Structural Tax Measures Would Secure Euro For Estonia: IMF

by Ulrika Lomas, Tax-News.com, Brussels

13 January 2010

The International Monetary Fund (IMF) in its Article IV consultation with Estonia, commended the government for fiscal measures introduced to ensure that state debt remains below the Maastricht Criterion of 3% of gross domestic product (GDP) in 2010, laying the foundations for Estonia’s adoption of the euro in 2011.

The IMF reports that Estonia’s economy contracted sharply in 2009, shrinking by almost 15%, but existing buffers and a determined response by both the public and the private sectors, will help stave off a prolonged recession. Unemployment has reached around 16%, but the government expects conditions to improve, with growth resuming in 2010.

In its recommendations, the IMF noted that in order to secure euro adoption in 2011 and enhance fiscal sustainability, additional structural fiscal measures would be beneficial to Estonian finances. The fund’s report observed that while there is some room for further expenditure cuts, the government should focus the majority of measures on the revenue side, particularly broadening the tax base and eliminating poorly targeted exemptions. The report also recommended amending the corporate tax code to discourage excessive debt accumulation by companies.

“A strengthened medium-term fiscal framework would help reduce the budget’s procyclicality and achieve a structural balance by 2012,” the fund advocated.

On the whole, the IMF gave a positive review of Estonia’s fiscal position, noting that reserves accumulated in the boom years and policy decisions in 2008-2009 had helped the government keep the fiscal deficit in check and avoid financing problems. Going forward the IMF Executive Board noted that when Estonia joins the euro zone, further stability will be added to the Estonian economy, removing currency and liquidity risks.

Recommended