Economists: Baltic tax systems are going in the same direction
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.