pension reform). The volume of the fund has increased to over 5 billion kroons which is more than the loans incurred by the Estonian government sector. and loan guarantees (600 million kroons) together. Thus Estonia is actually a provider of loans to other countries.

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