Econ­o­mists: Baltic tax sys­tems are go­ing in the same di­rec­tion

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Latvia and Es­to­nia will adopt mas­sive changes to their tax sys­tems next year. Lithua­nia also has plans for mul­ti­ple big changes. But look­ing at changes as a whole, all three coun­tries are headed in the right di­rec­tion: there are signs of pro­gres­sive­ness and author­i­ties are in search of new so­lu­tions for emerg­ing com­pa­nies and in­di­vid­ual work. Ex­cise tax rates for cer­tain prod­ucts are also on a rise, econ­o­mists say.

«Tax sys­tems are very sim­i­lar. Coun­tries are try­ing to adapt the best so­lu­tions from one another. All three coun­tries con­tinue hold­ing dis­cus­sions about tax pro­gres­sive­ness. Nev­er­the­less, none of the coun­tries are ready for a clearly pro­gres­sive tax sys­tem. At the same time, all coun­tries are look­ing for ways to im­prove eco­nomic growth by cre­at­ing a tax sys­tem that is sup­port­ive of busi­nesses. Hav­ing an ef­fi­cient and con­ve­nient tax sys­tem is one of the de­ci­sive factors that dic­tates a coun­try’s at­trac­tive­ness for in­vestors and its ad­van­tages over oth­ers,» says SEB Bank macroe­co­nomics ex­pert Dai­nis Gaspuitis.

This is why from a for­eign in­vestor’s per­spec­tive Baltic States are a rather ho­mo­ge­neous re­gion. Each coun­try’s in­dus­trial sec­tors have their own ad­van­tages, but eco­nomic chal­lenges are the same: age­ing of so­ci­ety, lack of labour force and pro­duc­tiv­ity chal­lenges, says Gaspuitis.

All three Baltic States fea­ture the topic of eco­nomic over­heat on their agenda. SEB Bank’s se­nior an­a­lyst in Lithua­nia Tadas Povi­lauskas com­ments: «For­mal in­dexes are not a sig­nal of over­heat­ing, but all three coun­tries do have some symp­toms, which means a risk zone is near. And once again in­fla­tion and rapid wage rise are no­ticed to­gether. Pri­vate con­sump­tion is on a rise in Latvia and Es­to­nia. Lending rates and real es­tate sec­tor, on the other hand, have yet to demon­strate any signs of anom­alies.»

Es­to­nia re­mains ahead of other Baltic States based on GDP in­dex at cur­rent prices. How­ever, Lithua­nia is ahead of Es­to­nia pur­chas­ing power par­ity-wise. «Es­to­nia’s GDP per capita is cur­rently 22% higher than Lithua­nia’s and 27% higher than Latvia’s. Con­sid­er­ing that Es­to­nia’s economy grows 2% every year, while Latvia’s and Lithua­nia’s economy grows 3%, it can be as­sumed that Lithua­nia will catch up to Es­to­nia in 2031 and Latvia – in 2038. But the re­al­ity is that growth rates of all Baltic States will be rather sim­i­lar,» says SEB Bank’s econ­o­mist in Es­to­nia Mihkel Nestor. Econ­o­mists note that Baltic States also face sim­i­lar chal­lenges in other fields, in­clud­ing the chal­lenge of in­tro­duc­ing an ed­u­ca­tion sys­tem re­form and man­ag­ing a de­clin­ing num­ber of stu­dents and teach­ers.

Econ­o­mists also agree that Baltic States should con­sider se­lec­tive ap­proach to im­ports of labour force, be­cause the lack of labour­ers may be­come a se­ri­ous fac­tor im­ped­ing eco­nomic growth in the fu­ture.

«All signs point to Es­to­nia reach­ing a wage level at which res­i­dents would con­sider stay­ing, not leav­ing to work abroad. But it is still im­por­tant to con­sider that em­i­gra­tion of Es­to­nian res­i­dents is lim­ited be­cause of close ties with Fin­land, where close ge­o­graph­i­cal prox­im­ity al­lows res­i­dents to work in Fin­land and live in Es­to­nia. On top of that, Fin­land’s eco­nomic stag­na­tion lim­its the num­ber of avail­able jobs,» ex­perts ex­plain.

It should be added that econ­o­mists also say that Es­to­nia has man­aged to es­tab­lish its rep­u­ta­tion as an IT leader by suc­cess­fully en­ter­ing the global arena with mul­ti­ple suc­cess sto­ries over the years. «An in-depth eco­nomic anal­y­sis shows that Latvia and Lithua­nia are not far be­hind Es­to­nia in terms of IT tech­nolo­gies. By at­tract­ing a global level com­pany to them, both coun­tries have the po­ten­tial to catch up to Es­to­nia in no time. Es­to­nia’s ex­pe­ri­ence also shows that it is pos­si­ble to se­cure a break­through by re­al­iz­ing state or­ders, which of­ten mo­bi­lize the in­dus­try and help es­tab­lish high stan­dards,» ex­perts say.


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