OECD stressed in a report published on Monday that Estonia as a small economy is open to volatility and should take steps to reduce the volatility, LETA/Public Broadcasting reports.
OECD said that Estonia could consider setting a ceiling to municipalities and tax spending to prevent a boom. OECD also proposed that an independent fiscal council could evaluate the suitability of the government's budget plans to the economic cycle. The financial knowledge of Estonians should be improved, for example the awareness of risks of borrowing at fluctuating interest rates.
Tax burden of the low income people could be reduced to facilitate creation of jobs, OECD estimated. Estonia's rebound from one of the world's deepest recessions will continue in 2013, with growth set for 3.6%, but the Baltic state needs to do more to fight unemployment, the OECD said Monday.
Visiting Tallinn to launch a report on the Estonian economy, Angel Gurria, head of the Organisation for Economic Cooperation and Development, said its forecast for growth this year tallied with the government's 2.2%, writes LETA/AFP. But he underlined that the OECD's outlook for 2013 outpaced Tallinn's predicted 3.0%. After the sharp end of a boom fueled by credit and wage hikes, Estonia's economy contracted by 3.7% in 2008, and then by a jaw-dropping 14.3% in 2009.
But it returned to growth in 2010, with output expanding by 2.3%, and went on to post an increase of 7.6% in 2011. "More effective supervision of financial markets would help Estonia ward against excessive credit cycles driven by foreign-financed lending," the report said.
"Cross-border co-operation of financial sector regulation needs to be further strengthened, particularly as Estonia is so integrated into the Nordic regional banking market," it added.
Estonia which had a reputation for fiscal prudence even before the slump, brought in biting austerity measures during the crisis. Estonia won praise from observers who back austerity as a crisis-cure. The OECD, a 34-nation grouping of industrialised nations which Estonia joined in 2010, said it was crucial now to do more for those who were hardest hit.
Speaking at a joint press conference with Prime Minister Andrus Ansip, Gurria said Estonia should "improve the effectiveness of social protection, labour market and educational policies". He said it was crucial to "support the most vulnerable and tackle unemployment and skill mismatches, most of all among young unemployed that were hit hardest during crises". The centre-right premier was left red-faced after saying that the OECD had heaped praise on what Ansip called Estonia's "unemployment benefit system".
Gurria pointed out that Estonia in fact spends the OECD's lowest sum on unemployment benefit compared to its national average wage. Gurria also noted that Estonia spends 6.7% of its gross domestic product on healthcare, compared with an OECD average of 9.6%.
Estonian Prime Minister Andrus Ansip commented that OECD's recommendations include a lot of useful and all proposals deserve to be discussed. "Apparently we cannot lead the debate to whether the (big volatility) could have been curbed with Estonia's own means, or maybe the volatility is inevitable for a small state with open economy that uses a liberal economic model," he noted. "I do agree (with OECD) that we can prepare better for future fall cycles."
Ansip did not agree to all OECD proposals though. For example OECD again recommended Estonia real estate and car tax which Ansip said he doesn’t support. "But I am not ready to declare that we won't discuss these things," he said.