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Supplementary budget includes lower excise duties and a temporary suspension of funded pension payments

13. April 2020 - 14:26

The state supplementary budget presented to the parliament includes measures easing the payment of taxes by companies, lower excise duties as well as lowering the value added tax payable on digital publications. Other measures will introduce a higher rate of tax deduction on forest sales revenue and temporarily suspend the government's payments to the funded second pillar pension scheme.

“As the Minister of Finance, I have presented the government with measures that help both businesses and the people, and I am glad that the parties to the government subscribe to my proposals,” Minister of Finance Martin Helme said. “The crisis at hand is unprecedented when it comes to its extent and impact in Estonia, and the government is ready to apply comprehensive measures to preserve the current income of the people, ensure the survival of businesses through the crisis and eventually, recover from this difficult economic position.”

Temporary suspension of second pillar pension scheme payments

The temporary suspension of contributions by the government to the funded second pillar pension scheme will save the state budget €142 million in 2020. The state will be able to use these funds to support the economy throughout the crisis. 

Starting from 1 May 2020 until 31 August 2021, the state will suspend its contributions payments made out of social tax (4 per cent of gross remuneration) to the accounts of the funded second pension pillar. Exception will be made to persons born from 1942 to 1960, who will continue making regular payments until the end of November 2020. 

In October 2020, everyone who has joined the second pillar of the pension system can decide whether to continue contributing two per cent of their remuneration to the second pillar or not. Those choosing to discontinue their contribution must submit an application in October 2020. After that, payments will be halted from December 2020 until 31 August 2021. The same choice applies to those born in 1942–1960.

For those who continue making the payments in this period, the government will contribute an amount equal to six percent of their gross remuneration into their second pillar accounts from the year 2023. 

Tax deduction on forest revenue

Both sole proprietors and non-entrepreneur natural persons will be able to claim tax deduction on revenue earned from selling timber or cutting right, for up to €5,000 a year. The tax deduction on forest revenue will not have an impact on the state budget in 2020.

Loss of revenue due to the crisis may result in the desire to sell forest land, and the measures to be applied by the government seek to relieve the pressure to sell. However, forest management allows natural persons the opportunity to earn additional income to alleviate the effect of the economic downturn, and should therefore be promoted.

Value added tax on electronic publications

The value added tax rate on electronic publications will be reduced to 9 per cent so that the tax rate will equal that of print publications. The value added tax rate on audiobooks on physical carriers will also be reduced. This will cost the budget will be €0.8 million.

Measures for the minimum social tax rate

The state will transfer the amount of the advance payment of social tax payable by sole proprietors in the first quarter to their prepayment accounts at the Tax and Customs Board. If a sole proprietor has already made the advance payment, they can use this money to cover any tax liability, either immediately or in the future.

To ease the tax burden of employers, the minimum social tax requirement will be suspended for three months. Despite the suspension of the minimum requirement, the validity of the health insurance subject to social tax payments will not be suspended for members of management board, providers of services under a contract under the law of obligations, and owners of a business account. This will cost the state budget €3.3 million.

Tax debt relief for entrepreneurs 

To assist in coping with economic difficulties, the Tax and Customs Board will not claim interest on tax debts in March and April. Furthermore, the interest rate payable on tax debts will be reduced from to 0.03 per cent from 0.06 per cent now and the tax administrator will have the right to reduce the interest rate to zero instead of the current 50 per cent when rescheduling tax debts.

Lowering of excise duties

To mitigate transportation and domestic expenses, the government will lower the excise duty rates on several types of fuels, and electric power, for two years, that is, from 1 May this year until 30 April 2022. The lowering of the rates will reduce the government's revenue by €76 million.

The excise duty rate on diesel fuel will be lowered from the current 493 euros to 372 euros per 1,000 litres. This rate equals the current rate in Lithuania. The change is forecasted to lower the price of diesel fuel by 14.5 euro cents per litre for consumers.

As a result, the retail price of diesel fuel will be more competitive compared to Latvia and Lithuania and transportation companies are expected to shift some of their refuelling back to Estonian petrol stations. Indirectly, diesel fuel is an important production input in the price of various goods and services.

The excise duty rate on diesel fuel is linked to the excise duties on various other fuels, so as a result, the excise duty rates on light fuel oil, and heavy fuel oil and shale oil which are similar to diesel, will also be reduced.

The excise duty rate on special-purpose diesel fuel used in agriculture will be lowered to 100 euros from 133 euros per 1,000 litres, continuing to make up close to 27 per cent of the diesel fuel excise duty rate subject to the standard rate of taxation. The lowering of the excise duty is expected to reduce the price of diesel fuel by 0.04 euros per litre, thereby increasing the competitiveness of the agricultural sector.

The excise duty rate on natural gas will be lowered to 40 euros from 79.14 euros per 1,000 cubic metres, that is, to the level of the year 2017. This is forecasted to make natural gas 7.1 per cent cheaper for consumers. The excise duty rates on pressurised and liquefied natural gas used as engine fuel will be cut to the same level. 

The rate of the excise duty on electricity will be lowered to 1 euro from 4.47 euros per megawatt-hour, or the EU minimum rate. For consumers, this will mean a 3.1 per cent reduction in the price of electricity. 

Public finances

According to the updated economic forecast by the Ministry of Finance, this the gross domestic product (GDP) of Estonia will contract by 8 per cent. The forecast takes into account the government’s restrictions on movement, and the current state of the economy. As the government's measures for relieving the crisis have not been enforced as a law yet, these have not been taken into account in the forecast. Therefore, the measures are expected to help alleviate the crisis and limit the extent of the recession.

General government nominal budget deficit this year, taking into account the government’s measures to support the economy, will be €2.62 billion.

The negative impact of the crisis mitigation measures approved by the government on the general government nominal budget position will be €1.15 billion, or 4.4 per cent of Estonia’s GDP in 2020. This will result in a nominal deficit of 10.1% of GDP.  Taking the crisis relief measures into account, general government structural budget deficit will be 5.5% of GDP.

The economic downturn will result in a significant decrease in tax revenue, impacting all levels of the government sector.

The State Treasury’s negative cash flows with the measures and the reserves will amount to €3.78 billion. General government debt will amount to  22 per cent of GDP. 

Taking the crisis relief measures into account, state budget revenues will be approximately €10.2 billion and will decrease by €1.63 billion compared to the budget for the current year. In the approved measures, state budget revenues are primarily impacted by cuts in the excise duty rates for diesel, gas and electricity, the reduction in the interest rates in tax debt rescheduling, and the temporary suspension of interest on taxes owed.

In the supplementary budget, state budget expenditure will increase by approximately €187 million. In addition to this, an additional €10 million in investments is planned. The impact of the measures on state budget expenditure will be €513 million. In addition to the measures, the position calculations include increasing the reserve fund of the government by €150 million and establishment of a targeted reserve fund of €80 million for covering the expenses related to COVID-19.