OECD Economic Surveys: Estonia 2011

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The 2011 edition of OECD's periodic economic survey of Estonia's economy.  This edition includes chapters covering emerging from the recessions, fiscal policy, public sector spending efficiency, and making the most of globalisation. It finds that Estonia continues to show a remarkable determination in policy making.  It has established business-friendly regulation, avoided fiscal deterioration during the crisis and made it into the euro area despite being hit by an accumulation of external shocks.  Nevertheless, it has not fully reaped the benefits of globalisation.

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Fiscal policy: Avoiding pro-cyclicality and safeguarding sustainability

Public finances came under severe strain during the economic crisis, but the remarkable fiscal consolidation implemented during 2009 averted a confidence crisis and paved the country’s way into the euro area. The large-scale fiscal adjustment of about 9% of GDP included significant structural measures, but also sizeable one-off and temporary measures, including the diversion of state contributions to the mandatory funded second pension pillar to the general government budget. Fiscal policy is now confronted with three overlapping challenges: establishing a new balance between revenues and expenditure to ensure a durable improvement in the underlying fiscal position; protecting fiscal balances in the upswing; and preventing an erosion of contributions to the second pension pillar. The last is particularly important for preserving long-term fiscal sustainability. To address these challenges, fiscal rules and institutions need to be strengthened. The tax system can be enhanced to support fiscal consolidation and improve efficiency, while preserving the simplicity and transparency of the Estonian tax system. There is scope to raise the share of the least distorting property and environmental taxes. The efficiency of the VAT system was weakened during the recession. Strengthening VAT administration, reconsidering exemptions and possibly increasing the standard VAT rate could be used to compensate for reductions in more distorting labour taxes.

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