Economists: Tax systems of the Baltic countries are heading in the same direction
In Latvia and Estonia sizeable changes in tax system will enter into force next year and in Lithuania a number of adjustments will come into effect. However, all of these changes are heading in the same direction.
In Latvia and Estonia sizeable changes in tax system will enter into force next year and in Lithuania a number of adjustments will come into effect. However, all of these changes are heading in the same direction: introduction of clear signs of progressivity, new solutions for start-ups and individual workers, and a rate hike for excise goods.
“Tax systems are very similar, and countries are trying to copy the best solutions from each other. Discussions about a progressive tax system are present in all three countries. However, none of the Baltic countries are ready for a progressive tax regime in its full extent. Meanwhile, all three countries are looking for opportunities to maximize economic growth by shaping the tax system according to needs of companies. An effective and convenient tax system is one of the key elements for each country’s attractiveness for investors, and its competitiveness against the two rivals,” concludes Dainis Gašpuitis, macroeconomics expert at SEB Latvia.
Hence, from foreign investor's perspective, Baltic States is a rather homogeneous region. Each of the countries has its own advantages in select areas, but their economic challenges are very similar: ageing society, availability of workforce and productivity.
In addition, overheating of economy is currently in agenda of all three countries. Tadas Povilauskas, senior analyst at SEB Lithuania says: “Even though formal indicators are not signalling overheating yet, in all three countries familiar symptoms are beginning to re-emerge, which means we are approaching the risk area. Once again, we see a rapid increase of wages and inflation at the same time, and private consumption in Latvia and Estonia is growing. However, crediting and real estate market are not showing any anomalies yet.”
In terms of GDP per capita Estonia is still number one in Baltics. Yet, in terms of purchasing power parity, Lithuania has managed to overtake Estonia. “Estonian GDP per capita is 22% higher than in Lithuania and 27% higher than in Latvia. If we assume that Latvian and Lithuanian economies will grow at a 3% rate each year and Estonian GDP expands by 2%, Lithuania will outgrow Estonia in 2031 and Latvia will surpass it in 2038. However, in reality growth rates will be very similar in all three countries,” believes Mihkel Nestor, economist at SEB Estonia.
Baltic countries have similar challenges in other areas as well. For example, reforming their education systems by introducing modern content and aligning the declining number of children with the number of schools and teachers. Economists agree that all three Baltic countries have to think about selective import of workforce, because lack of people can soon become a limiting factor for the economic growth.
It appears that Estonia has reached a salary level (approximately 1000 EUR after taxes) at which people are more inclined to stay, instead of leaving for other countries to earn larger wages. However, emigration In Estonia has been hindered also by its close ties with Finland, where the geographic proximity has allowed people to work in Finland while living in Estonia. Moreover, Finland's economic stagnation during recent years limited the number of available vacancies.
Estonia has also managed to shape its reputation as an IT flagship, by exposing its success stories internationally. A deeper economic review reveals that Latvia and Lithuania are not far behind. If even one large, global technology company is attracted, either of them can catch Estonia. Estonian experience also shows that public orders can be a good way to kick-start the IT industry.
