pondelok, mája 19, 2008

What has Estonia in common with the USA?

Estonia was considered by many as an example of low tax, entrepreneur-friendly economy. And it is still. No tax burden on invested returns, low company income tax and decreasing individual income tax (18% till 2011). These conditions have for a long time made a business paradise in this country with GDP growth at two-digit numbers.

But economics wheels are turning all the time and after mountain-climbing downhill comes. Moreover, estonian downhill is not steady. They are falling downward. Although numbers forecasted by government said there will be lower rate growth than in previous years, practically no GDP growth (0,4%) hadn´t expected any expert.

Photo by Flickr

One of the country’s top businessmen Jüri Käo says that he is surprised how bad the government is in economic forecasting and the best can do is to take its economic analysis and burn it. As a warning for other countries which are now floating on the optimistic tide (for example Slovakia) sound words of other businessman: „Estonia is not a rich country, but our politicians forgot this fact when times where good. I am very surprised how Estonians managed to be so optimistic for so long.”

State budget incomes have decreased rapidly due to economy slowing down. Of course, politicians are now looking for a typical solution. Raise taxes. Estonian finance minister Ivari Padar said the country can´t be dependent only on lowering cost of public sector to attain balanced budget. He suggests tax on luxury cars or tax activities increasing climate pollution. Well done bureaucratic homework. I would bet the final proposal will contain two or three more taxes.

According to swedish economist Stefan Carlsson estonian economy (together with Latvia) is already in a recession. Only strong microeconomic fundamentals should save both countries from longer downturn, as now happens in the USA. By the way, guess what have these regions common? Yes, for example falling property prices. And what is the reason of this situation? Sure, monetary policy of the central banks.

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