COMMISSION STAFF WORKING DOCUMENT Assessment of the 2013 national reform programme and stability programme for ESTONIA Accompanying the document Recommendation for a Council Recommendation on Estonia’s 2013 national reform programme and delivering a Council Opinion on Estonia's stability programme for 2012-2017
Date: 2013-05-29
Institutions: European Commission
Subjects: administrative reform, budgetary equilibrium, competitiveness, economic growth, economic statistics, indebtedness, innovation, labour market, public expenditure, trans-European network

EUROPEAN 
COMMISSION 

Brussels, 29.5.2013  
SWD(2013) 356 final 

COMMISSION STAFF WORKING DOCUMENT 

Assessment of the 2013 national reform programme and stability programme for 
ESTONIA 

Accompanying the document 

Recommendation for a Council Recommendation  

on Estonia’s 2013 national reform programme and delivering a Council Opinion on 
Estonia's stability programme for 2012-2017 

{COM(2013) 356 final} 

EN 

   EN 

 
 
 
 
  
 
CONTENTS 

Executive summary .................................................................................................................... 3 

1. 

2. 

2.1. 

2.2. 

3. 

3.1. 

3.2. 

3.3. 

3.4. 

3.5. 

4. 

5. 

Introduction .................................................................................................................. 5 

Economic developments and challenges...................................................................... 6 

Recent economic developments and outlook............................................................... 6 

Challenges .................................................................................................................... 7 

Assessment of policy agenda ....................................................................................... 9 

Fiscal policy and taxation............................................................................................. 9 

Financial sector .......................................................................................................... 13 

Labour market, education and social policies ............................................................ 14 

Structural measures promoting growth and competitiveness..................................... 18 

Modernisation of public administration ..................................................................... 22 

Overview table ........................................................................................................... 24 

Annex ......................................................................................................................... 28 

2 

 
 
 
 
EXECUTIVE SUMMARY 

Economic Outlook 

After a strong rebound in 2011, Estonia’s GDP growth moderated to 3.2% in 2012 and 
is expected to continue growing above the EU average at 3.0 % in 2013 and 4% in 2014, 
according  to  the  Commission's  spring  forecast.  The  unemployment  rate  continued  to  fall 
substantially to 10.2% in 2012 and is expected to fall to 9% by 2014. Export-led growth may 
resume  soon,  supported  by  the  relatively  strong  resilience  of  the  Nordic  countries  to  the 
sovereign debt crisis. Inflation continued its slow decrease to 4.2% in 2012, and is forecast to 
fall to 3.6% by 2013 and 3.1% by 2014, though wage inflation might soon reappear. 

The budget is expected to remain in deficit at -0.3 % of GDP in 2013 before reverting to 
a  headline  surplus  of  0.2  %  of  GDP  in  2014.  Estonia's  medium-term  objective  is  for  a 
structural budget surplus (minus one-offs and short-term measures), though, according to the 
Commission  spring  2013  forecast,  it  is  expected  to  slightly  deviate  from  this  objective  in 
2013,  with  an  expected  structural  deficit  of  -0.2%  of  GDP.  Government  debt,  which  is  the 
lowest in the EU, is expected to decrease from 10.1% in 2012 (with a slight increase to 10.2% 
in 2013) to 9.6% in 2014 due to budget surpluses. 

Key Issues 

Reflecting  the  economy’s  catching-up  potential,  real  GDP  is  expected  to  continue 
growing above the EU average, while public finances remain among the strongest in the 
EU.  However,  the  level  of  potential  growth  in  Estonia  in  the  years  ahead  is  likely  to  stay 
below its pre-crisis rate. 

Estonia  has  made  some  progress  on  addressing  the  2012  CSRs,  notably  by  limiting  its 
budget  deficit  to  0.3  %  of  GDP,  further  reducing  unemployment,  launching  education 
reforms  and 
these  commendable 
achievements,  reform  efforts  are  still  ongoing,  in  particular  in  certain  areas  of  education 
(tertiary,  vocational  education  and  training,  and  upper  secondary),  disability  and  incapacity 
for work schemes and the energy sector. 

in  energy  efficiency.  Notwithstanding 

investing 

Some  reform  efforts  appear  insufficient,  in  particular  given  the  scale  of  the  challenges 
on the labour market, the fight against poverty and in the education and energy sectors. 
Structural  unemployment  is  still  high  and  competitiveness  will  soon  be  hindered  by  skills 
mismatches, a lack of qualified professionals (both blue and white collar), weaknesses in local 
public service provision and relatively weak innovation: 

•  Public finances: The government still needs to fully comply with the new rules in the 
Treaty on Stability, Coordination and Governance. The structural budget balance rule 
as  set  out  in  the  Treaty,  which  is  expected  to  be  introduced  this  year,  should  be 
complemented by more binding expenditure targets. Estonia could improve efficiency 
by better targeting spending on social security. 

3 

 
 
•  Labour  market:  Bringing  more  people  –  particularly  skilled  people,  the  long-term 
unemployed  and  disabled  people  –  into  the  labour  force  is  Estonia's  most  pressing 
challenge.  The  shortage  of  skilled  labour  could  soon  lead  to  higher  costs  for 
companies and affect investment and growth potential. In this light, a better targeted 
education  and  adult  training  system  is  necessary  to  ensure  skills  matching  labour 
market needs. Fine-tuning of benefit systems and workplace accessibility could help to 
provide for incentives to work. A persistent shortage of childcare services hinders an 
early return of parents, especially women, to the labour market. 

•  Innovation:  Estonia's  competitiveness  could  be  hampered  by  weak  public-private 
cooperation,  overly  broad  priorities  for  research  and  innovation  and  a  mismatch 
between  the  technical  skills  taught  at  universities  and  the  needs  of  the  market. 
Prioritisation and internationalisation of research is a crucial challenge given the small 
size of the country. 

•  Energy/Transport:  Estonia’s  energy  and  resource  intensity  remains  amongst  the 
highest in the EU, while the importance of oil shale as an energy source emphasises 
the  need  to  develop  more  efficient  and  less-polluting  energy  sources.  The  transport 
sector  does  not  appear  environmentally  friendly  enough,  with  an  environmental  tax 
system  providing  too  little  incentives  to  change  environmentally  harmful  consumer 
limited  rail 
patterns, 
infrastructure.  Relative  isolation  due  to  insufficient  cross-border  connections  limits 
Estonia’s security, diversity of supply and price competition. 

insufficiently  attractive  public 

transport  networks  and 

•  Public  administration:  Regional  differences  and  inefficiencies  among  the  local 
governments  are  having  an  adverse  impact  on  the  provision  of  social  services, 
especially  childcare,  family  support  services,  long-term  care,  primary  healthcare, 
education and public transport. In addition, given the significant impact of EU funds 
on the economy, it is important to ensure the strategic programming of funds for 2014-
20 in order to boost growth and employment. 

•  Financial  sector:  A  potential  recurrence  of  excessive  credit  growth  remains  a 
medium-term concern as private-sector indebtedness is relatively high (around 130% 
of  GDP  in  2011  for  both  households  and  businesses)  and  is  likely  to  increase  again 
soon.  Skills  shortages  in  the  labour  market  may  soon  drive  up  wages  and  feed  into 
this.  This  risk  is  compounded  by  the  partial  tax  deductibility  of  mortgage  interest 
payments and loan guarantees that encourage borrowing.  

4 

 
 
 
1.  INTRODUCTION 

In  May  2012,  the  Commission  proposed  a  set  of  country-specific  recommendations  (CSRs) 
for  economic  and  structural  reform  policies  for  Estonia.  On 
these 
recommendations,  the  Council  of  the  European  Union  adopted  five  CSRs  in  the  form  of  a 
Council  Recommendation  in  July  2012.  These  CSRs  concerned  public  finances,  the  fiscal 
framework,  the  labour  market,  education  and  social  policies,  energy  and  transport,  research 
and  innovation  and  modernisation  of  public  administration.  This  Staff  Working  Document 
(SWD) assesses the state of implementation of these recommendations in Estonia. 

the  basis  of 

The  SWD  assesses  policy  measures  in  light  of  the  findings  of  the  Commission's  Annual 
Growth Survey 2013 (AGS)1 and the second annual Alert Mechanism Report (AMR)2, which 
were  published  in  November  2012.  The  AGS  sets  out  the  Commission's  proposals  for 
building the necessary common understanding about the priorities for action at national and 
EU  level  in  2013.  It  identifies  five  priorities  to  guide  Member  States  to  renewed  growth: 
pursuing differentiated, growth-friendly fiscal consolidation; restoring normal lending to the 
economy;  promoting  growth  and  competitiveness  for  today  and  tomorrow;  tackling 
unemployment  and  the  social  consequences  of  the  crisis;  and  modernising  public 
administration.  The  AMR  serves  as  an  initial  screening  device  to  determine  whether 
macroeconomic  imbalances  exist  or  risk  emerging  in  Member  States.  The  AMR  found 
positive signs that macroeconomic imbalances in Europe are being corrected. To ensure that a 
complete  and  sustainable  rebalancing  is  achieved,  14  Member  States  were  selected  for  a 
review of developments in the accumulation and unwinding of imbalances.3 Estonia was not 
among them. 

Against  the  background  of  the  2012  Council  Recommendation,  the  AGS  and  the  AMR, 
Estonia presented updates of its national reform programme (NRP) and stability programme 
in April 2013. These programmes provide detailed information on progress made since July 
2012  and  on  the  future  plans  of  the  government.  The  information  contained  in  these 
programmes provides the basis for the assessment made in this Staff Working Document. 

The  programmes  submitted  went  through  an  inclusive  consultation  process  involving  the 
national  parliament  and  the  main  socio-economic  partners,  including  through  a  web-based 
open consultation process. 

Estonia’s  stability  programme  was  prepared  in parallel with the national  reform programme 
and  the  multi-annual  state  budget  strategy.  The  stability  programme  is  fully  consistent  with 
the  code  of  conduct  for  the  Stability  and  Growth  Pact.  The  national  reform  programme  is 
consistent  with  the  guidance  provided  by  the  Commission’s  Secretariat-General.  The 
objectives and measures of the strategy are in conformity with the government’s Action Plan 
and the state budget strategy. 

Overall assessment 

The  analysis  in  this  SWD  leads  to  the  conclusion  that  Estonia  has  made  some  progress  on 
measures  taken  to  address  the  CSRs  in  the  Council  Recommendation.  On  the  positive  side, 
the country has managed to limit its budget deficit to 0.3% of GDP and to further reduce its 

1    COM(2012) 750 final. 
2    COM(2012) 751 final. 
3    A total of 13 in-depth reviews were published on 10 April 2013. While selected for an in-depth review in the 
AMR,  Cyprus  was  ultimately  not  reviewed  under  the  Macroeconomic  Imbalance  Procedure  in  view  of  the 
advanced preparations for a financial assistance programme. 

5 

 
 
                                                 
unemployment level, thanks in particular to better-than-expected economic growth, to engage 
in education reforms and to invest significantly in energy-efficiency policies. Notwithstanding 
these  commendable  achievements,  reform  efforts  appear  insufficient,  in  particular  given  the 
scale of the challenges on the labour market, in the fight against poverty, in certain areas of 
education  and  in  the  energy  sector.  Structural  unemployment  is  still  high,  and,  given  the 
subdued  global  outlook,  may  broadly  stagnate  in  2013.  Competitiveness  might  soon  be 
hindered by skills mismatches, a lack of qualified professionals (both blue and white collar) 
and  relatively  weak  innovation:  Estonia  needs  to  move  towards  more  technology-intensive 
sources of growth. Also, in the light of the exceptionally high energy intensity of the Estonian 
economy,  further  efforts  will  be  needed  to  reduce  the  energy  bill  and  improve  the  carbon 
performance  of  the  economy.  Lastly,  small  legislative  steps  have  been  made  to  foster 
municipality  mergers,  while  an  action  plan  to  improve  local  public  administration  is  being 
prepared. Therefore, in these areas, but also in fiscal frameworks, the challenges identified in 
June 2012 and reiterated in the AGS still apply. 

The policy plans submitted by Estonia are generally relevant and consistent with most of the 
challenges identified in last year's Staff Working Document. They thereby confirm Estonia's 
commitment to address shortcomings in the areas of the labour market, education and energy. 
Beyond  measures  already  scheduled  in  the  2012  Action  Plan  for  2011-15,  the  new  Action 
Plan proposes a number of new measures, in particular in the area of promoting healthy life 
expectancy and behaviour. However, a number of topics appear insufficiently targeted or less 
specifically  targeted  than  previously:  business  angels,  professional  disease,  regional 
unemployment, energy efficiency in transport and local administration reform. 

2.  ECONOMIC DEVELOPMENTS AND CHALLENGES 

2.1. 

Recent economic developments and outlook 

Recent economic developments 

Estonia's GDP growth appears broadly balanced. After a strong rebound in 2011, Estonia's 
real GDP growth moderated to 3.2% in 2012, supported by robust domestic demand but held 
back by slower export growth. A favourable labour market situation and strong fixed public 
investment  sustained  domestic  demand.  After  large  surpluses  over  the  period  2009-11,  the 
external  balance  reverted  to  negative  values,  as  Estonia's  trade  surplus  deteriorated  and 
revenue outflows from foreign investment strengthened. 

Inflation  continues  its  slow  decrease,  but  wage  inflation  might  soon  reappear.  Average 
annual HICP (harmonised index of consumer prices) inflation receded from 5.1% in 2011 to 
4.2%  in  2012,  pulled  downwards  by  declining  international  food  and  oil  prices.  As  wage 
growth  remains  broadly  consistent  with  productivity  growth  and  core  inflation  remains 
relatively  low,  there  is  no  short-term  risk  of  significant  wage  inflation.  However,  with  the 
unemployment rate already close to the natural rate of unemployment, this might become an 
issue in the coming quarters. Indeed, unemployment continued to decline rapidly to 10.2% in 
2012 as output growth remained strong. Nevertheless, long-term unemployment remains high, 
in  particular  among  the  low-skilled,  and  with  large  regional  differences.  The  labour  force 
participation  ratio  remains  historically  high,  but  inactivity  for  health  reasons  is  increasing. 
Indeed, in the EU context, Estonia shows relatively poor health outcomes, especially for male 
(healthy) life expectancy at birth and the prevalence of chronic conditions.4 

4   Public priorities have been set in a 2009-20 plan designed to address concerns about health outcomes. 

6 

 
 
                                                 
Deleveraging  is  now  reversing,  with  private  sector  indebtedness  likely  to  be  growing 
again  soon  and  the  indebtedness  of  enterprises  already  increasing.  At  around  130%  of 
GDP  in  2011  (consolidated  figures),  the  stock  of  private  debt  (households  and  enterprises) 
still reflected the rapid accumulation in the boom years. In addition, higher interest margins 
and  prudent  supervisory  policies  continue  helping  to  maintain  the  stability  of  the  banking 
sector. 

Public-sector finances remain among the strongest in the EU, with the lowest debt level, 
at around 10.1% of GDP in 2012, and a budget deficit limited to 0.3% of GDP, far better 
than the 2.6% of GDP planned in the stability programme update of spring 2012 and possibly 
partly reflecting the volatility of Estonia's economy. 

Economic outlook 

Reflecting  the  economy’s  catching-up  potential,  real  GDP  is  expected  to  continue 
growing  above  the  EU  average  over  the  long  term  thanks  to  continuing  capital 
accumulation and productivity gains. Economic growth is projected at 3.0% in 2013, with a 
progressive  recovery  of  Estonia's  main  trading  partners  from  mid-2013.  In  2014  growth 
should continue to converge towards its long-term average of 4%, driven by exports, but also 
by  domestic  demand  mostly  through  stronger  private  investment.  Export-led  growth  may 
resume  soon,  supported  by  Russia’s  relatively  good  economic  performance  and  by  the 
relatively strong resilience of the Nordic countries to the sovereign debt crisis. However, as 
domestic  demand  increases,  maintaining  external  balances  will  require  improvements  in 
competitiveness  to  foster  exports,  while  vigilance  will  still  be  needed  to  contain  risks  to 
macro-financial stability. The government balance is expected to remain negative at 0.3% of 
GDP  in  2013  before  reverting  to  a  nominal  surplus  of  0.2%  of  GDP  in  2014.  The  general 
government debt is expected to fall to 9.6% in 2014, owing to budgetary surpluses. 

Both the national reform programme and the stability programme share the same short-
term  economic  outlook,  but  neither  of  them  gives  any  figures  on  the  impact  of  the 
planned  structural  reforms  on  growth.  For  2013  the  outlook  is  broadly  in  line  with  the 
most recent Commission forecasts. For 2014 the Estonian authorities are more cautious and 
forecast real GDP growth of 3.6%. 

A number of factors combined could  pose  a  risk of inflationary pressures  re-emerging 
once domestic demand has fully recovered. Overall, the level of potential growth in Estonia 
in the years ahead is likely to stay below its pre-crisis rate, when rapid capital accumulation 
reflected EU accession and swift financial convergence. In addition, the population is ageing, 
with the working-age population declining. Post-crisis structural unemployment will also be 
higher,  weighing  on  potential  growth.  However,  steady  foreign  direct  investment  inflows 
should  still  mean  that  total  factor  productivity  will  make  a  sizeable  contribution  to  growth, 
while  continuing  structural  reforms  could  boost  potential  growth.  In  parallel,  investment  is 
likely to make a strong contribution to potential growth due to a number of factors, such as 
the  existence  of  a  business  and  policy  climate  that  favours  private  investment,  public 
infrastructure  investment  supported  by  EU  cohesion  and  structural  funds,  and  the  need  for 
further improvements to the housing stock, which should take place when real wage growth 
resumes. 

2.2. 

Challenges  

Estonia faces considerable challenges as regards the availability of a skilled labour and 
re-employment  of  the  long-term  unemployed  or  re-integration  of  the  disabled  into  the 
labour  market.  Overall,  the  main  policy  challenges  facing  the  country  have  not  changed 

7 

 
 
since the 2012 assessment exercise, although some adjustments are needed as the government 
progresses with its reform agenda. 

First,  the  government  still  needs  to  formalise  all  the  necessary  components  to  comply 
with the new rules in the Treaty on Stability, Coordination and Governance. In addition, 
the (structural)  budget balance rule, which is expected to be introduced this year, should be 
complemented by strengthening the binding nature of the multiannual expenditure targets. In 
parallel, given the need to preserve a sound fiscal position in view of increasing expenditure 
pressures,  the  efficiency  of  public  spending  could  be  improved,  in  particular  through  better 
targeting of public spending on social security. 

Second,  as  the  shrinking  of  the  labour  force is a major concern, bringing more people 
into  the  labour  force  is  the  most  prominent  challenge.  Limited  changes  to  the  benefit 
systems together with promoting accessibility to reasonably adjusted workplaces could foster 
labour  market  entries  and  prevent  disability-related  exits.  In  parallel,  long-term  and  youth 
unemployment  could  become  persistent  due  to  skills  mismatches  and  the  lack  of  jobs  in 
certain  regions,  entailing  a  higher  risk  of  poverty.  The  range  of  problems  faced  by  jobless 
households puts growing pressure on the provision of (and access to) quality social services, 
while  active  labour  market  policies  may  fall  short  of  what  is  needed  to  prevent  structural 
unemployment  from  weighing  on  labour  supply  and  from  pushing  up  wages  in  growing 
sectors.  Lastly,  a  persistent  shortage  of  childcare  services  and  generous  income  support  for 
stay-home  parents  discourage  an  early  return  of  parents,  especially  women,  to  the  labour 
market,  while  gender  pay  gap  and  segmentation  may  contribute  to  weaker  labour  market 
outcomes. 

Third,  shortages  of  qualified  labour  may  soon  contribute  to  exerting  upward  pressure 
on  wages,  leading  to  higher  costs  for  companies  and  affecting  investment  and  growth 
potential. This results from a high proportion of people without professional education from 
the  vocational  education  and  training  (VET)  system  or  from  higher  education,  a  low 
employment rate of the low-skilled and a still relatively low level of participation in lifelong 
learning,  in  particular  of  the  low-skilled  and  the  50-64  age  group.  In  this  light,  a  better 
targeted  education  and  adult  training  system  is  necessary  to  ensure  an  adequate  supply  of 
skilled human capital. 

Fourth,  productivity  growth,  and  thus  medium-  and  long-term  competitiveness,  is 
hampered  by  inefficiencies  in  research  and  innovation  (R&I).  Weak  public-private 
cooperation,  national  priorities  for  research  and  innovation  policy  that  are  too  broad, 
including a lack of focus on shared priorities between research and business innovation, and a 
relative mismatch between the technical skills produced by universities and the needs of the 
market  could  hamper  productivity  growth  and  thus  affect  the  country’s  medium-  and  long-
term  competitiveness.  Lastly,  prioritisation  and  internationalisation  of  the  R&I  system  is  a 
crucial challenge for Estonia, given the small size of the country. 

Fifth,  Estonia’s  energy  and  resource  intensity  remains  amongst  the  highest  in  the  EU, 
while  the  importance  of  oil  shale  as  an  energy  source  emphasises  the  need  to  develop 
more efficient and less polluting energy sources and adequately address the pressing waste 
issue  resulting  from  energy  production  from  oil  shale.  Also,  the  transport  sector  does  not 
appear  environmentally  friendly  enough,  with  insufficiently  attractive  public  transport 
networks  and  still  limited  rail  infrastructure  developments,  while  the  network  still  lacks 
intermodal  connections  for  passengers  and  freight.  Lastly,  relative  market  isolation  due  to 

8 

 
 
insufficient  cross-border  connections  limits  Estonia’s  security  and  diversity  of  supply  and, 
thereby, market competition. 

Sixth, regional differences and inefficiencies among the local governments are having an 
adverse impact on the provision of public services. This concerns in particular childcare, 
family  support  services,  long-term  care,  primary  healthcare,  education  and  public 
transport.  In  addition,  given  the  significant  impact  of  EU  funds,  it  is  important  to  create 
favourable  conditions  for  effective  and  sustainable  service  provision  to  ensure  the  strategic 
programming of funds for 2014-20 in order to deliver on the Europe 2020 priorities. 

Lastly,  a  potential  recurrence  of  excessive  credit  growth  remains  a  medium-term 
concern. Private-sector indebtedness relative to GDP remains relatively high and will likely 
be  increasing  again  soon.  Also,  in  the  present  context  of  reappearing  skills  shortages,  wage 
pressures  may  soon  resurface  and  could  feed  into  excessive  credit  growth  relatively  soon. 
This risk is compounded by partial tax deductibility of mortgage interest payments and loan 
guarantees  that  still  encourage  private  borrowing.  Furthermore,  property  taxation  is 
underdeveloped and the land tax has been virtually abolished as from January 2013. 

3.  ASSESSMENT OF POLICY AGENDA 

3.1. 

Fiscal policy and taxation 

Budgetary developments and debt dynamics 

The  main  goal  of  the  Estonian  budgetary  strategy,  as  expressed  in  the  2013  stability 
programme,  is  to  ensure  a  sustainable  fiscal  policy  that  supports  balanced  economic 
growth.  The  medium-term  objective  (MTO),  unchanged  compared  to  the  previous 
programme, is a structural surplus. The MTO more than adequately reflects the objectives of 
the  Pact.  According  to  the  programme,  the  MTO  was  achieved  as  of  2009.  Other  fiscal 
objectives  include  ensuring  sufficient  fiscal  buffers  and  reducing  the  tax  burden  to  the  pre-
crisis level by lowering labour taxes. During the budget year the government intends to avoid 
adopting positive supplementary budgets, using windfall revenue to accumulate reserves. 

Estonia  achieved  a  headline  budget  deficit  of  -0.3%  of  GDP  in  2012,  which  was 
considerably better than the deficit of -2.6% projected in the 2012 programme. This was 
primarily a result  of significantly stronger than expected economic and employment growth 
and  slower  than  expected  expenditure  growth.  In  addition,  the  outcome  was  positively 
affected  by  some  delays  in  the  implementation  of  investment  projects  financed  through 
revenue  from  the  sale  of  excess  greenhouse  gas  (GHG)  emission  certificates.  The  2013 
programme  forecasts  a  deficit  of  -0.5%  of  GDP  in  2013,  which  is  slightly  smaller  than 
projected in the 2012 stability programme. The improvement is a result of strong base effects 
from  2012  supported  by  solid  tax  revenue  growth,  which  has  been  partially  offset  by 
increased  expenditure  pressures,  a  1.2  percentage  point  (pp)  cut  in  the  unemployment 
insurance premium and delays in the implementation of one-off investments financed through 
GHG  sales  revenue.  Risks  to  the  fiscal  target  for  2013  seem  balanced  overall,  with  the 
authorities’  macroeconomic  projections  being  realistic.  Local  elections  in  October  2013  are 
not creating significant implementation risks as most municipalities are bound by the net debt 
ceiling. 

The programme targets a balanced budget for 2014. The improvement on 2013 primarily 
stems  from  a  better  macroeconomic  outlook.  That  said,  one-off  expenditure  related  to  the 
additional payments to the second-pillar pension system and the postponement of investment 
projects  financed  through  GHG  sales  revenue  add  pressures  to  the  budget  balance.  The 

9 

 
 
authorities intend to contain growth in government consumption expenditure, which is set to 
increase at a slower rate than nominal GDP over the whole programme period, in line with the 
Commission spring forecast. Compared with 2013, expenditure as a share of GDP is expected 
to  decline  in  all  areas  with  the  exception  of  subsidies  and  social  transfers  in  kind.  The 
projected  consolidation  is  also  supported  by  the  planned  revenue-increasing  discretionary 
measures (see Box 1). 

For 2015-17, the programme targets a steady improvement in the nominal balance through a 
gradual build-up of headline surpluses to 0.8% of GDP in 2017. Revenue as a share of GDP is 
set to decline by 5.4 pps of GDP between 2012 and 2016 as a result of the phasing-out of the 
EU structural funds, the reversal of temporary consolidation measures and the planned cut in 
the personal and corporate income tax rate in 2015. It is outpaced by a decline in expenditure. 
While  this  strategy  is  subject  to  risks,  linked  to  both  macroeconomic  developments  and 
implementation  of  the  strategy,  these  risks  can  be  assessed  as  broadly  neutral,  in  particular 
given the solid track record of the authorities in meeting the previous targets. 
After  achieving  the  MTO5  in  2012,  according  to  the  programme,  the  (recalculated) 
structural  balance  is  expected  to  temporarily  deviate  from  the  MTO  in  2013,  before 
improving  and  returning  to  surplus  of  0.3%  of  GDP  in  2014.6  In  2015  and  2016,  the 
programme targets a steady improvement in the (recalculated) structural balance, reaching a 
surplus of 0.8% of GDP in 2016. The improvement in the (recalculated) structural balance by 
0.7  %  of  GDP  corresponding  to  these  targets  complies  with  the  requirement  for  an  annual 
improvement of 0.5% of GDP in 2014 in accordance with the national projections. In parallel, 
according to the Commission spring 2013 forecast, the deviation from the MTO in 2013 is not 
significant, with a structural deficit of -0.2% of GDP, while the magnitude of improvement in 
the  structural  balance  in  2014  and  in  the  (recalculated)  structural  balance  correspond.  Both 
estimates show an improvement in the structural balance after 2013 and a return to the MTO 
from 2014 onwards. In addition, the estimates should be seen against the uncertainties linked 
to determining the cyclical position in real time for countries undergoing significant structural 
adjustments, the ambitious MTO set by the Estonian authorities and the relative closeness of 
the structural balance to the MTO. Based on the information provided in the programme, the 
growth  rate  of  government  expenditure,  net  of  discretionary  revenue  measures,  in  2014  is 
projected to exceed the lower rate of 0.85% under the expenditure benchmark and in 2015 the 
reference  medium-term  rate  of  potential  GDP  growth  of  2.11%.  This,  however,  is  not 
expected  to  undermine  the  achievement  of  the  MTO  in  2014  and  is  likely  to  maintain  it 
thereafter, reflecting the volatility of public investment and falling usage of EU funds after the 
end of the 2007-13 programming period. 

According to the programme, the general government debt, which is the lowest in the EU, is 
projected to increase marginally to 10.2% of GDP in 2013, before gradually declining to 8.3% 
in  2017.  This  profile  reflects  an  accumulation  of  financial  assets  due  to  nominal  surpluses 
after 2014. Medium-term debt projections (see Graph below Table V in annex) indicate that 
full  implementation  of  the  programme  would  lead  to  an  even  lower  debt-to-GDP  ratio  in 
2020. 

5   Cyclically adjusted balance net of one-off and temporary measures, recalculated by the Commission on the 
basis  of  the  information  provided  in  the  programme  using  the  commonly  agreed  methodology.  The 
Commission's spring forecast estimates have been used for the NAWRU estimates for Estonia. 

6   Compared with the (recalculated) structural balance, the programme forecasts a higher structural budgetary 
position and uninterrupted attainment of the MTO from 2009 onwards without deviation from the MTO in 
2013. The discrepancy is mainly due to a difference in assessment of the cyclical position of the economy 
between the common methodology and the approach taken in the programme. 

10 

 
 
                                                 
Box 1. Main measures 

Main budgetary measures 

  Revenue 

Expenditure 

2012 

•  Abolishing  reduced  excise  rates  for 
special-purpose diesel; net effect (0.11% 
of GDP) 

•  Lowering  the  ceiling  for  total  personal 
income tax deductibility from EUR 3 960 
to EUR 1 920 (0.03% of GDP, impact in 
2013) 

•  Increasing  tobacco  excise  duty  by  10% 

(0.05% of GDP) 

•  Increasing  alcohol  excise  duty  by  5% 

(0.04% of GDP) 

•  Reforming 

special  pension 

schemes 

(impact not specified) 

•  Increasing  the  number  of  state-financed 
education 
study  places 
institutions  as  part  of  higher  education 
reform (impact not specified) 

at  higher 

2013 

•  n.a. 

•  Lowering 

insurance 
unemployment 
contributions from 4.2% to 3% (-0.3% of 
GDP) 

•  Abolishing  the  land  tax  on  residential 
land for plots up to 1 500 m² in densely 
populated  areas  and  up  to  2  ha  in  rural 
areas (-0.1% of GDP) 

•  Increasing  tobacco  excise  duty  by  6% 

(0.04% of GDP) 

•  Increasing  alcohol  excise  duty  by  5% 

(0.05% of GDP) 

2014 

•  Increasing  tobacco  excise  duty  by  6% 

•  n.a. 

(0.03% of GDP) 

•  Increasing  alcohol  excise  duty  by  5% 

(0.07% of GDP) 

2015 

•  Lowering  the  personal  and  corporate 
income  tax  rate  from  21%  to  20% 
(impact not specified) 

•  n.a. 

•  n.a. 

2016 

•  n.a. 

  Note: The budgetary impact in the table is the impact reported in the programme, i.e. by the national 

authorities. A plus sign indicates that revenue/expenditure increases as a consequence of the 
measure. 

• 

Long-term sustainability 

Estonia  does  not  appear  to  face  short-term,  medium-term  or  long-term  sustainability 
challenges. In addition, government debt (10.1% of GDP in 2012) is significantly below the 
Treaty threshold of 60% of GDP. Estonia's very low level of government debt would increase 
to  13.7%  of  GDP  by  2030,  assuming  no  further  policy  changes  are  made.  The  long-term 
increase  in  age-related  expenditure  is  below  the  EU  average,  and  recent  reform  measures 
undertaken  in  the  field  of  pensions  have  further  reduced  sustainability  risks.  However,  as  a 

11 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
result, the projected decline in the benefit ratio could pose a risk to the adequacy of pension 
entitlements. 

Fiscal framework 

The  strength  of  the  current  fiscal  framework  lies  in  the  long-standing  commitment  to 
keeping  the  general  government  budget  in  balance.7  The  fiscal  framework  needs  to  be 
further  strengthened  to  comply  with  the  new  rules  set  in  the  Treaty  on  Stability, 
Coordination and Governance. Although the balanced-budget rule has not been formalised 
in  law,  all  Estonian  governments  have  adhered  to  it,  except  in  2008-09.  As  the  rule  was 
adapted  only  recently  to  take  account  of  cyclical  factors,  there  are  no  mechanisms  in  place 
that would limit expenditure growth when economic growth is above potential. The balanced-
budget rule is complemented by a debt rule applicable at the level of local government. There 
is a net debt ceiling of 60%8 of revenue from the main activities in the current fiscal year9 on 
borrowing  by  local  governments  and  dependent  units,  with  no  escape  clauses.  The 
government still needs to formalise the structural budget balance (or surplus) rule in the State 
Budget  Law  to  comply  with  the  new  rules  in  the  Treaty  on  Stability,  Coordination  and 
Governance.  The  process  of  preparing  the  structural  budget  balance  rule  started  already  in 
2011  and  the  authorities  are  expected  to  meet  the  deadlines  set  in  the  Treaty  on  Stability, 
Coordination and Governance. 

Lastly, the medium-term budgetary framework in place provides a basis for planning beyond 
the  next  year’s  budget.  However,  the  expenditure  limits  set  in  the  framework  are  indicative 
and  can  be  revised  in  the  following  year’s  update.  In  order  to  prevent  pro-cyclical  fiscal 
loosening  in  years  of  high  economic  growth,  the  expenditure  ceilings  could  be  made  more 
binding and accompanied with multi-annual expenditure rules. The same applies to the system 
for monitoring and reporting on the strategic targets, including issues of public accountability. 

Tax system 

Estonia’s  tax-to-GDP  ratio,  which  stood  at  32.8%  in  2011,  remains  low  compared  to 
other EU countries (EU27 GDP-weighted average at 38.8%). The tax structure is generally 
considered favourable to growth and the taxation policy framed in terms of a tax system with 
low tax rates and broad tax bases. With the general government budget close to balance, fiscal 
consolidation  does  not  appear  to  be  a  major  challenge  in  Estonia.  The  tax  burden  on 
consumption, as measured by its implicit tax rate, was 26.1% in 2011, the seventh highest in 
the EU. The tax wedge on labour at average wages (single, no children), was 40.4% in 2012. 
By contrast, the implicit tax rate on capital was at 7.9% the second lowest of the 19 Member 
States for which it is available and taxes on capital represented only 2.2% of GDP in 2011, the 
second  lowest  value  in  the  EU,  mainly reflecting  the design of corporate income tax  that is 
levied on distributed profits only. 

In  2011,  Estonia  adopted  a  legislative  package  aimed  at  further  improving  the  growth-
friendliness of taxation by reducing the tax burden on labour, providing incentives to increase 
participation  in  lifelong  learning  and  reducing  incentives  to  borrow.  They  include  reducing 
personal  and  corporate  income  tax  rates  by  one  percentage  point  (to  20%)  as  of  2015, 

7   The objective of keeping the nominal general government budget in balance (or in surplus since 2007) has 

been the cornerstone of this budget rule. 

8   The net debt ceiling (debt stock) can be expanded up to 100% of revenue for municipalities with high self-

financing capability. 

9   Revenue  including  transfers  but  excluding  net  revenue  from  sales  of  fixed  assets,  financial  revenue  and 

earmarked grants for acquisition of fixed assets. 

12 

 
 
                                                 
abolishing  the  fringe-benefit  tax  on  work-related  studies  and  lowering  the  ceiling  for  total 
personal  income  tax  deductibility  (linked  in  particular  to  mortgage  interest  payments)  by 
about  40%  as  of  2012.  In  addition,  the  government  decided  in  late  2012  to  lower 
unemployment insurance contributions from 4.2% to 3.0% (-0.3% of GDP), as of 2013. 

From 2013, Estonia has abolished the land tax on small and medium-sized residential plots, if 
the primary residence of the taxpayer is located on that land. The share of property taxes in 
Estonia was already the lowest in the EU (0.3% of GDP in 2011) and was levied only on land, 
based  on  outdated  land  registry  values.  While  the  fiscal  effect  of  abolishing  the  land  tax  is 
rather  small  (-0.1%  of  GDP),  it  could  weaken  the  counter-cyclical  policy  instruments 
available  to  influence  housing  sector  developments.  It  also  reduces  the  policy  potential  to 
strengthen and diversify budgetary revenue without harming growth.10 

Environmental  taxation  in  Estonia  (2.8%  of  GDP)  was  above  the  EU-27  average  in  2011  
(2.4%  of  GDP),  reflecting  high  revenue  from  transport  fuel  taxes.  Transport  taxation, 
excluding fuel taxes, was the second lowest in the EU, at 0.1% of GDP. There is no vehicle 
taxation, except for heavy-goods vehicles, and no measures have been taken so far to increase 
transport taxation. New cars in Estonia had the highest average emissions per km in the EU in 
2011 (156.9 g CO2/km, 16% above the EU average). The price effect of motor fuels due to 
increased fuel excise duties and high world oil prices has not had any strong effect so far on 
car purchase decisions. Despite the increase, diesel excise duty is still slightly below the EU 
average  and  excise  duty  on  petrol  is  well  below.  Introducing  or  raising  taxes  on  sources  of 
energy  and  also  on  transport  and  waste  (e.g.  road  tax,  energy  consumption-linked  tax  on 
motor  vehicle  use  or  ownership,  in  line  with  the  Commission  communication,11  or  landfill 
taxes) could help to achieve environmental goals and further diversify budgetary revenues.  

Thanks  to  the  simple  tax  system  and  widespread  use  of  e-government,  Estonia  has 
relatively  low  tax  compliance  costs.  The  relative  share  of  informal  work  is  about  10%  of 
employment,  which  is  below  the  EU  average.12  To  improve  tax  compliance,  Estonia  has 
recently  taken  relevant  measures  to  gain  better  control  over  low  enforcement  areas  by 
amending  the  VAT  law  to  prevent  tax  fraud  in  gold-related  transactions  and  by  limiting 
access  to  the  zero  VAT  rate  for  excise  goods  in  excise  warehouses.  The  Tax  and  Customs 
Board systematically works on tax compliance issues, focusing on improving tax collection in 
construction,  catering  and  accommodation.  In  parallel,  the  government  is  planning  further 
measures:  (i)  for  all  excise  goods,  limiting  imports  from  third  countries  by  private  persons, 
starting  from  late  2013;  (ii)  reinforcing  the  rules  on  registering  employees  to  reduce 
undeclared  work;  and  (iii)  introducing  an  electronic  receipts  system  to  improve  VAT 
collection and limit scope for VAT fraud. 

3.2. 

Financial sector 

Estonia’s  banking  sector  remains  sound,  with  strong  capital  buffers,  satisfactory  asset 
quality and high provision coverage, but a medium-term financial stability risk persists. 
The total loan portfolio of the banking sector is growing again, with enterprises' indebtedness 

10   See,  for  example,  European  Commission  (2012),  Tax  reforms  in  EU  Member  States  2012,  European 
Economy No 6/2012. See also OECD (2012), OECD Economic Surveys: Estonia 2012, OECD Publishing. 

11   Commission Communication COM(2012) 756, 14.12.2012. 
12   See Hazans, M. (2011). Informal Workers across Europe. Evidence from 30 European Countries. The World 
Bank,  Policy  Research  Working  Paper.  December  2011.  Alternatively,  it  has  been  assessed  that  the 
prevalence of undeclared work in Estonia amounted to around 7-8% of GDP in 2005-06, being more or less 
in  line  with  the  weighted  EU-27  average  (European  Employment  Observatory  Review:  Spring  2007; 
European Commission (2012). Tax reforms in EU Member States 2012). 

13 

 
 
                                                 
relative  to  GDP  increasing  anew. Credit  growth  could  accelerate  as  the  reserve  requirement 
for  banks  is  low,  there  is  no  rule  setting  a maximum  loan-to-value  ratio  for  mortgages,  and 
real  wage  growth  is  increasingly  positive.  Further  incentives  to  borrow  still  exist,  including 
the  partial  deductibility  of  mortgage  interest  payments  and  loan  guarantees,  thereby  also 
contributing to maintaining a medium-term macro-financial stability risk. The total value and 
the number of real estate transactions increased by 13% and 12% respectively in 2012, while 
the housing affordability index is high and a growing number of people (11%) intend to buy 
real estate in the next 2-3 years, opening the possibility of a new property bubble.13 Overall, 
promoting  savings  remains  desirable  as  the  loan-to-deposit  ratio  still  exceeds  100%.14  The 
reduction in the land tax base that entered into force in January 2013 (see section 3.1) could 
have  a  -  probably  only  limited  -  effect  in  the  opposite  direction.  Furthermore,  there  is  no 
longer any talk of updating the land registry values used as a basis for the existing land tax, 
which date back to 2001. 

Access to finance 

Access  to  finance  for  small  and  medium-sized  enterprises  (SMEs)  -  despite  improving 
over the previous year - remains difficult. Since the onset of the crisis, sources of financing 
such  as  the  stock  and  bond  market  have  been  virtually  frozen.  In  addition,  relatively  few 
Estonian  companies  have  access  to  bond  financing  or  international  markets  anyway. 
However, banks report a rise in the number of clients, deposits, foreign transactions, leasing 
contracts  and  card  usage.  Also,  their  loan  portfolio  is  composed  less  of  real  estate  projects 
than  during  the  previous  boom  period,  which  gives  greater  access  for  companies  active  in 
other sectors. Nevertheless, this has so far mostly benefited larger companies or projects and 
utilities. For SMEs, lending conditions remain very strict: limited liability is largely a fiction, 
as very often entrepreneurs have to collateralise their own assets. This reduces the availability 
of credit to further invest and grow. 

In  parallel  with  the  planned  use  of  financial  engineering  instruments  from  EU  funds  to 
improve the access of SMEs to finance, the government is continuing to support companies 
through the institutions created for this purpose in previous years: KredEx, Enterprise Estonia 
and the Estonian Development Fund. The latter is being made more project-based. Enterprise 
Estonia is focusing on the market segments that appear more promising (ICT, medicine and 
medical technologies, wood and food) and on key clients. Two important new organisations 
or  bodies  were  created  in  2012  in  order  to  facilitate  access  to  seed  and  equity  capital:  the 
Estonian  Business  Angels  Network  and  the  Baltic  Innovation  Fund,  which  will  invest  in 
private equity and venture capital funds in the Baltic countries, focusing on metal/machinery, 
electronics, ICT, shared services and logistics. 

3.3. 

Labour market, education and social policies 

In 2012, as economic growth continued, more unemployed people found a job and real wages 
increased.  As  employment  continues  to  grow,  the  national  target  in  this  respect  appears 
achievable,  partly  facilitated  by  the  shrinking  working-age  population  (denominator  effect). 
However, persistent youth and long-term unemployment, skills mismatches, and labour 
force  losses  due  to  chronic  conditions15  or  health  problems  resulting  in  growing 

13   Study commissioned by the Estonian Association of Real Estate Companies. 
14   About 110% in early 2013. 
15   At  the  level  of  local  governments,  which  were  hit  harder  by  the  economic  crisis,  the  general  reduction  in 
social protection costs was more than 8% in 2010 compared with 2009, even though the number of disabled 
persons has increased each year over the last five years. The total increase has been more than 11%. 

14 

 
 
                                                 
workforce  shortages  remain  the  main  source  of  concern  and  a  potential  bottleneck  to 
sustainable growth. Lastly, a persistent lack of childcare facilities and/or possibilities delays 
the return of parents, especially women, to the labour market, while the gender pay gap and 
segmentation might prevent higher qualified women from fully contributing to labour market 
outcomes. 

In  2012,  the  Council  recommended  that  Estonia  improve  incentives  to  work  by 
streamlining  the  social  benefits  system  and  increase  flexibility  in  the  allocation  of 
benefits,  while  ensuring  adequate  social  protection.  In  response,  several  measures  have 
been introduced. Others are only in their development phase, will need implementation or are 
double-edged,  while  further  measures  could  have  been  considered.  Progress  has  been 
limited  on  the  Council  recommendation.  In  line  with  the  commitments,  the  rate  of  the 
unemployment  insurance  premium  has  been  reduced  for  employers  and  employees  from 
January 2013, along with the personal and corporate income tax rates as of 2015 (see under 
section  3.1  'Tax  system').  However,  an  envisaged  increase  in  the  basic  exemption  from 
personal  income  tax  has  been  postponed.  To  alleviate  the  high  poverty  risk  of  the 
unemployed, the unemployment allowance has been increased substantially from EUR 65 to 
EUR 101.50 (around 35% of the national minimum wage) per month from 2013. 

Discussions on the revision of the incapacity for work schemes have started, while plans for 
establishing the long awaited insurance scheme against accidents at work have been deferred 
by  several  months:16  submission  of  the  scheme  to  parliament  is  now  announced  for  winter 
2013-14 and it is unlikely to enter into force before mid-2015. In spite of the growing poverty, 
Estonia has not sufficiently ensured better accessibility to efficient and quality services (see 
also under section 3.5 'Modernisation of public administration'). Also, the social contribution 
‘minimum’  and  the  absence  of  unemployment  benefits  for  part-time  workers17  do  not 
facilitate  a  smooth  transition  from  unemployment/inactivity  to  work  via  part-time  jobs.18,  19 
An  increase  in  the  minimum  wage  to  EUR  320,  i.e.  35%  of  the  average  wage,  has 
strengthened  work  incentives  for  low-wage  earners,  but  has  contributed  to  raising  labour 
costs. It is important that minimum wage increases remain fully consistent with productivity 
growth in the economy as a whole, especially as the share of the low-skilled in the total labour 
force  is  relatively  large.  Lastly,  the  data-management  interoperability  of  the  social  benefit 
system  in  general  remains  insufficient,20  thereby  limiting  evidence-based  policy  response  in 
terms  of  higher  flexibility  and  better  targeting  in  benefit  allocation,  leading  to  possible 
overlaps/inefficiency and unemployment/inactivity traps. 

To  address  the  recommendation  on  better  targeting  family  and  parental  benefits  and 
removing  distortionary  income  tax  exemptions  related  to  children,  some  steps  in  the 
right direction have been made, but further progress is needed, not least in the area of 
childcare  possibilities.  The  government  has  addressed  the  need  for  better  targeting  family 
benefits  by  approving  an  additional  child  benefit  as  from  July  2013  for  families  living  in 
relative poverty, and by raising the child allowance for the third and subsequent child to EUR 

16   Reform plans no longer involve the occupational disease part of the insurance scheme under consideration. 
17   Unemployment benefits for part-time workers, but within limits to prevent abuses. 
18   R.  Leetmaa,  K.  Nurmela  and  PRAXIS  (July  2012),  'European  Employment  Observatory'  –  Long-term 
unemployment  in  Estonia',  A.  Vork  (2009),  'Labour  supply  incentives  and  income  support  systems  in 
Estonia',  OECD  (2012),  'Country  Economic  Survey  –  Estonia',  European  Employment  Observatory  (April 
2013),  'Template  for  Post-Assessment  of  National  Reform  Programmes  –  national  SYSDEM  experts  (EU-
27)'. 

19   Estonia has one of the lowest rates of part-time work in the EU. 
20   i.e. the lack of one central system linking both national and local levels (see also under section 3.5). 

15 

 
 
                                                 
76.72  per  month.  Also,  these  additional  benefits  are  not  included  in  the  calculation  of  the 
subsistence benefit. Furthermore, Estonia plans to modify the parental benefits formula during 
2013  to  ensure  that  the  time  profile  of  benefits  encourages  parents  to  go  back  to  work. 
However, the focus in Estonia on income support measures in the event of childbirth21 may be 
comparatively cost effective than childcare services in increasing fertility rates, while having 
a negative impact on women’s employment.22 At the same time, measures which have proven 
to  have  a  stronger  positive  impact  on  birth  rates  and  female  employment,  such  as  the 
provision of childcare services, remain underfinanced23 (see under section 3.5 'Modernisation 
of public administration'). In particular, the draft reform of the Pre-School Act is still under 
discussion in the Ministry of Education and Research, as it was already in spring last year.24 

The  recommendation  on  increasing  the  return  of  the  long-term  unemployed  to  the 
labour market has only been partly implemented, with limited progress so far. Despite a 
continued improvement in bringing the unemployed back into work, the proportion of long-
term and very long-term unemployed in the total workforce remains high. The government is 
responding with some tailor-made and complex activation measures, although their intensity 
and coverage are still low. However, active labour market policy measures (ALMPs) are only 
partly effective in addressing this challenge as problems affecting the long-term unemployed 
are many-sided (e.g. indebtedness, addiction, health problems,  caring obligations), requiring 
additional services by other institutions and administrative levels (see also under section 3.5 
'Modernisation of public administration'). This is further exacerbated by the high level of low-
skilled  unemployed  and  high  regional  disparities.  In  this  respect,  there  is  no  coordinated 
response  for  developing  basic  economic  activities  and  encouraging  job  creation  in  regions 
affected by high unemployment.25 

In response to the recommendation on increasing the employment of young people, the 
progress in addressing youth unemployment has been limited so far and therefore this 
part of the CSR has been partly implemented. The government has increased the provision 
of  career  counselling,  work-related  training  and  job-search  workshops.  However,  overall, 
although  the  youth  unemployment  rate  has  dropped  substantially,  from  32.9%  in  2010  to 
20.9%  in  2012,  it  has  remained  high  and  the  youth  employment  rate  is  still  below  the  pre-
crisis level due to difficulties in reaching young people with existing measures. Indeed, only 

21   At 1.5% of GDP in 2010, the share of income support measures, including parental benefits was the highest 

among EU-27 Member States. 

22   In 2011, the employment rate of women with children in the 20-49 age group was more than 20 pps lower 

than that of childless women, one of the highest differentials in the EU. 

23   Overall, according to surveys of child day-care services in municipalities, commissioned by the Ministry of 
Social Affairs, the waiting list for childcare places grew from 4 830 in January 2009 to 5 890 in January 2012 
(Ainsaar,  M.,  Soo,  K.  Kohalikud  omavalitsused  ja  lastega  pered  2011;  Ainsaar,  M.,  Soo,  K.  Kohalike 
omavalitsuste  toetus  lastega  peredele  2008  ja  laste  päevahoid  2008-2009  Eestis).  In  particular,  the  low 
availability  of  quality  childcare  possibilities  for  children  under  three  remains  a  factor  that  hinders  parents' 
return to work. 

24   Last year's draft adjustments considered establishing day-care facilities at public primary schools throughout 
the country, making them more accessible for families and giving local authorities additional financial means 
for creating new places and new facilities. 

25   The long-term unemployment in North-Eastern Estonia is a particular source of concern, combining causes 
such as an unfavourable place of residence, where industrial activities are partly obsolete, a lesser knowledge 
of the Estonian language and an insufficient education background for at least half thereof. Not surprisingly, 
the group of those living in North-Eastern Estonia had the highest regional unemployment rate in Estonia as 
well as the highest persistence of unemployment. 

16 

 
 
                                                 
around a third of the young jobless were registered as unemployed in 2012 and benefited from 
ALMPs. 

Education policies 

Estonia is confronted with relatively significant skills mismatches resulting in particular from 
a  major  structural  shift  from  non-tradable  to  tradable  sectors  in recent  years. Despite public 
spending on education above the EU average, Estonia is also faced with a high proportion of 
people  without  any  professional  qualifications,  since  about  32%  of  Estonians  aged  25-64 
years  have  not  graduated  either  from  VET  or  from  higher  education.  A  persistent  lack  of 
graduates in science, technology, engineering and mathematics (STEM) is also an issue. 

In response to the recommendation on linking training and education more effectively to 
the  needs  of  the  labour  market,  ambitious  reforms  of  the  tertiary,  VET  and  upper 
secondary  education  systems  are  in  progress,  with  more  results  still  expected.  Overall, 
some progress has been made on addressing this part of the CSR. 

At  tertiary  education  level,  performance  agreements  have  been  signed  between  the 
Ministry  of  Education  (MoE)  and  higher  education  institutions  under  the  new  Higher 
Education  Act,  and  will  be  implemented  as  of  September  2013.  This  reform  could  help 
steer study outcomes towards fields  required by the economy (e.g. STEM). In parallel,  new 
scholarships  have  been  set  up  for  students  in  the  STEM  fields  that  present  the  greatest 
demand,  in  order  to  boost  the  number  of  graduates.  It  is  important  that  this  reform  is  fully 
implemented  by  Estonia  in  the  future,  including  through  ensuring  adequate  funding  and,  in 
parallel, that the high degree of autonomy of tertiary education institutions is maintained. 

A  draft  new  VET  Institutions  Act  is  in  parliament.  An  ambitious  modernisation  of 
vocational  education  curricula  is  planned,  with  the  aim  of  increasing  the  share  of 
apprenticeship in the curricula and better matching study outcomes with the skills required by 
the  labour  market.  Accreditation  experts  coming  from  enterprises  have  already  delivered 
positive assessments of seven out of 40 sectors of teaching in VET, as part of a regular review 
process. Preliminary plans include establishing a managing centre for apprenticeship training, 
with the aim of creating 2 000 apprenticeship places in cooperation with VET institutions and 
employers. This will, however, require a high degree of cooperation with social partners, in 
particular - but not exclusively - the enterprise sector, and appropriate financing. Both aspects 
currently appear to be partly missing. 

The government has recently updated its general education development plan (2007-13) 
with a view to improving the quality and efficiency of the education system and reducing 
the  number  of  early  school  leavers.  The  national  mechanism  for  tracking  early  school 
leaving  is  being  implemented.  In  parallel,  the  government  has  launched  a  long-awaited  and 
ambitious reform of the upper secondary general education school network, whose objective 
is to raise the quality of education and bring it more into line with the needs of the job market, 
and to align the network of upper secondary schools with Estonia’s demographic situation. In 
this context, a draft new Basic and Upper Secondary Schools Act is currently in parliament 
with a view to establishing a clearer separation of basic schools and upper secondary schools, 
with  the  possible  longer  term  objective  of  moving  towards  state-owned  upper-secondary 
schools,  which  is  a  lengthy  process.  Lastly,  it  remains  to  be  seen  whether  this  long-term 
rationalisation of the upper secondary schools network can be implemented independently of 
a more ambitious reform of local authorities (see under section 3.5 'Modernisation of public 
administration'). 

17 

 
 
Estonia is also investing heavily in the use of new technologies and digital skills, by e.g. 
updating  the  ICT  skills  of  students,  teachers  and  teachers  of  educators  in  general  and 
vocational  education  and  in  higher  education.  Also,  the  Estonian  government  has  very 
recently  launched  a  pilot  project  for  computer-based  statistics  education  in  lower  and  upper 
secondary schools. 

An  inter-ministerial  skills  task  force  was  set  up  in  2012  to  find  solutions  for  better 
matching  people’s  skills  to  labour  market  needs.  Work  has  started  and  an  inventory  of 
competencies has been created in a State Register of Occupational Qualifications and a cross-
link  between  online  registers  has  been  established.26  Entrepreneurship  skills  are  included  in 
the  university  curricula  and  on  a  voluntary  basis  in  secondary  education.  Still,  one  of  the 
main bottlenecks in the Estonian economy remains the lack of skilled workforce at both 
high and low ends, including of highly qualified managers. 

In response to the recommendation on increasing opportunities for low-skilled workers 
to  improve  their  access  to  lifelong  learning,  limited  progress  has  been  registered 
concerning  this  part  of  the  CSR.  As  regards  low-skilled  workers,  relevant  existing 
programmes are continuing for unemployed 16-29 year-olds with or without basic education, 
while  the  'back  to  school'  vocational  education  programme  is  also  ongoing.  In  parallel,  an 
inter-ministerial task force set up in 2012 is in charge of drafting the future national lifelong 
learning strategy for 2014-20. However, the currently insufficient inclusion of the low-skilled 
and  older  workers  in  lifelong  learning  is  still  not  sufficiently  addressed  and  the  training 
activities do not always credibly meet labour market needs in terms of relevance and quality. 
Limited  progress  has  been  made  on  the  draft  adjustments  to  the  Adult  Training  Act  since 
spring  2012,  with  the  revision  of  the  training  licences  system  for  training  providers  and 
changes to the financing system of adult training still in the hands of the MoE. Lastly, adult 
and  unemployed  training  could  benefit  more  from  the  modernised  VET  Centres  and  the 
modernised vocational curricula. 

3.4. 

Structural measures promoting growth and competitiveness 

Energy, transport, infrastructure, climate change and the environment 

Estonia’s energy and carbon intensity are still among the highest in the EU, in particular in 
transport, where the new car fleet is the most energy-intensive in the EU.27 The importance of 
oil shale as an energy source emphasises the need to develop more efficient and less polluting 
energy sources and adequately address a pressing waste issue. Also, there is a need to improve 
knowledge of the true cost of the water resource as an economic factor in a context of water 
abundance. The transposition of several EU Directives in the energy sector has not yet been 
fully  completed.  Lastly,  Estonia  needs  to  connect  its  energy  markets  to  other  EU  electricity 
and gas networks in order to increase security of supply and diversify energy sources, develop 
cross-border trading and avoid congestion. 

In 2012, the Council recommendation mentioned the need to improve energy efficiency, 
in  particular  in  buildings  and  transport,  and  environmental  incentives  concerning 
vehicles.  Given  the  scope  of  the  challenges,  and  despite  some  clear  progress  in  insulating 
public  buildings,  the  measures  undertaken  so  far  have  had  a  limited  impact,  not  least  those 

26   Also the hiring of high-skilled foreign workers has been facilitated by establishing a fast-track procedure for 

obtaining the work permit. 

27   While the overall share of public transport in Estonia is still slightly above the EU average, the number of 
trips made with public transport has been in steady decline and the use of passenger rail transport remains 
one of the lowest in the EU. 

18 

 
 
                                                 
designed to increase energy efficiency in the transport sector. Therefore, some progress has 
been made on this part of the recommendation. 

Estonia is proceeding with its investment programmes in the building and transport sectors. In 
the  building  sector,  this  continued  up  to  the  end  of  2012,  when  most  CO2  projects  in  the 
government  buildings  sector  were  almost  finished  and  the  EU  funding-related  projects  had 
largely been completed. The government is waiting for the new financial programming of EU 
funds  (2014-20)  to  continue  with  the  insulation  of  apartment  blocks  and  individual  houses. 
Additionally, Estonia introduced measures to improve energy efficiency in power generation 
and in district heating and has planned measures to promote high-efficiency cogeneration, in 
particular  in  the  use  of  biomass.  However,  considerable  amounts  of  money  could  still  be 
invested  to  improve  energy  efficiency  and  reduce  carbon  intensity  of  buildings,  both 
residential and industrial. Measures targeted at the industrial sector are planned. 

With  respect  to  transport,  Estonia  does  not  use  tax  incentives  to  improve  the  energy 
efficiency  of  its  car  fleet.  Its  action  remains  limited  to  the  use  of  public  funds  to  support 
environmental  projects.  The  2012-14  Electro-Mobility  Programme  continues  to  provide 
public  support  for  the  acquisition  of  electric  cars  and  for  establishing  a  quick  charging 
infrastructure  covering  the  whole  country.  Estonia  has  also  undertaken  a  financing 
programme (EUR 86 million) focused on energy efficiency in public transport. In this context, 
pilot projects for LPG buses are being initiated. To promote public transport, Tallinn city has 
introduced  free  public  transport  for  its  residents  as  from  2013,  with  a  decrease  in  private 
traffic intensity of some 10% so far. However, if this initiative is to be a complete success, it 
will have to be ensured that the loss of ticket revenue does not compromise service quality, 
investment in new vehicles and in transport infrastructure. 

The  new  Transport  Development  Plan  2014-20  (currently  in  preparation)  is  expected  to  put 
forward  a  comprehensive  strategy  for  a  more  environmentally  friendly  and  innovative 
transport sector, including enhancing public transport networks, continuing rail infrastructure 
developments,  creating  car-pooling  stations  and  improving  intermodal  connections  for 
passengers  and  freight.  In  parallel,  the  draft  'Estonian  Business  Growth  Strategy  2020'  has 
proposed logistics and transport engineering among the top development priorities. Innovative 
approaches  will  be  even  more  important  to  fully  exploit  the  economic  potential  of  the  Rail 
Baltic  project,  whose  building  works  have  been  planned  for  2018-23,  and  which  aims  to 
improve Estonia's connectivity with western Europe.28 In this context, the decision made by 
the Estonian authorities to significantly reduce the amount of EU structural funds investment 
in  transport  infrastructure  during  the  next  programming  period  (2014-20)  is  a  source  of 
concern. 

Overall,  it  is  unlikely  that  these  measures  will  be  sufficient  to  contain  the  modal  shift 
away  from  public  transport  towards  private  cars  and,  more  generally,  to  contain  the 
ongoing increase in non-ETS GHG emissions. Most recent data point to Estonia's non-ETS 
emissions increasing more than expected in the 2011 projections and being already above the 
Effort  Sharing  Decision  target  for  2013  (see  in  the  Overview  table,  p.  23).  It  can  even  be 
expected  that  Estonia  will  fail  to  meet  its  GHG  emission  target  for  2020  in  the  absence  of 
additional  measures  to  improve  energy  efficiency,  in  particular  in  the  field  of  transport  and 
housing, and to reduce the energy intensity of its car fleet. 

In response to the recommendation on strengthening environmental incentives related to 
waste,  some  progress  has  been  made  with  the  increase  in  royalties  on  oil  shale 

28   Also, ensuring adequate air connectivity appears essential to Estonia's economic development. 

19 

 
 
                                                 
production, and more results are expected in 2013. However, given the need and scope 
for further measures in the areas of oil shale, municipal waste and waste water, this part 
of the Council recommendation has been only partly implemented. The importance of oil 
shale  as  an  energy  source  adds  to  the  need  to  reduce  the  waste  it  generates  and  to  develop 
sustainable options and economic incentives to use the waste accumulated from the oil shale 
already mined. The increase in royalties on the production of oil shale from 2013 is a step in 
the  right  direction.  With  respect  to  incineration,  50%  of  municipal  waste  will  be  used  in  a 
cogeneration plant being built close to Tallinn and to be completed in June 2013. However, a 
number of barriers to reaching the 2020 recycling targets for municipal waste remain as the 
producer  responsibility  in  place  appears  insufficient  to  cover  the  full  costs  of  separate 
collection, sorting and recycling of the waste streams, while the pay-as-you-throw scheme has 
limited coverage. Regarding waste water, Estonia is implementing the EU Directive relatively 
slowly, and additional efforts will be needed to reach full compliance. In terms of efficiency 
of  the  water  utility  companies,  there  is  a  lack  of  emphasis  on  setting  standards,  limits  or 
requirements for processes in the water industry in order to ensure that technological changes 
actually take place. 

As  regards  the  recommendation  on  fostering  renewable  energy  use,  including  through 
upgraded  infrastructure  and  legislation,  the  progress  made  can  be  considered  to  have 
been substantial and the challenge temporarily addressed. However, attention could be 
paid to avoiding changes affecting the legitimate expectations of investors in the formal 
agreements reached with private actors. Estonia has reached its 2011-12 interim target for 
renewable  energy  production,  distribution  and  use.  Moreover,  the  country  is  preparing  new 
development  plans  extending  to  the  horizon  of  2050.  The  overall  objective  is  to  further 
diversify the portfolio of energy sources, i.e. relying even less on fossil fuels and increasing 
still further the share of renewable energy in primary sources. In January 2013, Estonia fully 
opened its electricity market to competition. An amendment to the Electricity Market Act is 
under  discussion  in  parliament,  but  may  end  up  retroactively  introducing  unfavourable 
changes to the support conditions for wind generators, reneging on previous agreements with 
industry.  Transposition  of  the  third  internal  energy  market  package  of  energy-related  EU 
Directives  needs  to  be  completed,  especially  as  Estonia  is  close  to  full  compliance.29  With 
respect  to  transmitting  the  wind  energy  produced  on  the  west  coast  to  eastern  Estonia, 
expropriation  measures  for  extending  the  infrastructure  are  nearly  in  place.  Regarding  the 
transport sector, the share of renewable energy in all modes has stayed very low, far behind 
the  target  of  10%.  As  a  result,  the  government  is  planning  to  introduce  an  obligation  to 
incorporate 5-7% of biofuel in motor fuel and to thereby increase the use of renewable energy 
in public transport. 

With  respect  to  the  recommendation  on  continuing  the  development  of  cross-border 
connections to end relative energy market isolation, some progress has been registered 
so far. Further progress depends partly on factors outside Estonia's control. Given the 
scale of the existing challenges, this part of the CSR can be considered to have been only 
partly  implemented.  Cross-border  electricity  connections  with  Latvia  (third  cable)  and 
Finland (second cable) are being strengthened, and power grid systems synchronised: Estonia 
has recently joined the Nord Pool Spot market by creating the Estlink price area for day-ahead 
market  trading  in  the  power  exchange.  It  is  continuing  its  efforts  to  unbundle  its  gas  sector 
and address its dependence on long-term oil-indexed contracts with Russia. Progress is being 
registered with respect to the country’s first liquefied natural gas (LNG) terminal: decisions 

29   A limited number of articles have not been fully transposed. 

20 

 
 
                                                 
are  expected  to  be  made  relatively  soon,  as  the  conclusions  of  a  study  on  the  best  place  to 
establish the necessary terminal have been unveiled. 

Research and innovation 

All actors in the research and innovation sector in Estonia are highly dynamic: government, 
universities and the business sector. However, a weak link between the public research sector 
and the economy at large translates into weak public-private cooperation,30 too broad national 
priorities for limited resources and a relative mismatch between the technical skills produced 
by universities and the needs of the market. In practice, the challenge for Estonia is to boost 
innovation in traditional industries, while at the same time focusing its limited resources and 
supporting  growth  of  knowledge-intensive  companies,  mostly  in  sectors  where  Estonia 
already has or can easily develop a competitive advantage. Also, the governance of the R&I 
system  could  take  more  account  of  the  needs  of  both  universities  and  businesses  when 
designing  policy  measures.  In  addition,  internationalisation  of  the  R&I  system  is  a  crucial 
challenge  for  Estonia,  given  the  small  size  of  the  country.  Overall,  progress  has  been 
limited and the part of the CSR related to the R&I system is considered as only partly 
implemented. 

With respect to the recommendation on enhancing cooperation between businesses and 
academia, the challenge of weak public-private cooperation in the field of R&I persists, 
despite  a  few  measures  in  place  such  as  the  existence  of  technology  transfer  offices  in 
universities,  R&D  grant  schemes  for  collaboration  between  companies  and  universities, 
Competence Centres, and Innovation Vouchers. The government approach in supporting start-
ups  and  fast-growing  enterprises  is  highly  appreciated  by  the  business  community  and  the 
new  Baltic  Innovation  Fund  will  be  beneficial  in  further  providing  the  necessary  financial 
support for these types of companies. However, further development of instruments such as 
public procurement for innovation would be helpful for better determining the governmental 
demand  for  R&I,  with  a  view  to  increasing  competitiveness  and  addressing  societal 
challenges.  Part  of  the  solution  can  also  be  found  through  university-industry  research 
mobility and exchange schemes. 

In response to the part of the recommendation on fostering prioritisation of the research 
and  innovation  systems,  Estonia  is  currently  preparing  both  a  national  research  and 
innovation strategy and a national innovation and entrepreneurship strategy. These strategies 
are  at  present  undergoing  public consultation  and  are  due  to  be  adopted  by  the  end  of  June 
2013. They are expected to identify knowledge-intensive sectors that could push the country 
up on the international value chain and give access to wider markets, as well as concentrate 
public  resources  on  a  more  limited  number  of  fields  of  science  and  technology  that  reflect 
Estonia’s  strengths,  as  identified  by  international  benchmarking.  However,  there  are  two 
separate strategies and these did not benefit from a broad consultation exercise involving the 
private  sector  and  universities  during  their  early  development,  which  may  affect  the  final 
results.  Furthermore,  there  is  a  concern  that  research  and  business  innovation  will  not  be 
brought into a single or at least strategically coordinated and politically endorsed framework. 

Regarding  the  part  of  the  recommendation  on  fostering  the  internationalisation  of  the 
research  and  innovation  systems,  the  Estonian  authorities  acknowledge  a  need  for  special 
attention.  However,  while  the  measures  in  place  regarding  highly  skilled  professionals  are 
going in the right direction, as a small country it is unlikely that Estonia will solve the talent 

30   The  Community  Innovation  Survey  shows  that  whereas  there  are  numerous  innovative  SMEs  in  Estonia, 

universities are generally not among the first three preferred collaboration partners. 

21 

 
 
                                                 
challenge alone. In addition, where Estonian top scientists are well integrated internationally, 
this is not the case for the overall research community in Estonia. Evident channels are via the 
European Framework Programmes and European Research Area initiatives alongside various 
collaborations with the Baltic-Nordic countries. 

Internal market and competition 

Estonia  generally  enjoys  a  business-friendly  regulatory  environment,  and  the 
availability  of  e-government  tools  is  exceptionally  high.  The  administrative  burden 
imposed on businesses appears reasonable, and the state also scores well in terms of its own 
efficiency  (for  instance,  the  state  spends  a  much  smaller  share  of  revenues  to  collect  taxes 
than  in  other  EU  countries,  including  quite  efficient  ones).  On  the  other  hand,  the  impact 
assessment of regulations could be improved, in terms of both content and the time available 
to stakeholders to provide feedback. 

The  government  is  taking  action  to  improve  the  insolvency  procedure,  one  of  the  few 
areas where Estonia lags behind her EU peers. A review of the situation is ongoing with a 
view  to  facilitating  agreed  debt  restructuring  and  finding  alternative  ways  of  dealing  with 
insolvencies. 

3.5.  Modernisation of public administration 

At local level, the mismatch between fiscal capacity and devolved responsibilities places 
great  pressure  on  public  service  provision  by  local  governments.  This  situation  is 
aggravated  by  the  small  size  of  many  municipalities  and  the  low  population  density  in 
most  counties,  leading  to  generally  low  local  administrative  capacity.  In  August  2011,  at 
Estonia's request, the OECD produced a review31 that highlighted inadequate efficiency, weak 
interoperability  in  terms  of  data  and  systems  and  fragmented  tools  and  processes.  Also, 
strengthening  of  the  central/local  relationship  was  advocated,  through  greater  institutional 
coordination  and  collaboration  (see  also  under  section  3.3  'Labour  market,  education  and 
social policies'), including the data-management interoperability of the social benefit system. 
Lastly, the financing system of municipalities does not currently include incentives for local 
governments  to  support  entrepreneurship  and  job  creation  and  thereby  to  increase  their 
revenue,  while  the  equalisation  fund  in  favour  of  weaker  municipalities  in  its  current  form 
might reduce municipalities' motivation to make extra efforts to increase revenues. 

The  quality  service  provision  required  from  local  governments  by  law  appears 
ineffective  in  most  sectors  -  transport,  education,  social  services,  including  childcare, 
long-term care and primary healthcare. Due to the small size of most municipalities, their 
capacity to recruit competent professionals who would be sufficiently occupied is limited. In 
particular, the integration of the long-term unemployed into the labour market is made more 
challenging by the ineffectiveness of local governments in providing support services, since 
this  target  group  usually  requires  the  provision  of  a  range  of  local  social  services  as  a 
precondition for re-employment or activation. Without first improving the provision of social 
and other support services at the level of local governments, ALMPs are expected to remain 
partly ineffective.32 A sound framework for effective delivery of public services at local level 
is also required for the implementation of EU funds. 

31   OECD  Public  Governance  Reviews,  'Estonia:  Towards  a  Single  Government  Approach',  OECD,  Paris, 

August 2011. 

32   e.g. unemployed people who want to be registered, a prior condition to benefit from various ALMP measures 
and  health  coverage,  are  not  systematically  granted  transport  benefits  by  local  governments,  but  the 
Unemployment Insurance Fund seeks to remedy local governments' possible failures. 

22 

 
 
                                                 
In  response  to  the  Council  recommendation  on  improving  the  efficiency  of  local 
governments  and  ensuring  effective  service  provision,  limited  progress  has  been 
registered  so  far,  since  the  measures  already 
introduced  or  currently  under 
consideration do not appear sufficiently advanced or comprehensive at this stage to be 
totally credible, while further measures could be considered. Amendments to the Act on 
the  Administrative  Division  of  the  Territory  and  to  the  Promotion  of  Local  Government 
Merger Act entered into force in March 2013, with the aim of facilitating voluntary mergers 
of  municipalities,  by  increasing  the  financial  support  for  mergers  and  by  allowing  mergers 
between municipalities without common border. In parallel, the Ministry for Regional Affairs 
has  published  a  draft  proposal  for  local  government  reform  based  on  an  'attraction  centre' 
model that could result in Estonia having no more than 30-50 local governments by the year 
2017.  However,  the  reform  proposal  has  not  received  full  government  support  yet.  On  the 
ground, while since 1996 voluntary mergers have reduced the number of municipalities only 
from 254 to 226, seven mergers of a total of 18 local administrations are planned in 2013. No 
revision of the financing system for municipalities is being considered so far. 

With  respect  to  services,  an  action  plan  to  improve  public  administration  is  being  prepared, 
and  a  pilot  project  in  the  areas  of  care  for  the  elderly  and  waste  management  has  been 
undertaken. The results of this project will be used as examples for joint service provision and 
joint procurements, while the optimal size of cooperation area has been defined. In parallel, 
the  current  draft  of  the  new  Basic  Schools  and  Upper  Secondary  Schools  Act  brings  more 
clarity to the respective responsibilities of the state and local municipalities in the education 
sector (see under section 3.3 'Education policies'). However, data and systems interoperability 
in the central/local relationship remains insufficient, in particular in the social benefits area. 

The  new  Civil  Service  Act  modernising  public  administration  entered  into  force  on  1  April 
2013.  In  parallel,  the  implementation  of  a  new  national  reform  programme  for  raising  the 
quality of financial reporting by the state, and of another aimed at improving the systems for 
managing  and  implementing  EU  structural  funds,  is  currently  in  progress.  In  June  2012, 
parliament  also  adopted  a  new  Anti-corruption  Act.  These  developments  are  expected  to 
reinforce the already good credentials of Estonia in these essential and sensitive areas. 

23 

 
 
4.  OVERVIEW TABLE 

2012 commitments 

Summary assessment 

Country-specific recommendations (CSRs) 

fiscal  position  by 
CSR  1:  Preserve  a  sound 
implementing budgetary plans as envisaged, ensuring 
achievement  of  the  MTO  by  2013  at  the  latest,  and 
compliance  with 
expenditure  benchmark. 
Complement  the  planned  budget  rule  with  more 
binding  multi-annual  expenditure  rules  within  the 
medium-term  budgetary 
continue 
enhancing  the  efficiency  of  public  spending  and 
implementing measures to improve tax compliance. 

framework, 

the 

substantial  progress 

Estonia  has  made 
in 
implementing the budgetary plans mentioned in the 
CSR. However, no progress has been registered so 
far  on  the  fiscal  framework  issue.  The  medium-
term  objective  was  achieved  in  2012,  one  year 
before  the  deadline.  The  temporary  deviation  from 
the MTO in 2013 is not significant and a structural 
surplus  is  forecast  to  be  reached  from  2014 
onwards.  The  government  is  expected  to  fulfil  its 
commitment  under 
the  Treaty  on  Stability 
Coordination  and  Governance  and  to  adopt  the 
structural budget balance rule in time. However, the 
authorities  are  not  planning 
introduce  an 
expenditure rule. The government has taken steps to 
improve tax compliance. 

to 

CSR  2:  Improve  incentives  to  work  by  streamlining 
the social benefits system and increasing flexibility in 
the  allocation  of  disability,  unemployment  and 
parental  benefits,  while  ensuring  adequate  social 
protection. Improve delivery of social services, while 
better  targeting  family  and  parental  benefits  and 
tax  exemptions 
removing  distortionary 
related  to  children.  Increase  the  participation  of  the 
young  and  the  long-term  unemployed  in  the  labour 
market. 

income 

limited 

progress 

has  made 

in 
Estonia 
implementing the CSR. With the aim of increasing 
labour  supply,  it  has  reduced  the  unemployment 
insurance  premium 
for  both  employers  and 
employees from January 2013 and the personal and 
corporate  income  tax  rates  as  of  2015.  Little 
progress  has  been  made  so  far  on  the  overhaul  of 
the  incapacity  for  work  schemes  and  on  the  long 
awaited insurance scheme against accidents at work. 
The government has also improved the targeting of 
family  benefits  in  favour  of  families  living  in 
relative poverty. As current activation measures can 
only partly address the complex problems faced by 
the long-term and young unemployed, the activation 
level is still insufficient. 

Estonia has made some progress in implementing 
the CSR. The government has initiated a process of 
addressing  skills  mismatches  by  setting  up  a  skills 
taskforce  and  has  started  preparing  the  2014-20 
Lifelong  Learning  Strategy.  There  has  been  a 
noticeable  increase  in  the  participation  of  adults  in 
lifelong learning but the level of participation by the 
low-skilled  and  older  workers  in  2010-11  was  still 
very 
low.  Performance  agreements  have  been 
signed  between  the  MoE  and  tertiary  education 
institutions.  A  new  major  VET  modernisation 
reform  is  under  way.  Weak  cooperation  between 
business and universities remains the main issue in 
R&D,  together  with  the  internationalisation  of  the 
to  be 
R&I  system.  Prioritisation 
addressed in two new strategies which are due to be 
adopted in late spring 2013. It remains to be seen to 
what extent the two strategies will be brought into a 
strategically coherent framework.  

is  expected 

CSR 3: Link training and education more effectively 
to  the  needs  of  the  labour  market,  and  enhance 
cooperation  between  businesses  and  academia. 
Increase  opportunities  for  low-skilled  workers  to 
improve  their  access  to  lifelong  learning.  Foster 
prioritisation and internationalisation of the research 
and innovation systems. 

24 

 
 
and 

and 

CSR  4:  Improve  energy  efficiency,  in  particular  in 
strengthen 
transport, 
buildings 
environmental  incentives  concerning  vehicles  and 
waste, including by considering incentives such as the 
taxation  of  vehicles.  Foster  renewable  energy  use, 
including  through  upgraded 
infrastructure  and 
legislation. Continue the development of cross-border 
connections to end relative market isolation. 

limited 

progress 

programme, 

has  made 

energy-efficient 

Estonia 
in 
implementing the CSR. The government has taken 
action to improve the energy efficiency and reduce 
the  carbon 
intensity  of  government  buildings. 
Limited  action  has  been  undertaken  for  non-
government buildings despite the huge potential. In 
transport,  measures  undertaken  so  far  (electro-
mobility 
public 
transport  fleet)  are  relevant,  but  insufficient  given 
their  overall  very  limited  impact.  There  is  no 
vehicle taxation except on heavy-goods vehicles. So 
far  consumer  patterns  have  been  slow  to  change. 
Some  progress  has been  made  in  energy  efficiency 
but  it  is  difficult  to  evaluate  whether  the  support 
instruments  will  be  sufficient  to  foster  energy 
efficiency in the short and medium term. Steps have 
been  taken  in  the  right  direction  for  strengthening 
environmental  incentives  in  the  area  of  waste, 
although  it  is  still  unlikely  that  the  2020  recycling 
target  for  municipal  waste  will  be  reached  and 
further  effective  measures  for  improving  waste 
management,  especially 
to  waste 
generated from oil shale, would be required. Estonia 
has  reached  its  interim  target  for  2011-12  for 
renewable energy consumption. Estonia would need 
to  complete  the  second  electricity  interconnection 
with  Finland,  and  diversify  its  natural  gas  supply 
with  a  regional  LNG  terminal  in  the  Baltic  States 
and  a  possible  interconnection  with  Poland.  The 
should  be 
internal  Baltic 
strengthened  for  both  electricity  and  gas 
to 
contribute  to  the  security  of  supply  and  regional 
trade.  

transmission  grid 

relation 

in 

CSR 5: Enhance fiscal sustainability of municipalities 
while  improving  efficiency  of  local  governments  and 
ensure  effective  service  provision,  notably  through 
stronger  incentives  for  the  merger  of  or  increased 
cooperation between municipalities. Relevant reform 
proposals should be put in place within a reasonable 
timeframe. 

limited 

progress 

has  made 

Estonia 
in 
implementing  the  CSR.  Limited  adjustments  have 
been  made  to  two  Acts  to  facilitate  voluntary 
mergers  of  municipalities,  but  cover  neither  local 
government revenue nor services, and their possible 
impact  is  likely  to  be  small.  With  respect  to 
services, an action plan is being prepared and pilot 
projects  are  ongoing,  while  some  clarity  may  soon 
be brought to respective responsibilities in the upper 
secondary  education  sector.  Nevertheless, 
low 
accessibility  and  quality  of  services  provided  at 
local level remain a hindrance to the re-employment 
of the long-term unemployed. 

Europe 2020 (national targets and progress) 

Employment rate target set in the 2011 NRP  

Employment rate (%)  

76% 

66.7% in 2010 

70.4% in 2011  

71.7% in 2012.  

Around  43  000  people  must  be  brought  into  the 

25 

 
 
 
labour market in absolute terms to achieve the target 
of  76%.  The  employment  rate  continues  to  grow 
due  to  more  previously  unemployed  people  being 
re-employed  and  more  inactive  people  joining  the 
labour force. 

2.36% in 2011, already surpassing the intermediate 
target  of  2%  set  for  2015.  However  the  steep 
increase from 2010 (1.63%) was due mainly to one 
investment  in  a  shale-oil  testing  facility  that  was 
recorded as a private investment, resulting in private 
R&D  expenditure  in  2011  doubling  in  absolute 
terms compared to 2010. This one-off investment is 
not  expected  to  be  reproduced  next  year.  Without 
this  investment,  the  Estonian  authorities  estimate 
that  the  increase  in  private  R&D  expenditures 
would  have  been  20  %  instead  of  100%  between 
2010  and  2011.  The  investment  was  made  by 
Energy Estonia, which is a  public enterprise, but it 
was registered as a private R&D investment due to 
statistical  procedures.  It  is  therefore  expected  that 
next  year  Estonia's  R&D  intensity  will  decrease  to 
some extent, but will still be well on track to  meet 
the 2020 target. 

According  to  the  national  projections  submitted  to 
the Commission lately and when existing measures 
are  taken  into  account,  the  target  is  expected  to  be 
missed:  +12% 
to  2005 
(representing a projected gap of (only) 1 percentage 
point compared to the target). 

in  2020  compared 

However,  according  to  the  most  recent  inventory 
data  non-ETS  greenhouse  gas  emissions  increased 
by  9%  between  2005  and  2011  and  are  already 
above the target for 2013 set by the Effort Sharing 
Decision. It can therefore be expected that the GHG 
emission target will not be reached. 

The share of renewable energy in gross final energy 
consumption  was  25.9%  in  2011  and  0.2%  in 
transport  (Source:  Eurostat  April  2013.  Only 
formally  reported  biofuels  compliant  with  Articles 
17 and 18 of Directive 2009/28/EC are included). 

of 

Estonia  has  set  an  indicative  national  energy 
efficiency  target  in  accordance  with  Articles  3  and 
24 
the  Energy  Efficiency  Directive 
(2012/27/EU).  It  has  also  expressed  it,  as  required, 
in  terms  of  an  absolute  level  of  primary  and  final 
energy  consumption  in  2020  and  has  provided 
information  on  the  basis  on  which  this  has  been 
calculated. 

Early  school  leaving:  10.9%  in  2011  and  10.5%  in 
2012.  Estonia  performs  slightly  better  than  the  EU 
average for the early school leaving rate (10.5% vs 
12.9%  in  2012).  It  is  getting  close  to  both  the  EU 
headline  target  for  2020  (10%)  and  its  national 

R&D target set in the 2011 NRP: 3% by 2020 

Greenhouse  gas  (GHG)  emissions  target:  limit  the 
increase  in  non-ETS  emissions  to  no  more  than  +11% 
compared to 2005 

Renewable energy target: 25% by 2020 

Share of renewable energy in all modes of transport:  
10% 

Indicative national energy efficiency target for 2020: 
stabilisation of final energy consumption in 2020 at the 
level of 2010. 

This means reaching a 2020 level of 6.5 Mtoe primary 
consumption and 2.84 Mtoe final energy consumption. 

Early school leaving target: 9.5% 

26 

 
 
 
 
leavers 

target  (9.5%).  It  is  also  worth  noting  that  a 
significant reduction in the early school leaving rate 
for males has taken place in recent years. 
As  regards  the  period  2010-11  the  early  school 
leaving rate has decreased by 0.7 pps. 
training 
Early 
(percentage  of  the  population  aged  18-24  with  at 
most  lower  secondary  education  and  not  in  further 
education or training): 
2010: 11.6% 
2011: 10.9% 
2012: . 

from  education  and 

Tertiary education target: 40% 

Tertiary  education  attainment:  40.3%  in  2011  and 
39.1%  in  2012.  Estonia  performs  also  better  than 
the  EU  average  for  the  tertiary  attainment  rate 
(39.1% as against 35.8% in 2012). It has in this area 
almost  reached  both  its  national  target  and  the  EU 
target  for  2020.  In  addition,  a  strong  increase  in 
tertiary attainment of females was noted for Estonia. 
In  the  period  2011-12  the  tertiary  attainment  rate 
decreased by 1.2 pps, however: 
2010: 40.0% 
2011: 40.3% 
2012: 39.1%. 

Target for the reduction of population at risk of poverty: 
15% in 2020 

2010: 15.8% 

2011: 17.5%. 

A reduction in the at-risk-of-poverty rate from  
17.5% in 2010 (income year) to 15% in 2020 
(income year) means that the number of people who 
are at risk of poverty will be reduced by 36 248. 

With the increase in 2011 and given the previously 
stable level of around 18-19%, the task of meeting 
the target is very challenging. 

27 

 
 
 
5.  ANNEX 

Table I. Macroeconomic indicators 

Core indicators
GDP growth rate
Output gap 1
HICP (annual % change)
Domestic demand (annual % change) 2
Unemployment rate (% of labour force) 3
Gross fixed capital formation (% of GDP)
Gross national saving (% of GDP)
General Government (%  of GDP)
Net lending (+) or net borrowing (-)
Gross debt
Net financial assets 
Total revenue 
Total expenditure
  of which: Interest
Corporations (%  of GDP)
Net lending (+) or net borrowing (-)

1995-
1999

2000-
2004

2005-
2009

2010

2011

2012

2013

2014

5.7
-4.3
10.2
6.4
10.0
27.3
20.9

-0.2
7.1
34.3
39.2
39.5
0.4

7.3
2.7
3.5
9.7
11.3
28.8
22.3

0.7
5.3
29.6
35.8
35.1
0.2

1.6
4.4
5.2
0.8
7.5
31.1
22.6

0.3
4.9
29.8
37.6
37.3
0.2

3.3
-6.0
2.7
1.1
16.9
19.1
23.3

0.2
6.7
36.5
40.9
40.7
0.1

8.3
0.5
5.1
9.8
12.5
21.7
26.1

1.2
6.2
35.2
39.5
38.3
0.1

3.2
1.4
4.2
7.6
10.2
25.0
25.0

-0.3
10.1
n.a
40.2
40.5
0.2

3.0
1.2
3.6
2.6
9.7
24.7
25.4

-0.3
10.2
n.a
39.3
39.6
0.2

4.0
1.3
3.1
3.7
9.0
25.3
26.0

0.2
9.6
n.a
37.8
37.6
0.2

-7.6

-5.6

-2.3

7.1

6.1

4.4

4.8

4.4

n.a
n.a
17.9
30.7

n.a
n.a
16.8
30.2

n.a
n.a
16.7
30.0

-3.3
n.a
36.4
2.4
14.1
1.9

-105.2
-7.7
20.6
23.4

-160.6
0.5
12.1
28.6

-146.0
2.6
15.7
31.0

-169.5
-1.4
20.3
29.5

-121.7
-16.6
22.5
30.6

0.5
51.1
37.5
1.0
18.2
3.9

-0.7
51.2
36.9
1.8
16.6
3.8

-5.5
62.6
37.1
1.8
13.9
0.3

-3.3
48.2
34.2
2.3
15.6
0.2

-1.8
49.6
35.6
2.8
14.9
3.1

Net financial assets; non-financial corporations
Net financial assets; financial corporations
Gross capital formation
Gross operating surplus
Households and NPISH (%  of GDP)
Net lending (+) or net borrowing (-)
Net financial assets
Gross wages and salaries
Net property income
Current transfers received
Gross saving
Rest of the world (%  of GDP)
Net lending (+) or net borrowing (-)
Net financial assets
Net exports of goods and services
Net primary income from the rest of the world
Net capital transactions 
Tradable sector
Non tradable sector
  of which: Building and construction sector
Real effective exchange rate (index, 2000=100)
Terms of trade goods and services (index, 2000=100)
Market performance of exports (index, 2000=100)
Notes:
1 The output gap constitutes the gap between the actual and potential gross domestic product at 2005 market prices.
2 The indicator on domestic demand includes stocks.
3  Unemployed persons are all persons who were not employed, had actively sought work and were ready to begin working immediately or within two weeks. 
The labour force is the total number of people employed and unemployed. The unemployment rate covers the age group 15-74.

6.7
73.0
6.7
-5.6
3.5
45.7
41.5
5.1
125.2
101.4
98.2

4.8
59.0
3.9
-5.2
4.2
46.7
40.4
5.6
121.6
98.2
112.2

0.3
n.a
0.5
-4.5
3.4
45.6
41.1
6.5
123.5
97.7
118.1

-7.5
78.6
-4.9
-4.8
1.7
45.2
42.7
8.1
120.1
102.9
93.6

0.4
n.a
1.3
-4.0
2.4
n.a
n.a
n.a
127.1
97.8
122.1

0.4
n.a
1.0
-4.0
2.6
n.a
n.a
n.a
125.5
97.7
120.5

-8.2
60.4
-5.6
-4.3
0.5
49.7
39.4
5.6
89.1
94.7
88.5

-7.9
27.5
-8.9
-0.9
0.5
49.9
38.5
5.6
80.4
86.7
75.0

-3.8
n.a
36.1
2.0
13.7
1.6

-3.7
n.a
36.2
2.2
14.0
1.6

Source :
Commission services’ 2013 spring forecasts (COM); Stability programme (SP).

28 

 
 
Table II. Comparison of macroeconomic developments and forecasts 

Real GDP (% change)
Private consumption (% change)
Gross fixed capital formation (% change)
Exports of goods and services (% change)
Imports of goods and services (% change)
Contributions to real GDP growth:
- Final domestic demand
- Change in inventories
- Net exports
Output gap1
Employment (% change)
Unemployment rate (%)
Labour productivity (% change)
HICP inflation (%)
GDP deflator (% change)
Comp. of employees (per head, % change)
Net lending/borrowing vis-à-vis the rest of 
the world (% of GDP)

2012
COM SP
3.2
4.5
20.9
5.6
9.1

3.2
4.4
21.0
5.6
9.1

2013
COM SP
3.0
3.8
5.2
4.5
5.1

3.0
3.3
3.0
4.1
3.6

2014
COM SP
3.6
3.8
5.8
6.0
5.9

4.0
3.5
7.3
6.2
5.9

2015
SP
3.5
4.3
6.1
6.5
7.0

2016
SP
3.5
3.6
7.2
6.8
7.2

2017
SP
3.5
3.6
7.2
6.8
7.2

7.6
-0.3
-2.9
1.4
2.2
10.2
1.0
4.2
3.2
6.7
0.3

7.6
-0.4
-2.9
1.6
2.5
10.2
1.1
4.2
3.2
7.4
2.2

2.7
-0.1
0.5
1.2
0.3
9.7
2.7
3.6
3.1
5.7
0.4

3.4
0.0
-0.5
1.4
0.3
9.1
2.7
3.6
3.5
4.9
2.0

3.7
0.0
0.3
1.3
1.0
9.0
3.0
3.1
3.3
6.1
0.4

3.5
-0.1
0.1
1.1
0.4
8.3
3.2
2.9
3.1
4.9
1.4

3.8
0.0
-0.5
0.9
0.0
7.8
3.5
2.9
3.0
8.4
-0.2

3.8
0.0
-0.4
0.8
0.0
7.5
3.5
2.9
2.9
6.5
-1.1

3.9
-0.1
-0.4
0.6
0.0
6.9
3.5
2.8
2.8
6.1
-1.0

Note:
1In percent of potential GDP, with potential GDP growth recalculated by Commission services on the basis of the programme scenario 
using the commonly agreed methodology.

Source :

Commission services’ 2013 spring forecasts (COM); Stability programme (SP).

29 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Table III. Composition of the budgetary adjustment 

(% of GDP)

Revenue
of which:
- Taxes on production and imports
- Current taxes on income, wealth, etc.
- Social contributions
- Other (residual)
Expenditure
of which:
- Primary expenditure

of which:

Compensation of employees
Intermediate consumption
Social payments
Subsidies
Gross fixed capital formation
Other (residual)
- Interest expenditure
General government balance (GGB)
Primary balance
One-off and other temporary measures
GGB excl. one-offs

Output gap

2

Cyclically-adjusted balance

2

3
Structural balance (SB)
Change in SB
Two year average change in SB 

3

Structural primary balance
Change in structural primary balance
Expenditure benchmark

Applicable reference rate

4

2012

2013

2014

2015

2016

2017

COM COM SP
39.4
39.3
40.2

1
COM
37.8

14.3
7.0
11.9
7.1
40.5

14.1
7.0
11.4
6.8
39.6

14.1
7.1
11.5
6.7
39.9

13.9
6.9
11.1
5.9
37.6

SP
37.3

13.8
7.0
11.2
5.3
37.3

SP
35.5

13.7
6.8
11.2
3.8
35.3

SP
34.8

13.5
6.9
11.1
3.3
34.1

SP
35.4

13.2
7.0
11.0
4.2
34.6

40.3

39.5

39.7

37.4

37.1

35.1

33.9

34.3

10.8
7.4
13.1
1.0
5.6
2.4
0.2
-0.3
-0.1
-0.8
0.6

1.4

-0.7

0.2
0.8
0.6

0.3

11.1
6.7
13.0
1.0
5.0
2.6
0.2
-0.3
-0.1
-0.5
0.2

1.2

-0.6

-0.2
-0.4
0.2

0.0
-0.4

10.6
7.3
12.9
1.0
5.2
2.8
0.2
-0.5
-0.4
-0.5
0.0

1.4

-0.9

-0.4
-0.6
0.1

-0.2
-0.6

11.0
6.1
12.9
1.0
4.2
2.2
0.2
0.2
0.4
-0.3
0.5

1.3

-0.2

0.2
0.3
0.0

0.3
0.3

10.3
7.1
12.7
1.1
3.8
2.2
0.2
0.0
0.1
-0.6
0.6

1.1

-0.3

0.3
0.7
0.1

0.5
0.7

10.0
7.0
12.7
1.1
2.4
2.0
0.2
0.2
0.4
-0.4
0.6

0.9

-0.1

0.3
0.1
0.4

0.5
0.1

9.7
6.8
12.5
1.1
2.3
1.5
0.2
0.7
0.9
-0.3
1.0

0.8

0.5

0.8
0.4
0.2

1.0
0.4

9.4
6.7
12.2
1.1
3.5
1.4
0.3
0.8
1.1
-0.3
1.1

0.6

0.6

0.9
0.1
0.3

1.2
0.2

1.01

2.26

2.26

2.11

0.85

2.11

2.11

n.a.

Change: 
2012-2017

SP
-4.8

-1.1
0.0
-0.9
-2.9
-5.9

-6.0

-1.4
-0.6
-0.9
0.1
-2.1
-1.0
0.1
1.1
1.2
0.5
0.5

-0.7

1.3

0.7
-
-

0.9
-

-

5

-0.3

0.1

-0.1

0.0

0.9

1.0

-1.1

n.a.

 (% GDP)

Deviation
Two-year average deviation (% GDP)
Notes:
1On a no-policy-change basis.
2Output gap (in % of potential GDP) and cyclically-adjusted balance according to the programme as recalculated by Commission services 
on the basis of the programme scenario using the commonly agreed methodology.
3Structural (primary) balance = cyclically-adjusted (primary) balance excluding one-off and other temporary measures.

-0.1

-0.8

-0.1

n.a.

0.4

0.9

0.1

1.0

-
-

4 Reference medium-term rate of potential GDP growth. The (standard) reference rate applies from year t+1, if the country has reached its 
M TO in year t. A lower  rate applies as long as the country is adjusting towards its M TO, including in year t.The reference rates applicable 
to 2014 onwards have been updated in 2013. 
5 Deviation of the growth rate of public expenditure net of discretionary revenue measures and revenue increases mandated by law from the 
applicable reference rate. The expenditure aggregate used for the expenditure benchmark is obtained following the commonly agreed 
methodology. A positive sign implies that expenditure growth exceeds the applicable reference rate. 

Source :
Stability programme (SP); Commission services’ 2013 spring forecasts (COM); Commission services’ calculations.

30 

 
 
Table IV. Debt dynamics 

(% of GDP)

Gross debt ratio1
Change in the ratio
Contributions 2 :

1. Primary balance

2. “Snow-ball” effect

Of which:

Interest expenditure

Growth effect

Inflation effect

3. Stock-flow adjustment

Of which:

Cash/accruals diff.

Acc. financial assets

Privatisation

Val. effect & residual

5,6

Gap to the debt benchmark
Structural adjustment7
To be compared to:
Required adjustment8
Notes:

Average
2007-2011

5.7

0.4

0.1

0.0

0.2

0.0

-0.2

0.3

2012

10.1

3.9

0.1

-0.2

0.2

-0.2

-0.2

4.0

2013

2014

COM

10.2

0.1

0.1

-0.4

0.2

-0.3

-0.3

0.4

SP

10.2

0.1

0.4

-0.5

0.1

-0.3

-0.3

0.2

COM

9.6

-0.6

-0.4

-0.5

0.2

-0.4

-0.3

0.3

SP

9.9

-0.3

-0.1

-0.5

0.1

-0.3

-0.3

0.3

2015
SP

9.3

-0.6

2016
SP

8.8

-0.5

2017
SP

8.3

-0.5

-0.4

-0.4

0.2

-0.3

-0.3

0.2

-0.9

-0.4

0.2

-0.3

-0.3

0.8

-1.1

-0.2

0.3

-0.3

-0.2

0.8

2013

2014

2015

2016

2017

2012

n.r.

n.r.

COM / 
3

SP

n.r.

n.r.

SP4

n.r.

n.r.

COM / 
3

SP
n.r.

n.r.

SP4

n.r.

n.r.

SP

n.r.

n.r.

SP

n.r.

n.r.

SP

n.r.

n.r.

n.r.

n.r.

n.r.

n.r.

n.r.

n.r.

n.r.

n.r.

1End of period.
2The snow-ball effect captures the impact of interest expenditure on accumulated debt, as well as the impact of real GDP growth and 
3 Assessment of the consolidation path set in SP assuming growth follows the COM  forecasts.
4Assessment of the consolidation path set in the SP assuming growth follows the SP projections.
5Not relevant for M ember Sates that were subject to an EDP procedure in November 2011 and for a period of three years following the 
6Shows the difference between the debt-to-GDP ratio and the debt benchmark. If positive, projected gross debt-to-GDP ratio does not 
7Applicable only during the transition period of three years from the correction of the excessive deficit for EDP that were ongoing in 
8Defines the remaining annual structural adjustment over the transition period which ensures that - if followed – M ember State will 
comply with the debt reduction benchmark at the end of the transition period, assuming that COM  (SP) budgetary projections for the 
previous years are achieved.

Source :
Stability programme (SP); Commission services’ spring 2013 forecasts (COM); Commission services’ calculations.

31 

 
 
 
 
 
Table V. Sustainability indicators 

S2

of which:

Initial budgetary position (IBP)

Long-term cost of ageing (CoA)

of which:

Pensions

Health care

Long-term care

Others

S1 (required adjustment)*

of which:

Initial budgetary position (IBP)

Debt requirement (DR)

Long-term cost of ageing (CoA)

S0 (risk for fiscal stress)**

Debt,  % of GDP (2012)

Age-related expenditure, % of GDP (2012)

EE

EU27

No-policy 
change 
scenario 

Programme 
(SCP) 
scenario

No-policy 
change 
scenario 

Programme 
(SCP) 
scenario

1.2

0.5

0.7

-0.1

0.7

0.2

-0.2

-3.4

-0.4

-3.1

0.2

0.4

-0.6

1.0

0.2

0.7

0.2

-0.1

-4.1

-0.9

-3.5

0.2

3.0

0.8

2.2

1.0

0.9

0.6

-0.4

2.2

0.0

1.9

0.3

1.3

-0.9

2.2

1.1

0.8

0.6

-0.3

0.5

-1.8

1.9

0.4

0.22

10.1

19.1

:

87.0

25.8

Note: 
The 'No-policy change' scenario depicts the sustainability gap under the assumption that the budgetary position evolves 
according to the Commissions' spring 2013 forecast until 2014. The 'Programme (SCP)' scenario depicts the sustainability gap 
under the assumption that the budgetary plans in the programme are fully implemented.
* The required adjustment of the primary balance until 2020 to reach a public debt of 60% of GDP by 2030.              
** The critical threshold for the S0 indicator is 0.44. 

Source : 
Commission services; 2013 stability programme.                                                                                                                               

(% of GDP)
16

Gross debt as % of GDP - EE - Medium term debt projections

14

12

10

8

6

4

2

0

0
9
9
1

2
9
9
1

4
9
9
1

6
9
9
1

8
9
9
1

0
0
0
2

2
0
0
2

4
0
0
2

6
0
0
2

8
0
0
2

0
1
0
2

2
1
0
2

4
1
0
2

6
1
0
2

8
1
0
2

0
2
0
2

2
2
0
2

4
2
0
2

6
2
0
2

8
2
0
2

0
3
0
2

COM no-policy change scenario

COM + Shock ( -1p.p. in the short-term/long-term interest rate on maturing and new debt from 2015)

COM + Shock (+1p.p. in the short-term/long-term interest rate on maturing and new debt from 2015)

COM consolidation scenario (0.5% per year on SB) in order to achieve MTO

COM consolidation scenario (1% per year on SB) in order to achieve MTO

SCP scenario

32 

 
 
 
 
Table VI. Taxation indicators 

Total tax revenues (incl. actual compulsory social contributions, % of GDP)

31.0

30.7

31.9

35.9

34.1

32.8

2002

2006

2008

2009

2010

2011

Breakdown by economic function (% of GDP)1
     Consumption

              of which:

              - VAT

              - excise duties on tobacco and alcohol

             - energy

             - other (residual)

     Labour employed

     Labour non-employed

     Capital and business income

     Stocks of capital/wealth
     p.m.  Environmental taxes 2
3
VAT efficiency
     Actual VAT revenues as % of theoretical revenues at standard rate

11.9

13.0

11.7

14.5

13.6

13.6

8.4

1.6

1.5

0.4

9.1

1.6

1.8

0.5

7.9

1.3

2.0

0.5

8.9

2.5

2.6

0.5

8.8

1.7

2.6

0.5

8.5

2.0

2.5

0.6

16.7

14.9

17.1

18.2

17.8

16.7

0.2

1.6

0.6

2.0

0.3

2.0

0.6

2.2

0.3

2.1

0.6

2.3

0.5

2.2

0.6

3.0

0.4

1.7

0.6

3.0

0.4

1.6

0.6

2.8

69.7

80.7

66.6

66.3

68.5

68.8

Note: 
1 Tax revenues are broken down by economic function, i.e. according to whether taxes are raised on consumption, labour or capital. See European Commission 
(2013) Taxation trends in the European Union, for a more detailed explanation.
2 This category comprises taxes on energy, transport and pollution and resources included in taxes on consumption and capital.
3 The VAT efficiency is measured via the VAT revenue ratio. The VAT revenue ratio is defined as the ratio between the actual VAT revenue collected and the 
revenue that would theoretically be raised if VAT was applied at the standard rate to all final consumption. A low ratio can indicate a reduction of the tax base due 
to large exemptions or the application of reduced rates to a wide range of goods and services ('policy gap') or a failure to collect all tax due to e.g. fraud ('collection 
gap'). See European Commission (2012), Tax reforms in EU M ember States, European Economy 6/2012 and Taxation Papers 34/2012 for a more detailed 
explanation.

Source: Commission

33 

 
 
 
Table VII. Financial market indicators 

2008

2009

2010

2011

2012

Total assets of the banking sector (% of GDP)

136.1

154.8

141.8

119.1

116.5

Share of assets of the five largest banks (% of total assets)

Foreign ownership of banking system (% of total assets)
Financial soundness indicators:
              - non-performing loans (% of total loans)1)
              - capital adequacy ratio (%) 1)
              - return on equity (%) 1), 2)
Bank loans to the private sector (year-on-year % change)

Lending for house purchase (year-on-year % change)

Loan to deposit ratio

CB liquidity as % of liabilities

Banks' exposure to countries receiving official financial assistance  (% of GDP)

Private debt (% of GDP)
Gross external debt (% of GDP)4)
            - Public
            - Private

Long term interest rates spread versus Bund (basis points)*

Credit default swap spreads for sovereign securities (5-year)*
Notes: 

1) Latest data (September 2012).
2) Branches of foreign banks are excluded.
3) Latest data 2012Q3.

94.8

97.1

1.9
18.9

13.4

0.0

0.0

93.4

94.9

5.2
22.3

-24.6

-4.8

-1.8

92.3

…

5.4
22.1

2.1

-4.4

-2.1

90.6

…

4.1
18.6

33.3

-3.5

-1.5

…

…

3.4
19.6

13.9

-0.4

0.2

203.9

184.0

169.0

145.2

134.0

…

…

…

…

…

…

0.0

…

101.5

113.6

104.2

90.4

3.1
48.1

4.2

6.1
51.6

4.8

5.2
53.2

3.2

3.4
50.5

…

0.1

…

86.3

6.0
51.0

…

524.8

373.9

107.2

102.6

101.2

* M easured in basis points.

Source :

Bank for International Settlements and Eurostat (exposure to macro-financially vulnerable countries), IMF (financial soundness indicators), 
Commission (long-term interest rates), World Bank (gross external debt) and ECB (all other indicators).

34 

 
 
 
Table VIII. Labour market and social indicators 

Labour market indicators
Employment rate
(% of population aged 20-64)
Employment growth 
(% change from previous year)
Employment rate of women
(% of female population aged 20-64)
Employment rate of men 
(% of male population aged 20-64)
Employment rate of older workers 
(% of population aged 55-64)
Part-time employment (% of total employment, 
15 years and more)
Part-time employment of women  (% of women employment, 15 
years and more)
Part-time employment of men  (% of men employment, 15 years 
and more)
Fixed term employment (% of employees with a fixed term 
contract, 15 years and more)
Transitions from temporary 
to permanent employment
Unemployment rate1 (% of labour force, 
age group 15-74)
Long-term unemployment rate2 (% of labour force)
Youth unemployment rate 
(% of youth labour force aged 15-24)
Youth NEET rate (% of population aged 15-24)

Early leavers from education and training (% of pop. 18-24 with at 
most lower sec. educ. and not in further education or training)

Tertiary educational attainment (% of population 30-34 having 
successfully completed tertiary education)
Formal childcare (from 1 to 29 hours; % over the population less 
than 3 years)
Formal childcare (30 hours or over; % over the population less 
than 3 year)
Labour productivity per person employed (annual % change)

Hours worked per person employed  (annual % change)
Labour productivity per hour worked (annual % change; constant 
prices)

Compensation per employee (annual % change; constant prices)

Nominal unit labour cost growth (annual % change)

Real unit labour cost growth (annual % change)

2007

2008

2009

2010

2011

2012

76.8

77.0

69.9

66.7

70.4

72.1

0.7

72.5

81.4

60.0

8.2

0.2

72.8

81.7

62.4

7.2

12.1

10.4

4.3

2.1

0.6

4.6

2.3

10.1

8.9

14.4

4.1

2.4

0.1

5.5

1.7

12.1

8.8

14.0

-9.9

68.8

71.0

60.4

10.5

13.8

7.0

2.5

0.9

13.8

3.8

27.5

14.9

13.9

-4.8

65.7

67.7

53.8

11.0

14.5

7.1

3.7

0.5

16.9

7.7

32.9

14.5

11.6

7.0

67.6

73.5

57.2

10.6

15.4

5.6

4.5

0.5

12.5

7.1

22.3

11.8

10.9

2.2

69.3

75.2

60.6

10.4

14.9

5.8

3.7

:

10.2

5.5

20.9

12.5

10.5

33.3

34.1

35.9

40.0

40.3

39.1

1.0

14.0

6.6

-0.2

6.8

12.0

17.2

5.0

1.0

16.0

-4.3

-1.5

-2.8

4.0

14.6

8.7

4.0

2.0

4.0

21.0

19.0

15.0

-4.5

-6.9

2.5

-1.8

1.4

2.8

8.5

2.6

5.8

1.1

-6.2

-6.8

1.2

2.3

-1.1

-3.0

-1.4

-4.2

:

:

1.1

-1.6

2.8

3.0

5.6

2.3

Notes:
1 Unemployed persons are all persons who were not employed, had actively sought work and were ready to begin working immediately or within 
two weeks. The labour force is the total number of people employed and unemployed.

2 Long-term unemployed are unemployed persons for at least 12 months.

Sources: 
Commission (EU Labour Force Survey and European National Accounts) 

35 

 
 
 
Expenditure on social protection benefits (% of 
GDP)
Sickness/Health care

Invalidity

Old age and survivors

Family/Children

Unemployment

Housing and Social exclusion n.e.c.

Total

of which:  means tested benefits
Social inclusion indicators
At-risk-of-poverty or social exclusion1 
(% of total population)
At-risk-of-poverty or social exclusion of children 
(% of people aged 0-17)
At-risk-of-poverty or social exclusion of elderly 
(% of people aged 65+)
At-Risk-of-Poverty rate2 (% of total population)
Severe Material Deprivation3  (% of total population)
Share of people living in low work intensity households 4 (% of 
people aged 0-59)
In-work at-risk-of poverty rate (% of persons employed)
Impact of social transfers (excluding pensions) on reducing 
poverty
Poverty thresholds, expressed in national currency at constant 
prices5

2006

2007

2008

2009

2010

3.74

1.14

5.41

1.45

0.11

0.04

11.96

0.10

4.00

1.12

5.24

1.38

0.14

0.02

11.96

0.07

4.78

1.45

6.35

1.77

0.30

0.02

14.76

0.06

5.41

1.90

8.12

2.28

1.23

0.03

19.08

0.10

4.80

1.95

7.90

2.28

0.76

0.05

17.88

0.15

2007

2008

2009

2010

2011

22.0

20.1

35.4

19.4

5.6

6.2

7.8

21.8

19.4

40.9

19.5

4.9

5.3

7.3

23.4

24.5

35.6

19.7

6.2

5.6

8.1

21.7

24.0

19.0

15.8

9.0

8.9

6.5

23.1

24.8

17.0

17.5

8.7

9.9

7.9

23.0

21.1

23.9

36.5

29.7

2669

3118

3155

2905

2764

Gross disposable income (households)

8213

8828

8351

8034

8610

Relative median poverty risk gap (60% of median equivalised 
income, age: total)

20.2

20.3

17.0

23.2

26.0

Notes:
1 People at-risk-of poverty or social exclusion (AROPE): individuals who are at-risk-of poverty (AROP) and/or suffering from severe 
material deprivation (SM D) and/or living in household with zero or very low work intensity (LWI).
2 At-risk-of poverty rate (AROP): share of people with an equivalised disposable income below 60% of the national equivalised median 
income. 
3 Share of people who experience at least 4 out of 9 deprivations: people cannot afford to i) pay their rent or utility bills, ii) keep their 
home adequately warm, iii) face unexpected expenses, iv) eat meat, fish, or a protein equivalent every second day, v) enjoy a week of 
holiday away from home once a year, vi) have a car, vii) have a washing machine, viii) have a colour tv, or ix) have a telephone.

4 People living in households with very low work intensity: share of people aged 0-59 living in households where the adults (excluding 
dependent children) work less than 20% of their total work-time potential during the previous 12 months.

5 For EE, CY, M T, SI, SK, thresholds in nominal values in Euros; HICP -  index 100 in 2006 (2007 survey refers to 2006 incomes)

Sources: 
For expenditure for social protection benefits ESSPROS; for social inclusion EU-SILC.

36 

 
 
 
 
 
Table IX. Product market performance and policy indicators 

Performance indicators

Labour productivity1 total economy (annual 
growth in %)
Labour productivity1 in manufacturing (annual 
growth in %)
Labour productivity1 in electricity, gas, steam and 
air conditioning supply (annual growth in %)
Labour productivity1 in the construction sector 
(annual growth in %)
Total number of patent2 applications per million of 
labour force

Policy indicators

Enforcing contracts 3 (days)
Time to start a business 3 (days)
R&D expenditure (% of GDP)
Tertiary educational attainment 
(% of 30-34 years old population)
Total public expenditure on education 
(% of GDP)

Product market regulation4, Overall
(Index; 0=not regulated; 6=most regulated)
Product market regulation4, Retail
(Index; 0=not regulated; 6=most regulated)
Product market regulation4, Network Industries 5
(Index; 0=not regulated; 6=most regulated)

2003-
2007

6.0

7.5

0.9

2008

2009

2010

2011

2012

-4.3

-4.5

8.5

-6.3

-17.5

30.9

1.2

6.9

1.0

0.3

-9.3

8.4

-12.6

10.6

n.a.

-1.7

7.8

-3.7

27.4

-2.2

11.6

22.1

49.3

63.3

74.6

n.a.

n.a.

2003-
2007
425

44

1.0

2008

2009

2010

2011

2012

425

7

1.3

425

7

1.4

425

7

1.6

425

7

2.4

425

7

n.a.

30.3

34.1

35.9

40.0

40.3

40.0

4.90

5.59

6.09

n.a.

n.a.

n.a.

2007

2008

2009

2010

2011

2012

n.a.

n.a.

1.3

1.8

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

2.5

n.a.

n.a.

n.a.

n.a.

n.a.

Notes:
1 Labour productivity is defined as gross value added (in constant prices) divided by the number of persons employed.
2 Total number of patent applications to the European Patent Office (EPO) per million of labour force

3 The methodologies, including the assumptions, for this indicator are presented in detail on the website 
http://www.doingbusiness.org/methodology. 

4 The methodologies of the product market regulation indicators are presented in detail on the website 
http://www.oecd.org/document/1/0,3746,en_2649_34323_2367297_1_1_1_1,00.html. The latest available product market 
regulation indicators refer to 2003 and 2008, except for Network Industries.
5 Aggregate Energy, Transport and Communications Regulation (ETCR).
*figure for 2007.

Source :
Commission, World Bank - Doing Business  (for enforcing contracts and time to start a business) and OECD (for the 
product market regulation indicators). 

37 

 
 
 
Table X. Green Growth 

Green Growth performance

Macroeconomic
Energy intensity 
Carbon intensity 
Resource intensity (reciprocal of resource productivity)
Waste intensity 
Energy balance of trade 
Energy weight in HICP
Difference between change energy price and inflation 
Environmental taxes over labour taxes
Environmental taxes over total taxes

Sectoral 

Industry energy intensity 
Share of energy-intensive industries in the economy
Electricity prices for medium-sized industrial users**
Gas prices for medium-sized industrial users***
Public R&D for energy 
Public R&D for the environment
Recycling rate of municipal waste
Share of GHG emissions covered by ETS*
Transport energy intensity
Transport carbon intensity
Security of energy supply
Energy import dependency
Diversification of oil import sources 
Diversification of energy mix
Share renewable energy in energy mix

kgoe / €
kg / €
kg / €
kg / €
% GDP
%
%
ratio
ratio

kgoe / € 
% GDP
€ / kWh
€ / kWh
% GDP
% GDP
ratio
%
kgoe / €
kg / €

%
HHI
HHI
%

2002-
2006

0.67
2.27
3.35
n.a.
-2.6%
n.a.
n.a.
13.0%
6.8%

0.34
9.6
n.a.
n.a.
n.a.
n.a.
16.5%
n.a.
n.a.
n.a.

n.a.
n.a.
n.a.
n.a.

2007

2008

2009

2010

2011

0.59
2.05
3.67
n.a.
-3.5%
11
7.2
13.8%
7.0%

0.31
9.8
0.05
0.02
0.02%
0.04%
23.4%
72.7%
0.63
1.80

23.8%
0.25
0.44
9.9%

0.59
2.00
3.41
1.98
-4.2%
12
14.9
13.1%
7.3%

0.32
10.1

0.06
0.03
0.02%
0.03%
20.4%
68.9%
0.67
1.91

24.0%
0.29
0.41
11.0%

0.62
1.93
3.69
n.a.
-2.3%
13
3.7
16.0%
8.4%

0.29
9.9
0.06
0.03
0.02%
0.03%
20.7%
63.7%
0.72
2.07

21.4%
0.28
0.40
13.5%

0.70
2.34
n.a.
2.17
-1.6%
13
3.9
16.3%
8.8%

0.26
n.a.
0.07
0.03
0.02%
0.08%
19.9%
72.6%
n.a.
n.a.

13.1%
0.26
0.47
13.9%

0.65
n.a.
n.a.
n.a.
-1.3%
14
1.3
n.a.
n.a.

n.a.

n.a.
0.07
0.03
0.02%
0.05%
n.a.
70.7%
n.a.
n.a.

11.7%
n.a.
0.49
13.5%

Country-specific notes: 
The year 2012 is not included in the table due to lack of data.
General explanation of the table items:
Source: Eurostat unless indicated otherwise; ECFIN elaborations indicated below
All macro intensity indicators are expressed as a ratio of a physical quantity to GDP (in 2000 prices)
          Energy intensity: gross inland energy consumption (in kgoe) divided by GDP (in EUR)
          Carbon intensity: Greenhouse gas emissions (in kg CO2 equivalents) divided by GDP (in EUR)
          Resource intensity: Domestic M aterial Consumption (in kg) divided by GDP (in EUR)
          Waste intensity: waste (in kg) divided by GDP (in EUR)
Energy balance of trade: the balance of energy exports and imports, expressed as % of GDP  
Energy weight in HICP: the share of the "energy" items in the consumption basket used in the construction of the HICP
Difference between energy price change and inflation: energy component of HICP, and total HICP inflation (annual %-change)
Environmental taxes over labour or total taxes: from DG TAXUD's database "Taxation trends in the European Union"
Industry energy intensity: final energy consumption of industry (in kgoe) divided by gross value added of industry (in 2005 EUR) 
Share of energy-intensive industries in the economy: share of gross value added of the energy-intensive industries in GDP
Electricity and gas prices medium industrial users: consumption band 500  - 2000M Wh and 10000 - 100000 GJ;  figures excl. VAT.
Recycling rate of municipal waste: ratio of municipal waste recycled over total municipal waste
Public R&D for energy or for the environment: government spending on R&D (GBAORD) for these categories as % of GDP
Share of GHG emissions covered by ETS: based on greenhouse gas emissions as reported by M ember States to EEA (excl LULUCF)
Transport energy intensity: final energy consumption of transport activity (kgoe) divided by transp industry gross value added (2005 EUR)
Transport carbon intensity:  greenhouse gas emissions in transport activity divided by gross value added of the transport sector
Energy import dependency: net energy imports divided by gross inland energy consumption incl. energy consumption international bunkers

Diversification of oil import sources: Herfindahl index (HHI), calculated as the sum of the squared market shares of countries of origin 

Diversification of the energy mix: Herfindahl Index over natural gas, total petrol products, nuclear heat, renewable energies and solid fuels

Share renewable energy in energy mix: %-share in  gross inland energy consumption, expressed in tonne oil equivalents

*Provisional data (15 April 213). Commission Services and EEA.

** For 2007 average of S1 & S2 for DE, LU, NL, FI, SE & UK. Other countries only have S2.

*** For 2007 average of S1 & S2 for IT, NL, FI, SE & UK. Other countries only have S2.

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