Raul Eamets, chief economist at Bigbank, has said that economic forecasts published by the Bank of Estonia on Tuesday show that the government’s economic policy decisions will reduce the economic well-being of Estonians during the next few years.
“Tax changes mean price increases, higher unemployment, lower economic growth and a drop in real wages by 2026,” Eamets declared in a news release.
The release also said that the central bank’s projections have confirmed trends which forecasters have highlighted before.
“There’s a bit more optimism about economic development this year, but a bit more pessimism about next year,” says Eamets. “The central bank is forecasting a 0.4% decline in economic growth for this year, while the Finance Ministry predicts a drop by 1.0%. For next year, the central bank forecasts 1.9% economic growth, while the Finance Ministry’s prediction is 2.1%.”
Eamets also pointed to significant variations in inflation forecasts – the ministry predicts 5% next year, while the central bank forecasts 3.9%. He believes that the difference arises from assessments of the impact of Estonia’s new vehicle tax. Because it is a new tax, experts don’t really know how to evaluate its impact, the economist added.
“It is also true that it is difficult to predict how tax changes will impact price increases overall, because it is most likely that prices will climb by more than the increase in VAT,” Eamets explains. “There is no simple formula no measure the extent to which this will happen or how much of the tax hike will be passed on to consumers via prices. The reason for this is straightforward: in addition to so-called mechanical price growth, the opportunity to adjust prices is always used when a legal window is opened so that it can be done.”
Eamets went on to say that although the central bank has insisted that there are limits to price rises in the retail sector, because of increasing purchases at foreign online stores, the fact is that not all goods, let alone services, can be bought online.
“The central bank estimates that taxes will account for almost half of our price increases this year and next,” the economic added.
Source: BNS
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