COMMISSION STAFF WORKING DOCUMENT Country Report Estonia 2017 Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN CENTRAL BANK AND THE EUROGROUP 2017 European Semester: Assessment of progress on structural reforms, prevention and correction of macroeconomic imbalances, and results of in-depth reviews under Regulation (EU) No 1176/2011 {COM(2017) 90 final} {SWD(2017) 67 final to SWD(2017) 93 final}
Date: 2017-02-22
Institutions: European Commission, Secretariat-General
Subjects: EU employment policy, EU investment, Estonia, economic development, economic recovery, euro area, fiscal policy, macroeconomics, multilateral surveillance, structural adjustment

EN 

   EN 

   EUROPEAN COMMISSION  Brussels, 22.2.2017  SWD(2017) 72 final   COMMISSION STAFF WORKING DOCUMENT Country Report Estonia 2017 Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN CENTRAL BANK AND THE EUROGROUP 2017 European Semester: Assessment of progress on structural reforms,  prevention and correction of macroeconomic imbalances, and results of in-depth reviews under Regulation (EU) No 1176/2011  {COM(2017) 90 final} {SWD(2017) 67 final to SWD(2017) 93 final}   
 
 
CONTENTS 

Executive summary 

1. 

Economic situation and outlook 

2. 

Progress with country-specific recommendations 

3. 

Reform priorities 

3.1.  Public finances and taxation 

3.2. 

Financial sector 

3.3. 

Labour market, education and social policies 

3.4. 

Investment 

3.5. 

Sectoral policies 

3.6.  Public administration 

A.  Overview Table 

B.  MIP Scoreboard 

C. 

Standard Tables 

References 

LIST OF TABLES 

1.1. 

2.1. 

Key economic, financial and social indicators - Estonia 

Summary table on 2016 CSRs assessment 

3.2.1.  Financial soundness indicators – All banks in Estonia 

B.1.  MIP SCOREBOARD for Estonia 

C.1. 

Financial market indicators 

C.2. 

Labour market and social indicators 

C.3. 

Labour market and social indicators (continued) 

C.4. 

Product market performance and policy indicators 

C.5.  Green growth 

LIST OF GRAPHS 

1.1. 

1.2. 

1.3. 

Real GDP growth and contributions 

Quarterly harmonised index of consumer prices (HICP) inflation (yoy % change) 

Breakdown of rate of change of unit labour costs (ULC) in Estonia (and euro area) 

1 

4 

10 

14 

14 

16 

19 

25 

32 

36 

39 

43 

44 

49 

9 

11 

16 

43 

44 

45 

46 

47 

48 

4 

5 

6 

 
 
 
 
1.4. 

1.5. 

1.6. 

1.7. 

Breakdown of external position (current and capital accounts) 

Exports market share breakdown – Estonia 

Net international investment position (NIIP) (% of GDP) 

Net lending/net borrowing by sector (% of GDP) 

3.1.1. 

Tax revenues from property taxes as percentage of GDP (2014) 

3.1.2. 

Tax wedge on single earners, various income levels (2015) 

3.2.1.  Credit cost for firms 

3.2.2.  Funding of non-financial corporations (2015) 

3.2.3. 

Lending trends - To non-financial corporations (NFC) and for house purchases 

3.2.4.  Changes in the house price index and commercial loans for house purchase - Estonia 

3.3.1. 

Tightening of the workforce 

3.3.2.  Gender pay gap in unadjusted form 

3.3.3. 

Labour market outcomes by skills level and by gender 

3.3.4.  At-risk-of-poverty or social exclusion rate and its components (AROP, SMD, LWI) 

3.4.1.  Export market share growth by value of goods and services 

3.4.2.  Estonia's exports of goods to Russia and exports of mineral fuels (y-o-y change in %) – 

euro/rouble exchange rate 

3.4.3.  Dynamism and competitiveness of exports (goods) on top-10 country destinations (2014-

2015) - Estonia 

3.4.4.  Breakdown of real effective exchange rate (REER), nominal effective exchange rate 

(NEER), relative harmonised index of consumer prices (HICP) - Estonia 

3.4.5.  Nominal wage growth in Estonia in comparison with wage benchmarks 

3.4.6.  Profits and investment by companies in Estonia - Total economic activities and 

manufacturing sector 

3.4.7. 

Total factor productivity in Estonia over 2007-2015 - Index (2010 = 100) 

3.4.8. 

Total productivity on the basis of value-added - Estonia's total economy and 

manufacturing sector 

3.5.1.  Patent application to the European Patent Office (by priority year and per million people 

of active population) 

3.5.2.  Charge for the use of intellectual property from abroad as % of GDP 

LIST OF BOXES 

2.1. 

Contribution of the EU budget to structural change in Estonia 

3.4.1. 

Investment challenges and reforms in Estonia 

3.6.1.  Selected highlights: 'Work Ability' reform and high performance in international skills survey 

6 

7 

7 

8 

14 

15 

16 

17 

17 

18 

19 

20 

21 

22 

25 

25 

26 

26 

27 

28 

29 

29 

32 

33 

12 

30 

38 

 
 
 
 
EXECUTIVE SUMMARY 

This report assesses Estonia’s economy in the light 
of  the  European  Commission’s  Annual  Growth 
Survey  published  on  16 November  2016.  In  the 
survey,  the  Commission  calls  on  EU  Member 
States  to  redouble  their  efforts  on  the  three 
elements  of  the  virtuous  triangle  of  economic 
policy — boosting investment, pursuing structural 
reforms and ensuring responsible fiscal policies. In 
so  doing,  Member  States  should 
focus  on 
enhancing  social  fairness  in  order  to  deliver  more 
inclusive growth. 

Real GDP growth in Estonia slipped to 1.1 % in 
2016,  but  is  expected  to  recover  to  above  2 % 
from  2017.  In  2016,  Estonia’s  economy  suffered 
from  weak  external  demand  and  investment,  both 
public  and  private,  while  persistently  strong  wage 
growth  kept  private  consumption  and  house 
building at a relatively high level. In 2016, growth 
was  at  a  rate  of  1.1 %  but  it  is  projected  to 
accelerate to more than 2 % in the coming years as 
external  demand  and  business  investment  are 
expected  to  recover  gradually.  At  the  same  time, 
household consumption is projected to slow down 
to  more  sustainable  levels  due  to  less  dynamic 
wage  growth  linked  to  a  policy  of  limiting  wage 
increases  in  the  public  sector  and  to  various 
reforms  to  expand  labour  supply.  The  fiscal 
position  remains  strong,  with  a  budget  in  surplus 
and  negligible  government  debt.  However,  some 
weakening of Estonia’s fiscal position is expected 
in 2018, as the new government in office intends to 
implement a more expansionary budgetary policy. 

Estonia  has  one  of  the  best  performing  labour 
markets  in  the  EU,  but  its  declining  working-
age  population  is  a  challenge.  The  Estonian 
labour  market  is  characterised  by  its  flexibility, 
high  participation  and  employment  rates,  and  low 
unemployment.  At 
time,  ageing 
the 
combined with prolonged low fertility rates are set 
to shrink the working-age population over the next 
decade.  This  will  contribute 
the  ongoing 
tightening  of 
labour  market,  creating  a 
continued  upward  pressure  on  wage  growth.  This 
for  businesses’  profitability, 
poses  a 
competitiveness  and  overall  long-term  economic 
growth. 

same 

risk 

the 

to 

However,  ongoing  labour  market  reforms  are 
expected  to  boost  labour  supply  and  prevent 
excessive  wage  growth.  The  entry  into  force  of 
bringing 
the  Work  Ability 

reform 

is 

work-incapacity  pensioners  back  to  the  labour 
market. This increased labour supply is expected to 
slow the wage growth. Labour supply will benefit 
from  further  ongoing  reforms  creating  further 
incentives  to  work,  reducing  the  gender  pay  gap 
and providing more accessible childcare. Also, the 
ongoing  local  government  reform  is  projected  to 
make  labour  market  activation  policies  more 
effective,  as  local  social  services  are  made  more 
efficient.  Finally,  labour  and  skills  shortages  are 
expected to decrease, as measures are being taken 
to address them. Notably, constraints on economic 
immigration have recently been relaxed. 

Estonia 
is  generally  performing  well  on 
education and training. Estonia has high rates of 
tertiary education attainment and performs well in 
international  skills  surveys.  Also,  participation  in 
lifelong 
the  EU  average. 
is  above 
However,  early  school  leaving  remains  above  the 
Europe 2020 target. 

learning 

The  Estonian  economy  is  well  integrated  with 
its Nordic neighbours and the euro area, but its 
foreign  direct  investment  remains  below  the 
relationship 
long-term  average.  The  close 
between  Estonia 
is 
characterised  by  a  large  share  of  intra-industry 
trade  flows.  However,  in  recent  years,  foreign 
direct  investment  growth  in  the  manufacturing 
sector and in professional, scientific and technical 
activities  has  remained  below  Estonia’s  long-term 
average. 

neighbours 

and 

its 

falling 

After 
in  2015,  Estonia’s  exports 
recovered  in  2016  and  further  improvements 
are  expected.  In  2015,  the  market  share  losses 
mainly resulted from a sharp currency depreciation 
in neighbouring Russia and falling international oil 
prices,  which  made  Estonia’s  oil  shale  sector  less 
competitive. None of these factors are expected to 
recur.  In  2016,  as  exports  of  goods  recovered 
strongly, the country's trade surplus increased. 

industry 

Nevertheless,  Estonia’s 
remains 
dominated by traditional sectors with low R&D 
intensity.  In  manufacturing,  Estonia’s  exports 
structure  seems 
towards 
lower-value  goods.  Also,  the  capital  stock  per 
worker  remains  relatively  low.  In  particular,  in 
2015,  investment  flows  in  intellectual  property 
products  remained  largely  below  the  EU  average 
and,  in  the  manufacturing  sector,  appeared  to  be 

to  continue  shifting 

1 

 
 
Executive summary 

The  main  findings  of  this  country  report,  and  the 
related policy challenges, are as follows: 

  The  shrinking  working  age  population 
may  result  in  a  tight  labour  market 
several  years.  The  persistent 
over 
demographic  challenge  highlights 
the 
importance  of  the  on-going  policies  to 
integrate low-income earners, people with 
disabilities  and  mothers  with  young 
children  into  the  labour  market.  Greater 
incentives  to  work  have  been  introduced 
so as to increase activity rates. The 'Work 
Ability' reform is aimed at increasing the 
labour  supply  by  bringing  a  significant 
number of currently inactive people back 
to the labour market. The implementation 
of  the  reform  started  in  2016  and  early 
indications seem positive, with a reported 
increase  in  the  overall  labour  supply. 
However,  the  workforce  is  expected  to 
grow  faster  than  employment  over  the 
coming  years.  Also,  several  restrictions 
on  economic  immigration  have  recently 
been  eased.  In  parallel,  accessibility  of 
childcare  services  is  being  improved. 
However,  the  gender  pay  gap  remains  a 
matter 
some 
measures  to  address  this  challenge  have 
already been taken, legislative changes to 
the  Gender  Equality  Act  and  to  the 
leaves  are  still 
system  of  parental 
in  vocational 
pending.  The  drop-out 
education has improved. 

concern.  Though 

for 

already  affected  by  a  gradual  decline  in  business 
profits.  However,  business  R&D  expenditure  has 
recently resumed its upward trend, suggesting new 
innovation  performance. 
potential 
Overall,  the  importance  for  Estonia  of  strategic 
investment  in  research  and  development  remains 
high. 

for  better 

Risks  stemming  from  the  housing  market  can 
be  considered  as  contained.  In  2016,  lending 
growth  for  house  purchases  was  robust,  but 
housing prices stabilised as supply caught up with 
demand. Also, financial regulations to mitigate the 
risk  of  the  financial  system  as  a  whole  have  been 
tightened  and 
the  possibility  of  deducting 
mortgage interest payments from tax bills reduced. 
Spill-over  risks  from  the  real  estate  sector  to 
economic and financial sector stability appear low. 
Financial  soundness  indicators  suggest  that  the 
banking sector is stable. 

the 

2016 

in 
Overall,  Estonia  made  some  progress 
addressing 
country-specific 
recommendations.  On  labour  market  and  social 
issues,  some  progress  was  made  on 
policy 
providing  high-quality 
local  social  services, 
including  by  adopting  and  implementing  local 
government reform. Limited progress was made on 
adopting and implementing measures to reduce the 
gender  pay  gap.  Some  progress  was  made  on 
in 
promoting  private 
research, 
development 
including  by 
and 
strengthening  cooperation  between  academia  and 
businesses. 

investment 
innovation, 

 

Estonia  has  already  achieved  a  number  of  its 
objectives  as  regards  its  national  targets  under 
the  Europe  2020  strategy,  but  some  areas 
remain  a  source  of  concern.  The  country 
surpassed  its  employment  target,  although  its 
shrinking  working-age  population  aided  progress. 
On  R&D,  Estonia  is  moving  away  from  its 
national target. On energy, the country is expected 
to meet its greenhouse gas emission and renewable 
energy  targets by  a  large  margin.  Estonia has  met 
its energy efficiency targets, but keeping the levels 
until  2020  will  be  a  challenge.  On  education, 
Estonia  has  already  reached  its  tertiary  education 
target,  although  with  a  significant  gender  gap  in 
favour  of  women.  The  early  school  leaving  target 
remains  a  source  of  concern,  while  the  country  is 
moving  further  away  from  its  national  ‘at  risk  of 
poverty’ reduction target of 15 %. 

2 

social 

assistance 

Inequality,  relative  poverty  and  social 
exclusion 
increasing 
continued 
gradually, and health outcomes remain 
significant  challenges.  Inequality  has 
increased in recent years and is now well 
above  EU  averages.  Benefits  (mostly 
and 
pensions, 
unemployment  benefits)  have  not  kept 
pace  with  growth  in  market  incomes. 
Moreover, Estonia’s flat tax regime has a 
limited  ability  to  redistribute  wealth,  but 
recent measures will make the tax system 
more  progressive  by  increasing  the  tax 
free  allowance,  which  will  vary  with  the 
income level. In parallel, life expectancy, 
healthy  life  expectancy  and  preventable 
mortality  remain  worse  than  the  EU 

 
 
Executive summary 

procedures  and  inadequately  protected 
minority  shareholders'  rights  in  corporate 
governance  remain  institutional  barriers 
to investment.   

  Overall,  the  tax  system  is  growth-
friendly, but categories of taxation that 
are  considered  least  detrimental  to 
growth  are  still  only  used  to  a  limited 
extent.  Tax  collection  remains  overall 
efficient  and  recent  measures  to  increase 
tax  compliance  have  been  successful. 
However,  Estonia  still  under  uses  some 
growth-friendly  tax  categories  such  as 
property taxes and transport taxes. 

  Carbon 

and 

emissions 

resource 
intensity  remain  high.  This  is  mainly 
because  Estonia 
is  a  producer  of 
electricity  and  heating  from  oil  shale. 
Also,  greenhouse  gas  emissions  and 
energy  consumption  from  transport  have 
increased  since  2005,  while  transport 
taxes  are  almost  inexistent,  which  does 
not  support  energy  efficiency  in  road 
transport.  There  are  ongoing  discussions 
on 
introducing  an 
emission-based car registration tax.  

the  possibility  of 

division 

  Estonia  is  currently  undertaking  local 
government  reform  to  improve  local 
public  services  and  governance,  and 
achieve  efficiency  gains.  Legislation  on 
the 
between 
of 
municipalities and central government, as 
well  as  on  the  financing  principles  of 
local  governments,  is  in  preparation.  So 
far,  incentives  for  local  government  to 
encourage 
and 
entrepreneurship have not been adopted. 

development 

tasks 

local 

averages,  while  Estonia  faces  challenges 
over  care  integration  and  accessibility  to 
nursing and to specialised medical care. 

in 

Increases 

  Labour  costs  per  worker  continued  to 
increase  in  2016,  posing  a  risk  to 
competitiveness. 
labour 
costs  per  worker  were  mainly  driven  by 
strong  wage  growth,  but  negative 
productivity  growth  also  contributed.  As 
Estonia’s  small  and  open  economy  is 
mostly  a  "price-taker",  subject  to  foreign 
prices,  strong  wage  increases  are  at  first 
reflected  in  falling  profitability.  In  the 
short  run,  this  can  lead  to  downward 
pressures  on  investment,  especially  in 
sector. 
Estonia’s 
Continued 
increases 
outpacing 
developments 
could  undermine  competitiveness  in  the 
medium term.   

manufacturing 
strong  wage 
productivity 

  Still-low 

of 

business 

investment 

in 
technological  development  and  weak 
research 
commercialisation 
achievements  remain  challenges  for 
productivity growth, for increasing the 
value-added of exports of goods and for 
strengthening  potential  output.  The 
volume  of  contract  research  between 
academia  and  businesses  increased  in 
2015,  but  the  cooperation  between  the 
two  sectors  remains  limited.  This  also 
resulted  in  a  still-low  level  of  patent 
applications. 
entrepreneurial 
An 
discovery  process  has  not  yet  been  re-
launched.  The 
low  attractiveness  of 
research  careers  and  the  relatively  low 
level 
are 
scientific 
interlinked challenges. 

excellence 

of 

  Estonia  has 

improved 

its 
further 
business  environment,  but  in  a  few 
areas  challenges  remain.  Estonia 
is 
running  several  projects  to  reduce  the 
and 
regulatory  burden,  bureaucracy 
overlapping  functions  of  different  public 
bodies.  However,  a  continuing  lack  of 
national rules for transferring companies’ 
registered  offices  into  and  out  of  Estonia 
environment. 
weakens 
insolvency 
Furthermore, 

the  business 
lengthy 

3 

 
 
 
 
1.  ECONOMIC SITUATION AND OUTLOOK 

GDP growth 

Estonia’s  economic  growth  slowed  to  about 
1.1 % in 2016, after 1.4 % in 2015 (Graph 1.1). 
Private  consumption  remained  the  main  growth 
driver,  supported  by  fast  and  sustained  wage 
growth.  However,  it  only  had  a  limited  positive 
impact  on  GDP  growth,  given  that  imports  make 
up a high proportion of its content, in particular car 
imports. While exports recovered thanks to higher 
demand  from  Estonia's  main  trading  partners, 
investment growth disappointed for a third year in 
a  row.  This  mainly  reflected  a  very  gradual 
lower 
implementation  of  EU-funds  and  still 
business 
and 
equipment 
construction.  Public  consumption  barely  grew, 
allowing public finances to remain strong. 

investment 

in 

Estonia’s real GDP is forecast to grow by 2.2 % 
in  2017  and  2.6 %  in  2018  as  regional  demand 
growth is expected to pick up. External demand, 
especially  from  Finland  and  the  other  two  Baltic 
States,  is  projected  to  gather  pace.  In  parallel, 
Estonia's oil shale sector and related exports are set 
to  benefit  from  the  rise  in  oil  prices.  In  services, 
buoyant  high-tech  exports  are  expected  to  largely 
compensate  for  the  losses  in  transport  services 
resulting  from  the  decline  in  transit  trade  with 
neighbouring Russia. Overall, the external balance 
of goods and services is set to remain positive over 
the  forecast  period.  However,  as  import-intensive 
investments  are  projected 
the 
contribution  of  net  exports  to  growth  is  set  to 
remain negative this year and next. 

resume, 

to 

speed  and 

Overall  investment  is  expected  to  recover  in 
2017  and  2018  as  the  new  EU  programming 
period  hits  cruising 
industry 
confidence rises. The improving regional demand 
is  expected  to  support  industry  confidence.  As  a 
to 
result,  Estonian  businesses  are  projected 
increase investment this year and next. In parallel, 
public investment is projected to surge, as the bulk 
of  projects  under  the  new  programming  period  of 
EU Funds have started being implemented. 

Private  consumption  growth  is  projected  to 
slow  down  slightly  in  2017  and  2018  as  rising 
consumer  prices  dampen  the  increase  in  real 
incomes.  Nevertheless,  domestic  demand 
is 
envisaged  to  remain  the  main  driver  of  growth 

4 

over  the  period  covered  by  the  forecast,  bolstered 
by continued strong wage increases. 

Graph 1.1: 

Real GDP growth and contributions 

(1) Forecasts for 2016-2018 based on the assumption of no 
change in policy. 
Source: European Commission 

Potential growth 

Overall though, Estonia’s potential growth rate 
seems  to  be  on  a  declining  trend.  While  the 
catching-up  process  of  the  country  with  the  EU’s 
more advanced economies is expected to continue, 
the persistent decline in working-age population is 
expected to weigh on growth potential. 

Inflation 

Inflation  is  set  to  increase  in  the  coming years, 
after  a  protracted  period  of  low  inflation  (see 
Graph  1.2).  As  a  result  of  a  projected  rise  in 
global  energy  prices,  strong  wage  growth  and  a 
significant  rise  in  excise  tax  rates,  inflation  is 
projected  to  accelerate to  almost 3 %  in 2017  and 
2018. 

Labour market 

in 

employment 

The  labour  market  has  remained  strong,  but 
improvements 
and 
unemployment indicators have stalled in recent 
months,  reflecting  the  lacklustre  GDP  growth. 
The  labour  market  participation  rate  has  reached 
historically  high  levels  of  70 %,  which  has  so  far 
compensated  for  the  decline  in  the  working-age 

-6-4-2024681012101112131415161718%, ppsInventories investmentInvestment (GFCF)ConsumptionNet exportsReal GDP growth 
 
 
1. Economic situation and outlook 

population. Owing to the work ability reform (see 
Section 3.3 for details), employment is expected to 
continue  growing  slightly  in  2017-2018.  At  the 
same  time,  unemployment  is  projected  to  rise 
significantly from about 6½ % in 2016 to over 8 % 
in  2018.  This  is  because  many  people  receiving 
work-incapacity  pensions  need  training  before  re-
joining the labour market after a long absence. 

Graph 1.2:  Quarterly harmonised index of consumer 

prices (HICP) inflation (yoy % change) 

21.6 % in 2015, 4.3 pps above the EU average (2) 
(see Section 3.3). Inequality is further exacerbated 
by  the  flat  tax  regime,  which  has  a  limited 
distributional function. While wage growth among 
high-skilled  workers  has  led  to  growing  market 
income  inequalities,  the  tax-benefit  system  has 
proven  relatively  ineffective  in  mitigating  this.(3) 
That said, when it comes to net wealth (difference 
between  total  assets  and  total  liabilities),  in  2014, 
Estonian  households  generally  owned  more  than 
they owed. Overall, Estonia has one of the highest 
net wealth (4) inequality in the EU (ECB, 2016). 

(2)  The  share  of  the  population  living  in  severe  material 
deprivation and in households with very low work intensity 
is, however, well below European averages and declining. 

(3)  The  Gini  coefficient  before  taxes  and  benefits  (including 
pensions)  for  2014  data  was  51.6,  while  after  taxes  and 
benefits  it  fell  to  35.6.  The  gap  (of  16.0  for  Estonia) 
measures  the  effectiveness  of  the  tax-benefit  system  in 
reducing inequality. This is well below the EU average gap 
of 19.3. The Gini coefficient is a commonly used measure 
for monitoring trends in income inequality. A coefficient of 
100  expresses  total  inequality  (meaning  all  the  income  is 
earned  by  one  person)  and  a  coefficient  of  0  expresses 
perfect  equality  (meaning  everyone  earns 
the  same 
income). 

(4)  Difference between total assets and total liabilities. 

Source: European Commission 

Social issues 

Income  inequality  has  increased  and  is  one  of 
the  highest  in  the  EU,  while  recent  poverty 
indicators  show  mixed  trends.  The  ratio  of 
incomes  of  the  richest 20 % of  households to  that 
of the poorest 20 % rose from 5.4 in 2012 to 6.2 in 
2015,  and  is  now  the  seventh  highest  in  the  EU. 
The key driver appears to be high wage dispersion 
as  a  result  of  strong  income  growth  among  the 
higher  skilled.  In  absolute  terms,  the  incomes  of 
the  poorest  10 %  of  households  have  lagged 
behind  the  growth  in  median  incomes  (1).  A 
contributing  factor  is  that  benefits  (particularly 
pensions  and  unemployment  benefits)  are  not 
keeping  pace  with  the  growth  in  market  incomes. 
This has also resulted in a gradual increase of the 
at-risk-of-poverty  rate  from  15.8 %  in  2010  to 

(1)  While  real  growth  in  disposable  income  for  the  bottom 
decile was 7 % (2015 SILC data), this is below the median 
income growth of 9 %. 

5 

-0.500.000.501.001.502.002.503.003.504.004.5001234% change yoyQuarters1314151617 (proj.)18 (proj.) 
 
                                                           
 
 
                                                           
1. Economic situation and outlook 

Graph 1.3: 

Breakdown of rate of change of unit labour 
costs (ULC) in Estonia (and euro area) 

Graph 1.4: 

Breakdown of external position (current and 
capital accounts) 

Source: AMECO 

Source: European Commission – Eurostat 

Competitiveness 

Current account 

Estonia  is  expected  to  post  a  continued,  but 
declining,  current  account  surplus.  The  surplus 
of 2.1 % of GDP in 2015 (Graph 1.4) decreased to 
0.6 % of GDP in 2016 and is expected to decrease 
further  to  0.3  %  in  2017  and  0.0  %  in  2018.  The 
surplus  mainly  comes  from  the  trade  balance, 
especially  from  exports  of  services.  With  the 
expected  recovery  of 
the 
resuming  investment  growth,  the  trade  balance  is 
projected  to  decline  somewhat  over  the  coming 
years. 

imports 

linked 

to 

Unit labour costs continued to rise strongly over 
the  past  year,  driven  by  strong  wage  growth 
and  decreasing  productivity  (Graph  1.3).  Wage 
growth  was  triggered  by  a  limited  labour  supply 
linked to the decline in working-age population. In 
2017 and 2018, nominal unit labour cost growth is 
expected  to  slow  down  as  a  result  of  productivity 
increases  as  external  trade  recovers.  Moreover, 
policy  efforts  to  boost  labour  supply  are  expected 
to  start  bearing  fruit,  while  net  migration  has 
turned positive. However, the rapidly rising wages 
and  slow  productivity  growth  are  issues  that  will 
still  warrant  close  monitoring  for  some  time  in 
terms  of  their  effect  on  competitiveness  (see 
Section 3.4. for an in-depth look). 

6 

-10-8-6-4-20246810111213141516*17*18*Rate of change y-o-y (%)Inflation (GDP deflator growth)Real compensation per employeeProductivity contribution (negative sign)Nominal unit labour cost (NULC)NULC in euro area-20-15-10-5051015070809101112131415% of GDPCapital account (KA)  Trade balance - services  Trade balance - goodsTrade balanceCurrent account balance (CA)Net lending/borrowing (CA+KA) 
 
 
1. Economic situation and outlook 

Graph 1.5: 

Exports market share breakdown – Estonia 

Graph 1.6:  Net international investment position (NIIP) (% 

of GDP) 

Source: European Commission 

Estonia  has  been  losing  export  market  share 
(see  Graph  1.5).  Estonia  achieved  large  market 
share  gains  immediately  after  the  end  of  the 
financial crisis, which had led to productivity gains 
and a downward correction to wages, but, in 2015, 
it  lost  market  share  both  in  value  (-7.9 %)  and 
volumes  (-3.3 %).  In  particular,  Estonia’s  exports 
to  neighbouring  Russia  were  strongly  affected  by 
the  rouble  depreciation,  while  the  country’s  oil 
shale  sector  suffered  from  low  oil  prices.  Also, 
exports  of  services  decreased  as  transit  trade  with 
Russia  further  contracted.  In  2016,  export  growth 
resumed  as  the  impact  of  the  negative  external 
shocks  faded  away.  In  the  longer  term,  export 
prospects  could,  however,  suffer  due  to  the 
continued 
and 
productivity  developments  affecting  Estonia’s 
competitiveness. The competitiveness is looked at 
more in-depth in Section 3.4. 

between  wage 

divergence 

Source: European Commission 

Overall external position 

to 

improve 

international 

The  negative  net 
investment 
position (NIIP) of Estonia continues to improve 
(Graph 1.6). In 2015, at -40.9 % of GDP, the NIIP 
position  remained  above  the  MIP  Scoreboard 
threshold  of  -35 %  of  GDP,  but  was  on  a 
downward  path  (see  Graph  1.7).  It  is  expected  to 
the  coming  years, 
in 
continue 
especially with a projected current account surplus 
and a related positive net lending to the rest of the 
world.  Furthermore,  much  of  the  NIIP  reflects 
foreign  direct  investment  (FDI),  which  is  a  stable 
component,  and  Estonia  has  limited  net  assets  in 
terms  of  marketable  debt.  This  contributes 
significantly to reducing market and volatility risks 
associated with the negative NIIP. In recent years, 
FDI  inflows  have  been  on  a  downward  path:  in 
2015,  FDI  inflows  into  Estonia  amounted  to  only 
one quarter of the 2014 inflow, but, in 2016, partly 
recovered.  This  issue  is more  closely looked  at  in 
Section 3.4. 

Financial sector 

The  banking  sector  is  robust,  supported  by  a 
strengthened 
framework. 
prudential 
Profitability  remains  sound  and  non-performing 
loans  are  limited.  Lending  to  the  corporate  sector 
increased  significantly  in  2016  on  the  back  of 
recovering investment growth. 

7 

-10-505101520101112131415Rate of change y-o-y (%)Contribution to export market share: goodsContribution to export marke share: servicesExport market share growth y-o-y-150-100-5005010'11'12'131415% of GDPNet portfolio invest., equity and investment fund shares/unitsNet portfolio invest., debt securitiesOther invest. (net)Net direct invest.Net financial derivativesNet int'l investment positionMarketable debt (portfolio debt instr., other invest. and res.assets, net) 
 
 
 
1. Economic situation and outlook 

the 

new 

According  to  the  Commission  winter  forecast,  in 
2018,  the  fiscal  position  is  projected  to  improve 
slightly  to  a  deficit  of  0.2%  of  GDP,  as  a 
temporary increase in state transfers to the pension 
funds  comes  to  an  end  and  reduces  expenditure 
commitments.  However,  this  forecast  did  not  yet 
include 
announced 
investment  plan,  since  sufficient  details  were  not 
yet  known  about  the  specific  investment  projects 
and  their  timing.  The  investment  plan  likely  costs 
about  0.5%  of  GDP  in  2018,  and  it  would  add  to 
the  fiscal  deficit  figures.  In  this  context,  the 
government  has  also  announced  that  it  would 
commensurately  lower  its  medium  term  fiscal 
targets. 

government's 

Housing market 

House  price  increases  slowed  down  in  2016,  as 
supply caught up with demand. House prices in 
the  economic  and 
Estonia  halved  following 
financial  crisis,  but since  then  the housing market 
has  experienced  a  robust  recovery.  House  prices 
increased again by about 10 % per year on average 
between  2010  and  2014.  However,  following  a 
sharp  increase  in  supply,  house  price  increases 
slowed down in 2015 and 2016. 

Graph 1.7:  Net lending/net borrowing by sector (% of 

GDP) 

(1) NPISH: non-profit institutions serving households. 
Source: European Commission 

Public finance 

favourable 

The  budget  is  expected  to  have  remained  in 
surplus in 2016, as tax revenues held up despite 
slower  economic  growth.  The  composition  of 
GDP  growth  has  been  very 
to 
government  revenue,  with  rapid  wage  growth 
boosting  labour  and  consumption  taxes.  Also, 
public  investment  expenditure  was  lower  than 
planned in 2016 due to delays in implementing EU 
funded  projects.  In  2017,  in  spite  of  strong 
expected  revenues,  expenditure  pressures  are 
projected to leave public finances with a deficit of 
about  0.5%  of  GDP.  Expenditure  pressures  stem 
from several factors: local government elections in 
2017 
additional 
(which 
to 
domestically-funded 
investments),  some  social 
to 
expenditure  measures,  and  costs 
Estonia’s holding the presidency of the Council of 
the  European  Union  in  the  second  half  of  2017. 

typically 

related 

lead 

8 

-10-8-6-4-20246810120809101112131415% of GDPHouseholdsGeneral governmentFinancial corporationsNon-financial corporationsTotal Economy 
 
1. Economic situation and outlook 

Table 1.1: 

Key economic, financial and social indicators - Estonia 

(1) Sum of portfolio debt instruments, other investment and reserve assets. 
(2,3) domestic banking groups and stand-alone banks. 
(4) domestic banking groups and stand-alone banks, EU and non-EU foreign-controlled subsidiaries and EU and non-EU 
foreign-controlled branches. 
(*) Indicates BPM5 and/or ESA95. 

Source: European Commission,  European Central Bank 

9 

2004-20082009201020112012201320142015201620172018Real GDP (y-o-y)5.7-14.72.37.64.31.42.81.41.12.22.6Private consumption (y-o-y)8.4-15.3-1.63.74.33.83.34.74.03.42.8Public consumption (y-o-y)4.5-3.2-0.41.33.21.92.73.41.51.91.6Gross fixed capital formation (y-o-y)8.2-36.7-2.734.412.7-2.8-8.1-3.3-2.24.44.7Exports of goods and services (y-o-y)12.1-20.324.024.24.82.33.1-0.63.73.13.4Imports of goods and services (y-o-y) 12.1-30.621.227.29.73.22.2-1.45.44.34.1Output gap8.1-9.0-6.6-0.71.91.42.11.20.1-0.10.1Potential growth (y-o-y)4.9-0.9-0.41.31.61.92.12.42.22.42.4Contribution to GDP growth:Domestic demand (y-o-y)7.1-20.3-1.59.56.11.50.02.31.93.22.9Inventories (y-o-y)-0.4-1.42.0-1.31.80.02.5-1.60.2-0.30.1Net exports (y-o-y)-1.08.12.8-0.6-3.7-0.80.80.6-1.1-0.7-0.4Contribution to potential GDP growth:Total Labour (hours) (y-o-y)-0.1-2.0-1.2-0.3-0.40.00.50.90.80.80.6Capital accumulation (y-o-y)3.30.70.61.51.71.51.10.90.80.80.9Total factor productivity (y-o-y)1.80.40.20.10.30.40.50.60.60.80.9Current account balance (% of GDP), balance of payments-11.92.51.81.3-1.9-0.40.92.2...Trade balance (% of GDP), balance of payments-7.25.06.45.71.51.93.54.1...Terms of trade of goods and services (y-o-y)1.40.4-1.90.4-0.51.41.10.31.30.20.1Capital account balance (% of GDP)1.23.43.54.13.42.61.12.1...Net international investment position (% of GDP)-78.2-80.1-71.2-54.8-51.1-50.1-46.7-40.9...Net marketable external debt (% of GDP) (1)-21.9*-33.0*-19.6*-3.9*-1.3*0.24.27.3...Gross marketable external debt (% of GDP) (1)81.4104.590.481.482.075.577.877.3...Export performance vs. advanced countries (% change over 5 years)56.526.118.335.719.620.330.310.83...Export market share, goods and services (y-o-y)6.6-7.92.815.2-2.33.71.0-7.9...Net FDI flows (% of GDP)-5.7-2.4-6.9-10.6-2.2-1.0-2.90.9...Savings rate of households (net saving as percentage of net disposable income)-6.87.24.24.84.11.24.84.3...Private credit flow, consolidated (% of GDP)19.3-6.0-7.6-1.06.84.14.63.3...Private sector debt, consolidated (% of GDP)111.1153.2140.4120.4117.8115.9116.7116.6...of which household debt, consolidated (% of GDP)39.057.053.445.641.940.239.740.7...of which non-financial corporate debt, consolidated (% of GDP)72.296.287.074.875.975.777.075.9...Corporations, net lending (+) or net borrowing (-) (% of GDP)-6.83.33.22.10.22.6-0.83.41.01.51.3Corporations, gross operating surplus (% of GDP)31.925.129.832.932.632.531.528.226.326.126.3Households, net lending (+) or net borrowing (-) (% of GDP)-5.34.72.02.11.6-0.51.0-1.00.30.60.6Deflated house price index (y-o-y)12.2-37.12.12.63.27.713.16.8...Residential investment (% of GDP)5.23.12.72.72.93.43.94.4...GDP deflator (y-o-y)7.80.41.75.33.23.91.71.02.43.13.0Harmonised index of consumer prices (HICP, y-o-y)5.80.22.75.14.23.20.50.10.82.82.8Nominal compensation per employee (y-o-y)14.7-2.92.70.86.64.64.25.76.25.15.0Labour productivity (real, person employed, y-o-y)4.2-5.07.61.02.60.22.0-1.4...Unit labour costs (ULC, whole economy, y-o-y)10.22.2-4.6-0.23.84.52.27.25.93.02.5Real unit labour costs (y-o-y)2.31.8-6.2-5.20.60.60.46.13.4-0.1-0.5Real effective exchange rate (ULC, y-o-y)7.81.1-6.0-2.0-1.04.32.15.05.22.00.6Real effective exchange rate (HICP, y-o-y)2.92.0-3.71.0-0.82.92.60.81.6-2.0.Tax rate for a single person earning the average wage (%)19.418.619.419.619.919.519.618.4...Tax rate for a single person earning 50% of the average wage (%)15.0*14.815.515.916.616.416.715.6...Total Financial sector liabilities, non-consolidated (y-o-y)25.4-6.8-2.6-1.56.210.29.05.7...Tier 1 ratio (%) (2).20.920.016.818.717.919.320.4...Return on equity (%) (3).-0.57.5-4.06.515.313.113.1...Gross non-performing debt (% of total debt instruments and total loans and advances) (4).8.99.34.53.01.92.61.9...Unemployment rate6.813.516.712.310.08.67.46.26.97.98.7Long-term unemployment rate (% of active population)3.33.77.67.15.53.83.32.4...Youth unemployment rate (% of active population in the same age group)14.627.432.922.420.918.715.013.1...Activity rate (15-64 year-olds)72.374.073.974.774.875.175.276.7...People at risk of poverty or social exclusion (% total population)23.623.421.723.123.423.526.024.2...Persons living in households with very low work intensity (% of total population aged below 60)7.65.69.010.09.18.47.66.6...General government balance (% of GDP)1.3-2.20.21.2-0.3-0.20.70.10.1-0.5-0.2Tax-to-GDP ratio (%)31.035.133.531.731.931.932.834.134.834.934.9Structural budget balance (% of GDP)..0.10.0-0.1-0.6-0.1-0.10.2-0.4-0.2General government gross debt (% of GDP)4.47.06.65.99.710.210.710.19.910.110.0forecast 
 
 
 
 
 
 
2.  PROGRESS WITH COUNTRY-SPECIFIC RECOMMENDATIONS 

with 

implementing 

Progress 
the 
recommendations  addressed  to  Estonia  in  2016 
has to be seen as part of a process which started 
with the introduction of the European Semester 
in 2011. 

Estonia  has  achieved 
some  progress  on 
stabilising  its  labour  supply.  Since  2012,  the 
country  has  been  able  to  increase  incentives  to 
work,  leading  to  a  marked  increase  in  labour 
market  participation.  In  the  context  of  local 
government  reform,  for  which  a  country-specific 
recommendation  was  already  in  place  in  2012, 
minimum  requirements  have  been  set  for  social 
services.  These  should  result  in  higher  quality 
services  at  local  level  and  higher  efficiency  in 
implementing  active  labour  market  policies.  In 
parallel, 
is 
continuing, which is expected to lead to economies 
of  scale  and  efficiency  gains.  Progress  has  been 
slower on the gender pay gap, for which a country-
specific 
since  2015. 
However,  some  progress  has  been  made  on  the 
accessibility  of  childcare  places  and  facilities.  On 
the relevance of education and training systems (a 
challenge  already 
in  2011),  some 
identified 
progress  has  been  made  on  vocational  education 
and  training.  However,  the  fall  in  working-age 
population has only just started and may result in a 
tight labour market over several years. 

the  merging  of  municipalities 

recommendation  exists 

especially  as  new  vehicles  purchased  in  Estonia 
remain the most environmentally unfriendly in the 
EU.  Finally,  despite  progress,  Estonia  will  likely 
remain  the  most  carbon-intensive  economy  in  the 
EU, and keep one of the highest carbon intensity in 
energy use. 

the 

2016 

Overall,  Estonia  has  made  some  progress  in 
addressing 
country-specific 
recommendations.  Under  CSR 1,  some  progress 
has been registered on adopting and implementing 
the  local  government  reform  and  on  ensuring  the 
provision  and  accessibility  of  high-quality  social 
services  at  local  level.  Specific  examples  of 
progress 
the 
(i) 
Administrative  Reform  Act  in  July  2016;  (ii) 
successful  completion  of  the  voluntary  phase  of 
the  merger  of  local  municipalities  in  December 
2016;  (iii)  ongoing  implementation  of  the  Social 
Welfare  Act.  Limited  progress  has  been  made  on 
reducing the gender pay gap. 

adoption 

include: 

of 

investment 

Under  CSR 2,  some  progress  has  been  made  on 
in  R&D  and 
promoting  private 
strengthening  cooperation  between  business  and 
academia.  Notably,  public  research  bodies  have 
been  given 
research 
incentives 
contracts with businesses. 

to  establish 

Estonia  has  made  some  progress  on  R&D 
investment.  Estonia  has  adopted  and  started 
implementing its R&D and innovation strategy and 
its  entrepreneurship  growth 
strategy,  which 
together  comprise  its  framework  for  cooperation 
between  businesses  and  academia  and  for  smart 
specialisation. Nevertheless, the Estonian research 
and  innovation  ecosystem  remains  fragile  and 
faces  persistent  key  challenges: 
low  private 
insufficient  cooperation 
in  R&D, 
investment 
between  businesses  and  academia,  lack  of  an 
ongoing  entrepreneurial  discovery  process,  low 
efficiency of public R&D spending and shortage of 
skills. 

Estonia  has  made  some  progress  on  energy 
efficiency.  Between  2012  and  2014,  substantial 
progress was made on major legislative initiatives 
aiming  to  reduce  energy  intensity,  mainly  in 
private  and  public  buildings.  However,  progress 
remains  limited  on  energy  intensity  in  transport, 

10 

 
 
2. Progress with country-specific recommendations 

Overall  assessment  of  progress  with 
2016 CSRs: Some 

Some progress 

  Some  progress  in  ensuring  the  provision 
and  accessibility  of  high-quality  social 
services at local level 

  Some 

progress 

implementing 
reform 

the 

in 

adopting 

and 
local  government 

  Limited  progress  in  reducing  the  gender 

pay gap   

Some progress 

  Some  progress 

in  promoting  private 
investment  in  research,  development  and 
innovation 

  Some 

progress 

in 
cooperation  between 
businesses 

strengthening 
and 

academia 

Table 2.1: 

Summary table on 2016 CSRs assessment 

Estonia 

CSR  1:  Ensure  the  provision  and  accessibility  of 
high-quality  public  services,  especially  social 
services, at local level, inter alia by adopting and 
implementing 
local  government 
reform. Adopt and implement measures to narrow 
the gender pay gap, including those foreseen in the 
Welfare Plan 

the  proposed 

CSR  2:  Promote  private  investment  in  research, 
development  and 
including  by 
strengthening  cooperation  between  academia  and 
businesses 

innovation, 

Source: European Commission 

11 

 
 
 
 
 
 
 
2. Progress with country-specific recommendations 

(Continued on the next page) 

12 

 Box 2.1: Contribution of the EU Budget to structural change in Estonia  Estonia is a major beneficiary of the European Structural and Investment Funds (ESI Funds) with an allocation up to EUR 4.5 billion till 2020. This is equivalent to 2.8% of GDP (over 2014-2017) and 47% of the expected national public investment1. By 31 December 2016, an estimated EUR 1.8 billion, which represents about 40 % of the total allocation for ESI Funds, have already been allocated to concrete projects. Compared with 2007-2013 the use of financial instrument is planned to increase by 43%.  Financing under the European Fund for Strategic Investments, Horizon 2020, the Connecting Europe Facility and other directly managed EU funds is additional to the ESI Funds. By end 2016, Estonia has signed agreements for EUR 204 million for projects under the Connecting Europe Facility. The EIB Group approved financing under EFSI amounts to EUR 95 million, which is expected to trigger nearly EUR 628 million in total investments (as of end 2016)  ESI Funds helped progress on a number of structural reforms in 2015 and 2016 via ex-ante conditionalities2 and targeted investment. Examples include the mapping of the healthcare infrastructure investment needs which has helped to re-launch investment and enhances the cost-effectiveness of and access to health care systems; the development of transport investment plans which have facilitated the development of mature road and railway projects; and revision and implementation of the OECD Public Governance review action plan, contributing to the on-going state reform (see section 3.6). These reforms have prepared the ground for better implementation of public investment projects in general, including those financed from national sources and from the other EU instruments mentioned above. Estonia has reported the completion of all ex ante conditionalities, except for the national climate change adaptation strategy (adoption planned in spring 2017).   Administrative reform support is available through targeted financing under the European Social Fund, advice from the Structural Reform Support Service and, indirectly, through technical assistance.  The relevant CSRs focusing on structural issues were taken into account when designing the 2014-2020 programmes, such as prioritisation and specialisation in research and innovation systems and enhancing cooperation between businesses and academia (a programming target being to increase private sector R&D expenditure up to 2% of the GDP by 2023). Public services quality at local level, including via local government reform, is also being improved. The Work Ability Reform is expected to bring an estimated 15000 currently unemployed or inactive persons, with reduced work ability, to employment by 2020 (see sections 3.2.1 and box 3.5.1).   In addition to the challenges identified in past CSRs, ESI Funds address wider structural obstacles to growth and competitiveness. These include ensuring access to high-speed internet for the whole population, investment in sustainable transport with the aim of doubling the number of train passengers per year (from 4.2m in 2013 to 8.4m in 2023) and increasing the share of public transport users to 50% by 2023 (42.8% in 2015), as well as helping to improve the labour market                                                            1 National public investment is defined as gross capital formation + investment grants + national expenditure on agriculture and fisheries 2 At the adoption of programmes, Member States are required to comply with a number of ex-ante conditionalities. For Members States that do not fulfil all the EACs by the end 2016, the Commission has the possibility to propose the temporary suspension of all or part of interim payments. The analysis of the fulfilment of the EACs will be finalised in the course of 2017.  
 
 
 
 
 
2. Progress with country-specific recommendations 

Box (continued) 

13 

 relevance of education and training systems and reforming the general education school network.  https://cohesiondata.ec.europa.eu/countries/EE    
 
 
 
 
3.  REFORM PRIORITIES 

3.1.  PUBLIC FINANCES AND TAXATION 

3.1.1.  FISCAL FRAMEWORK 

Estonia’s public finances are sound with a very 
low public debt and a general government fiscal 
position  in  surplus.  The  fiscal  framework  has 
been  strengthened  by  the  State  Budget  Act  that 
entered  into  force  on  23 March 2014,  establishing 
the  Fiscal  Council  and  making  the  long-standing 
commitment to prudent budgeting part of the law. 

above  the  EU-28  average  and  labour  taxes  below 
the  average.  The  corporate  income  tax  system  is 
investment-friendly  as  companies  benefit  from  a 
complete  deferral  of  tax  obligations  until  the 
profits are distributed. The new government plans 
to introduce a reduced rate — 14 % vs the standard 
20 %  —  for  companies  that  distribute  profits 
regularly. 

Graph 3.1.1:  Tax revenues from property taxes as 

percentage of GDP (2014) 

fiscal 

framework  relies  on 

Estonia’s 
the 
structural balanced budget rule, but it does not 
make  use  of  binding  multi-annual  expenditure 
targets  or  expenditure  rules,  which  may  limit 
the  counter-cyclicality  of  the  fiscal  framework. 
The  cornerstone  of  Estonia’s  medium-term  fiscal 
planning  is  the  balanced  budget  rule  in  structural 
terms.  By  contrast,  expenditure  rules  and  binding 
expenditure targets are underused. The difficulties 
in  establishing  precisely  the  real-time  cyclical 
position in a very open small economy like Estonia 
may,  however,  create  uncertainty  and  limit  the 
counter-cyclical properties of the fiscal framework. 

is 

independent  Fiscal  Council 

fully 
An 
operational,  but  practical  experience  has 
revealed  some  procedural  shortcomings  in  the 
current  operational  setup.  The  mandate  of  the 
Fiscal Council is to assess the economic forecasts 
that serve as a base for Estonian fiscal policy and 
to  observe  whether  the  national  fiscal  rules  are 
followed. In its September 2016 opinion, the Fiscal 
Council  pointed  to  a  procedural  issue  in  the 
assessment of the forecasts: the current operational 
setup  does  not  ensure  that  the  Fiscal  Council’s 
opinion reaches the government before it approves 
the draft budget for the next year. This was notably 
the  case  with  the  2017  draft  budget,  due  to  some 
delays  in  the  usual  state  budget  preparation 
schedule. 

3.1.2.  TAXATION FRAMEWORK 

In 2016, Estonia’s tax revenue is projected to be 
34.0 % of GDP (33.7 % in 2015), well below the 
40 %  average  for  the  EU-28.  The  tax  system  is 
taxes 
relatively  growth-friendly,  with 

indirect 

(1) Data does not include personal income tax on imputed 
rents.  
(2) There is no recurrent real estate tax in Malta. 
Source: European Commission (2016a) 

The  Estonian  tax  system  regularly  ranks  high 
on  the  competitiveness  index  (Tax  Foundation, 
2016)  and  performs  well  on  measures  of  tax 
administration  efficiency.  In  2014,  it  took  81 
hours  a  year  for  a  medium-sized  company  to 
comply  with  tax  obligations,  which  is  the  second 
lowest indicator in the EU-28 (World Bank, 2016). 
In 2013, the administrative costs of tax authorities 
amounted  to  0.4 %  of  tax  collected,  again  the 
second  lowest  in  the  EU-28.  Over  recent  years, 
Estonia  has  introduced  a  number  of  measures  to 
increase  compliance,  such  as  an  employment 
register  and  additional  reporting  obligations  for 
VAT.  These  were  described  in  more  detail  in  the 
2016 Country Report. In 2014, the VAT gap stood 
at  10 %  of  the  VAT  total  tax  liability,  down  by 
over  a  third  from  the  year  before  and  below  the 

14 

0.00.51.01.52.02.53.03.54.04.55.0FRUKBEELDKEU-28ESITIEPTPLNLFICYLUHUSELVMTDEROSISKATLTBGCZHREEOther property taxesRecurrent taxes on immovable property 
 
 
3.1. Public finances and taxation 

EU-27  average  of  14 %  (European  Commission, 
2016b). 

Graph 3.1.2:  Tax wedge on single earners, various income 

levels (2015) 

Estonia continues to pursue a policy of shifting 
its  tax  burden  away  from  labour  and  the 
government  is  taking  measures  to  reduce  the 
tax  wedge  on  low-income  earners  to  improve 
work incentives. In 2015, the income tax rate was 
lowered  by  1  pp. 
to  20 %,  unemployment 
insurance tax was reduced from 3 % to 2.4 % and 
the tax free allowance was increased. However, the 
previous government’s reduction of social security 
tax  by  1  pp.  by  2018  was  repealed  and  the  social 
security  tax  will  remain  at  33 %.  Due  to  the  flat 
personal income tax system and relatively low tax 
free  allowance,  the  tax  wedge  on  low-income 
earners in Estonia is above the EU average, while 
it is below the EU average for high income earners 
(see Graph 3.3.3).  

To further reduce the tax wedge on low-income 
earners,  the  government  plans  to  raise  the  tax 
free  allowance  to  EUR  500  per  month  by  2018 
from  EUR 170  per  month in  2016.  The  tax  free 
allowance  for  people  earning  more  than  the 
average  salary  will  decrease  gradually  and  reach 
zero once a person’s salary exceeds EUR 2 100 per 
month,  adding  an  element  of  progressivity  to 
Estonia’s  income  tax  system.  As  a  result,  the  tax 
wedge for a single earner with no children earning 
50 % of the average wage is expected to decrease 
to  around  30 %  from  37 % 
in  2015.  The 
government  plans  to  abolish  the  refund  scheme 
that was  introduced  in 2016  targeting  low-income 
earners  as  the  increase  in  the  tax  free  allowance 
makes this mechanism redundant. 

Source: European Commission on OECD Tax-benefit models 

Estonia underuses tax categories like recurrent 
property  taxes  and  transport  taxes,  which  are 
among  the 
least  detrimental  to  economic 
growth.  Total  revenue  from  property  taxes  stood 
at  0.4 %  of  GDP  in  2014.  This  was  the  second 
lowest  in  the EU  and  considerably  lower  than  the 
EU-28  average  of  2.5 %.  In  2014,  environmental 
taxes  were  above 
the  EU-28  average.  Most 
environmental  taxes  came  from  taxes  on  energy. 
By contrast, transport taxes were the lowest in the 
EU-28, accounting for 0.17 % of total tax revenue. 
Estonia  does  not  have  any  vehicle  taxation  apart 
from  a  circulation  tax  for  heavy  goods  vehicles. 
However,  there  are  concrete  plans  to  introduce  a 
time-based road charging scheme for heavy goods 
vehicles  and  discussions  are  ongoing  on  the 
possibility  of  introducing  a  CO2  emission-based 
car registration tax (see Section 3 

15 

0102030405060700.50.6711.251.67EstoniaEU minEU maxEU-28% 
 
 
3.2.  FINANCIAL SECTOR 

3.2.1.  BANKING SECTOR 

Table 3.2.1: 

Financial soundness indicators – All banks in 
Estonia 

to 

and 

households 

Credit  growth  is  strong  in  Estonia,  opening  up 
the  prospect  of  a  future  funding  gap.  Average 
private-sector  loan  growth  reached  10.1 %  in 
November 2016. Apart from a considerable rise of 
lending 
non-financial 
corporations  (NFCs),  the  increase  was  driven  by 
the  surge  in  loans  to  financial  intermediaries,  in 
particular car leasing companies. The growth in car 
leases  was  stimulated  by 
rising  household 
incomes,  demand  for  new  cars  in  light  of  the 
relatively  old  vehicle  stock  as  well  as  by  low 
interest rates (Bank of Estonia, 2016). At the same 
time, private sector deposits increased 9.3 % y-o-y. 
The 
funding 
constraints,  but,  if  the  trends  continue,  local 
deposits may prove insufficient to cover the future 
credit expansion. Loans from foreign parent banks 
are so far filling in the gap. 

financial  sector  has  not 

felt 

(1) ECB aggregated balance sheet: loans excl. to gov. and 
MFI / deposits excl. from gov. and MFIs. 
Source: ECB CBD 

The  cost  of  credit  for  Estonian  companies 
remained relatively high, despite falling interest 
rates  in  the  euro  area  (Graph  3.2.1).  While  the 
average interest on corporate loans in the euro area 
was  falling  until  end-2016,  in  Estonia  both  the 
interest charged and the margins were unchanged. 

Graph 3.2.1:  Credit cost for firms 

Financial  soundness  indicators  suggest  that the 
banking  sector 
is  stable.  Banks  were  well 
capitalised, with an average Tier 1 ratio of 34.3 % 
in  mid-2016,  the  highest  level  in  the  EU  (Table 
3.2.1).  The  quality  of  bank  assets  remains  good. 
The average ratio of non-performing loans (NPLs) 
decreased  from  2.6 %  in  2014  to  1.8 %  in  2016. 
Loan-loss provisions covered 58 % of outstanding 
NPLs, a level above the euro area average (49 %). 
The share of non-resident deposits, which accounts 
for  about  11 %  of  total  deposits  in  the  banking 
system,  has  slightly diminished,  thus  reducing  the 
banking sector’s exposure to volatility risks. Since 
2011, 
the  banking  sector  has  been  highly 
profitable.  In  2015,  both  the  return  on  equity 
(6.8 %) and on assets (1.1 %) were far above their 
euro area averages (4.4 % and 0.3 % respectively). 

Specific  external risks  stem  from the  dominant 
position  of  Nordic  financial  groups  in  Estonia. 
Potential  financial  stress  in  the  Swedish  banking 
system,  e.g.  caused  by  a  correction  in  housing 
prices,  could  have  an  indirect  adverse  impact  on 
Estonia (Bank of Estonia, 2016)(5). 

(5)  For  an  analysis  of  potential  financial  spill-overs  in  the 
Baltic-Nordic  region,  see  the  2016  Country  Report  for 
Sweden (European Commission, 2016c). 

Source: European Central Bank 

The  relatively  high  cost  of  credit  might  be 
linked to the high degree of concentration of the 
Estonian  banking  sector.  With  four  dominant 
banks  sharing  a  relatively  small  market,  the  level 
of competition is rather low. 

The  Estonian  capital  market  has  substantial 
development  potential.  Equity,  debt  securities 
and venture capital may complement bank loans as 
a  source  of  funding  for  companies.  Currently, 
however,  banks  still  play  a  dominant  role.  The 
total  loans  stock  is  equivalent  to  34 %  of  GDP 
(Graph  3.2.2).  Funds  raised  by  companies  on  the 
stock market amount to 9.5 % of GDP. The equity 

16 

(%)2010201120122013201420152016Q2Non-performing loans9.34.53.01.92.61.91.8Coverage ratio85.053.475.075.343.952.257.7Loan to deposit ratio*162.8144.5134.4128.9124.0122.1123.5Tier 1 ratio12.718.522.822.741.334.934.3Return on equity3.622.911.710.79.76.8-Return on assets0.43.12.01.81.61.1-0.001.002.003.004.005.006.007.008.00Jan-08Oct-08Jul-09Apr-10Jan-11Oct-11Jul-12Apr-13Jan-14Oct-14Jul-15Apr-16EE loans toNFCs, up toand includingEUR 1 million,new businessEA loans toNFCs, up toand includingEUR 1 million,new businessEE MFIslendingmargins onloans to NFCs 
 
  
                                                           
 
 
 
 
to 

market is shallow when measured in terms of local 
capitalisation,  but  the  stock  exchange  is  fully 
integrated  into  the  Nordic  OMX-Nasdaq  group, 
giving it a higher development potential. The role 
of  corporate  bond 
is  relatively  high 
issuing 
compared 
the  other  Baltic  markets.  The 
outstanding stock of corporate bonds amounted to 
6.9 % of GDP, a little below the EU average. The 
annual  gross  operating  surplus  of  Estonian 
companies  is  higher  than  on  average  in  the  EU, 
suggesting  that  companies  have  the  potential  to 
finance  investment  from  their  retained  profits. 
However, profits are declining, limiting investment 
in riskier or intangible assets (see Section 3.4). 

Graph 3.2.2:  Funding of non-financial corporations (2015) 

3.2. Financial sector 

However,  the  Estonian  Government  is  addressing 
this  issue  by  providing  additional  loan  guarantees 
through  KredEx.  At  the  end  of  2015,  KredEx 
that  can  be 
raised 
guaranteed to EUR 5 million. 

the  maximum  amount 

of 

capital 

investments 

Estonia  is  a  leading  EU  Member  State  in 
(0.136 %  of 
venture 
GDP)(7),  despite  a  deteriorating  performance. 
In 2016, to support start-ups in the country, a new 
Fund  of  Funds,  EstFund,  was  launched  by  the 
Ministry 
and 
Economic 
Affairs 
the  European 
Communications,  KredEx  and 
Investment  Fund.  It  will  invest  EUR 60  million 
from  the  European  Regional  Development  Fund 
and  the  European  Fund  for  Strategic  Investments, 
and  plans  to  attract  an  additional  EUR 40  million 
from  private  investors.  It  will  complement  the 
Baltic  Innovation  Fund  by  providing  smaller 
equity 
to  earlier  stage 
innovative companies with high-growth potential.     

investments,  mainly 

Graph 3.2.3:  Lending trends - To non-financial corporations 
(NFC) and for house purchases 

Source: European Central Bank, AMECO 

3.2.2.  ACCESS TO FINANCE 

Access  to  finance  in  Estonia  remains  good,  but 
the  proportion  of  the  SMEs  seeking  external 
financing is below the EU average (6). According 
to the European Commission’s Small Business Act 
factsheet for Estonia, the country is among the best 
performers in the EU on access to finance, with a 
steady  improvement  trend  since  2008.  Collateral 
requirements  and guarantees are  still  considered  a 
problem by smaller and newly created companies. 

(6)  According  to  the  SAFE  survey  2016,  74 %  of  Estonian 
SMEs  find  debt  financing  an  accessible  option  while  for 
the EU average the share is 85 %. Debt financing includes 
credit  line,  bank  overdraft  or  credit  cards  overdraft  + 
leasing  or  hire-purchase  +  factoring  +  trade  credit  +  bank 
loan  +  other loan  +  grants  or subsidised  bank  loan  +  debt 
securities issued. 

Source: European Central Bank 

3.2.3.  HOUSING MARKET 

Risks  stemming  from  the  housing  market 
persist,  but  can  be  considered  as  contained. 
Lending growth for house purchases increased (see 

(7)  The  definition  of  Venture  capital  investments  is  based  on 
market  statistics.  Three-year  averages  have  been  used  to 
reduce  volatility.  Venture  capital  statistics  are  obtained 
directly  from  Invest  Europe  (European  Commission, 
2016d). 

17 

00.0050.010.0150.020.0250.030.010.020.030.040.050.060.0Listed sharesDebt securitiesMFI loansGross operating surplus:corporationsVenture capital (rhs)% of GDPEEEU-6-4-20246810Dec-11Apr-12Aug-12Dec-12Apr-13Aug-13Dec-13Apr-14Aug-14Dec-14Apr-15Aug-15Dec-15Apr-16Aug-16Dec-16Loans to NFC, y-o-yLending for house purchase, y-o-y% 
 
                                                           
 
                                                           
3.2. Financial sector 

Graph 3.2.3) but remained moderate as a share of 
GDP  (see  Graph  3.2.4),  while  house  price 
increases  have  slowed  in  2016,  as  supply  caught 
up with demand. 

is  controlled  by  the 
Mortgage  borrowing 
macro-prudential  measures 
by 
Estonia’s  central  bank.  The  measures  were 
tightened  in  2015(8),  but  since  then  the  central 
bank has kept them stable. 

adopted 

incentives 

The  new  government’s  programme  includes 
for 
reducing  mortgage  debt 
households,  notably 
through  a  substantial 
reduction  in  the  possibility  to  deduct  mortgage 
interest 
tax 
deductibility  ceiling  is  set  to  decrease  from 
EUR 1 200 per year to EUR 300. 

tax  bills.  The 

income 

from 

Graph 3.2.4:  Changes in the house price index and 

commercial loans for house purchase - 
Estonia 

(1) MFIs: monetary financial institutions. 
Source: Eurostat, ECB, European Commission. 

(8)  For  analysis  of 

the  macro-prudential  measures,  see 

European Commission (2016e). 

18 

050100150200250-8-6-4-20246803Q104Q105Q106Q107Q108Q109Q110Q111Q112Q113Q114Q115Q116Q12010=100Rate of change y-o-y (%)MFI loans for house purchase (% GDP, annual change)Real house price index (2010=100), right axisNominal house price index (2010=100), right axis 
 
 
 
                                                           
3.3.  LABOUR MARKET, EDUCATION AND SOCIAL POLICIES 

have  built  up  (see  Section  3.4  for  additional 
analysis). 

The ‘Work Ability' reform 

The 'Work Ability' reform, which took effect in 
January 2016, is expected to bring a significant 
number  of  people  on  work-incapacity  pensions 
back  to  the  labour  market.  The  reform  offers 
targeted activation support services for individuals 
with reduced work ability (European Commission, 
2016e). The methodology for assessing the ability 
to work has been changed, the benefits scheme has 
been revised, and entitlements to allowances have 
been  made  more  conditional  on  people  who  still 
have some ability to work actually searching for a 
job.  Individuals  with  reduced  ability  to  work  are 
making  extensive  use  of  active  labour  market 
policies. Between January and December 2016, the 
share  of  individuals  with  reduced  ability  to  work 
among  the  unemployed  rose  from  12.8 %  to 
18.7 %.  As  of  1 January  2017,  all  beneficiaries 
under the old incapacity pension scheme will have 
their  ability  to  work  reassessed  under  the  new 
Work Ability Allowance Act.   

Gender  pay  gap  and  employment  of  young 
mothers 

While  Estonia  has  one  of 
the  highest 
employment  rates  of  women  across  the  EU,  it 
also  has the  highest gender  pay  gap  in  the  EU. 
Data  from  the  Structure  of  Earnings  survey  show 
that between 2010 and 2014, the unadjusted gender 
pay  gap  slightly  increased  from  27.7 %  to  28.1 % 
(see Graph 3.3.2). The high gap in wages between 
men  and  women  is  driven  to  a  large  extent  by 
sectoral  and  occupational  segregation,  but  a  large 
proportion  of  the  difference  in  wages  remains 
unexplained  by  observable  factors  (European 
Commission, 2016e, p. 42-43). The government is 
taking  several  actions  to  address  this  challenge, 
and  additional  measures  are  currently  under 
discussion. 

3.3.1.  LABOUR MARKET CHALLENGES 

Estonia  has  one  of  the  best  performing  labour 
markets  in  the  EU.  Activity  and  employment 
rates  are  above  the  EU  average  and  rising.  At  the 
same  time,  the  unemployment  rate  (including  the 
long-term  and  youth  unemployment  rate)  and  the 
number of people not in in education, employment 
or training (NEET) rate are below the EU average 
and continue to decrease. For high-skilled workers, 
unemployment  was  as  low  as  5.3 %  in  Q3-2016. 
Recently, the rising activity rate among the elderly 
has helped to boost labour supply. However, as the 
‘Work Ability’ reform aims to entice retirees back 
to the labour market (see below), the workforce is 
expected to grow faster than employment over the 
coming  years.  As  a  result,  unemployment  is 
projected  to  increase  from  about  6.8%  in  2016  to 
above 8.0% in 2018. 

Graph 3.3.1:  Tightening of the workforce 

Source: Eurostat 

The  main  challenges  stem  from  the  declining 
working-age population, mostly due to negative 
natural  change  (see  Graph  3.3.1).  Negative  net 
migration  was  a  contributing  factor  over  the  past 
decade, but has now reversed, likely due to rising 
wages,  less  employment  opportunities  in  Finland 
and  more  at  home.  In  2016,  13.6 %  of  employers 
in  industry  reported  that  a  shortage  of  labour  is 
constraining 
the 
tightening  labour  supply,  strong  wage  pressures 

their  business(9).  Reflecting 

(9)  Based  on  European  Business  Survey  data,  available 
through Eurostat, variable ei_bsin_q_r2. The corresponding 
EU average stood at 10.6 %. 

19 

0.02.04.06.08.010.012.014.016.018.01902903904905906907908909900203040506070809101112131415Unemployment rate (%, rhs)Population ('000, age 15-64, lhs)Active persons ('000, age 15-64, lhs)Employed persons ('000, age 15-64, lhs) 
 
 
                                                           
 
3.3. Labour market, education and social policies 

Graph 3.3.2:  Gender pay gap in unadjusted form 

Note: The gender pay gap is calculated as the difference 
between the average gross hourly wages of male and 
female paid employees, as a % of wages of male 
employees. Data are based on data from the Structure of 
Earnings data and cover the Industry, construction and 
services sector (exc. public administration, defence and 
social security) and excludes workers from companies with 
less than 10 employees. 
Source: Eurostat 

The 2016-2023 welfare development plan, which 
also  covers  gender  equality,  was  adopted  in 
June  2016  and  is  now  being  implemented.  One 
out of the plan’s four main areas is gender equality 
and the aim to ensure equal rights, responsibilities 
and opportunities for men and women in all areas 
of  society.  Measures  are  planned  to:  (i)  improve 
the  gender  balance  among  teachers;  (ii)  tackle 
gender  stereotypes  at  school  in  career  counselling 
and  entrepreneurship  studies;  and  (iii)  raise 
awareness among entrepreneurs and through media 
channels.  A  guidance  note 
to  help  using 
transparent and objective criteria for assessing and 
comparing work  is  being  finalised  and  a  study on 
gender  equality  monitoring  is  also  under  way.  In 
addition,  changes  to  the  Gender  Equality  Act  are 
being  discussed.  These  would  give  the  Labour 
Inspectorate the task of monitoring gender equality 
in  the  private  sector  more  closely,  including  by 
collecting  gender-disaggregated  wage  data.  The 
Labour  Inspectorate  would  also  offer  training  on 
how to address the gender pay gap and disseminate 
wage gap information publicly. The amendment is 
planned  to  be  submitted  to  the  government  in 
spring  2017  and  will  come  into  force  by  2018  at 
the earliest.  

Changes  to  the  parental  leave  system  are 
currently  under  discussion.  Since  2016,  the 
parental  leave  system  comes  under  the  Family 
Benefits  Act,  which  consolidates  all  previous 
legislation  on  family  benefits.  The  parental  leave 
system  in  Estonia  is  generous  compared  to  other 
countries, entitling parents to 18 months of leave at 
full  wage  replacement  rates  and  giving  them  the 
right  to  return  to  their  old  job  until  their  child’s 
third  birthday.  These  long  parental  leaves,  which 
are  almost  always  fully  taken  up  by  women, 
contribute  to  gender  pay  gaps(10).The  Ministry  of 
Social  Affairs  has  ordered  an  analysis  of  the 
system,  involving  social  partners  and  relevant 
stakeholders. 
the  government 
discussed  the  analysis  and  proposals  on  making 
one  part  of  the  parental  leave  entitlement  flexible 
and  divide  the  other  part  between  parents,  on  a 
non-transferable 
continue 
discussions  in  March.  These  proposals  would 
support  the  participation  of  women  in  the  labour 
market  and  the  sharing  of  child-raising  duties 
between parents. 

In  February, 

and  will 

basis, 

in  order  to 

Ireland  and  Hungary.  As 

Measures  being  considered  by  the  Estonian 
authorities 
improve  access  to 
childcare  and  long-term  care  may  boost  the 
labour  supply  of  women  and  mitigate  the 
gender pay gap. Labour force survey data indicate 
that around 3.8 % of the population aged 20-64 is 
inactive because they are taking care of children or 
incapacitated adults. This is the sixth highest level 
in  the  EU,  after  the  UK,  Slovakia,  the  Czech 
Republic, 
these 
responsibilities  usually  fall  on  women,  they  may 
contribute  to  gender  inequalities  in  the  labour 
market.  Access  to  long-term  care  is  still  weak  in 
Estonia,  more  particularly  due  to  a  shortage  of 
staff, especially nurses, in rural areas. At the same 
time,  institutional  long-term  care  is  too  expensive 
and  does  not  include  provision  for  services  on 
demand. The 2016-2023 welfare development plan 
includes a number of measures to relieve this care 
burden. The task force on analysing long-term care 
burden  is  expected  to  prepare  policy  guidelines 
and  solutions  by  the  end  of  2017.  Provision 
shortages have still been signalled in childcare for 
0-3  year-olds.  However,  provision  of  childcare  is 

(10)  Estonia  has  a  very  significant  impact  of  parenthood  on 
employment  among  women  (-22.1  percentage  points  for 
mothers of one child under 6 compared to women without 
children,  whereas  the  EU  average  is  -8.6  percentage 
points). 

20 

 0.0 5.0 10.0 15.0 20.0 25.0 30.0EECZDEATUKSKFILVEU28NLDKFRHUESPTBGCYIESELTMTHRPLSIBEITLURO20142010 
 
                                                           
3.3. Labour market, education and social policies 

quality  of  the  Estonian  basic  education  system. 
However,  the  gap  between  Estonian  and  Russian-
medium schools remains important. 

Reducing  early  school 
leaving  remains  a 
challenge  in  the  context  of  the  increasing 
demand  for  high-skilled  workers.  The  share  of 
early  school  leavers  was  11.2 %  in  2015  and  is 
around  the  EU  average, but above  Estonia’s  2020 
target  (9.5 %).  The  figure  masks  significant 
differences  between  rural  and  urban  areas  and 
remains  significantly  higher  for  men  than  for 
women  (13.2 %  vs  9 %  in  2015).  Drop-outs  are 
particularly  a  problem  in  the  first  year  of  upper 
secondary  vocational  educational  training  (VET) 
(22.4 %  in  2016),  but  it  is  on  a  decreasing  trend. 
Contributing  factors  are  insufficient  counselling 
and  alternative 
labour  market  opportunities. 
Authorities are financing 16 projects totalling EUR 
2.6  million  (0.01 %  of  GDP)  to  increase  the 
number  of  early  school  leavers  returning  to 
education. 

Graph 3.3.3:  Labour market outcomes by skills level and by 

gender 

improving,  there  are  400  vacancies  in  Tallinn, 
including  for  1.5-3  year  olds.(11)    The  European 
Regional Development Fund is used to create up to 
2  300  new  childcare  places  in  bigger  cities  and 
suburbs  and  the  European  Social  Fund  to  finance 
support  person  services,  various  care  services  and 
transportation  services  of  disabled  children  and 
adult people in 2015-2020. 

Pension reform and labour supply 

In  recent  years,  the  employment  rate  of  older 
people  has  increased  substantially,  reflecting 
also  the  gradual  rise  in  the  statutory  pension 
age.  The  previous  government  agreed  to  link  the 
official  retirement  age  to  life  expectancy  as  of 
2027(12)  and  to  abolish  special  pensions  for 
members of the defence forces, prosecutors, police 
and  border  guard  officials  and  retirement  regimes 
for  workers  in  arduous  or  hazardous  jobs.  The 
employment  rate  of  workers  in  the  age  group  55-
64  increased  from  53.8 %  in  2010  to  64.5 %  in 
2015  and  is  now  among  the  highest  in  the  EU. 
Employment  rates  for  older  female  workers  are 
particularly  high  compared  with  the  EU  average. 
High  employment 
individuals  past 
rates  of 
retirement age may also be motivated by financial 
reasons.  There  are  some  plans  to  raise  pension 
adequacy (see Section 3.3.3). 

3.3.2.  EDUCATION AND SKILLS  

in 

(PISA)  shows 

Performance  in  basic  skills  remains  one  of  the 
highest 
the  EU  and  worldwide.  The 
2015 OECD  Programme  for  International  Student 
Assessment 
that  among  EU 
countries Estonia has the lowest proportion of low 
achievers in mathematics (11 %) and science (9 %) 
and the second lowest in reading (11 %). However, 
the  proportion  has  slightly  increased  in  all  three 
tested  subjects  since  2012.  Gender  gaps  and  the 
impact  of  socioeconomic  status  on  performance 
are one of the lowest in the EU, indicating that the 
education  system  is  equitable  at  this  level.  The 
average  scores  obtained  by  Estonian  students  are 
some of the highest in the world, and the share of 
high  performing  students  increased  in  reading 
(11 %) and science (13.5 %). These show the high 

(11)  https://info.haridus.ee/Asutused/Nimekiri/LF 
(12)  The retirement age is already due to rise gradually to 65 in 

2026 from 63 currently. 

(1) Wages are measured as gross monthly fulltime 
equivalent wages, based on self-reported data. They mostly 
refer to 2013 incomes (latest available data). Employment 
rates refer to 2015 (latest available annual data). 
Source: Eurostat – Labour Force Survey data - 2015 

improvements, 

vocational 
Despite 
recent 
education  and 
training  remains  relatively 
unattractive. Estonian authorities aim for a 35 %-
65 %  share  of  basic  school  graduates  pursuing 
VET  as  opposed  to  general  secondary  education. 
In  practice,  the  ratio  remains  around  27 %-73 %. 
implementing 
There  was  some  progress  on 

21 

 0.0 10.0 20.0 30.0 40.0 50.0 60.0 70.0 80.0 90.0 100.00200400600800100012001400160018002000malefemalemalefemalemalefemalelow-skilledmedium-skilledhigh-skilledemployment rate EE (% of 20-64 age group, rhs)employment rate EU28 (% of 20-64 age group, rhs)wage (EUR per month, lhs) 
                                                           
 
3.3. Labour market, education and social policies 

To  address  skills  shortages,  Parliament  eased 
existing  restrictions  on  economic  immigration 
in  December  2016.  The  wage  requirement  has 
been lowered to the level of the average wage for 
certain  categories  of  workers.  An  important  step 
from  the  perspective  of  Estonia’s  IT  sector  was 
taken  already  in  May  2016,  when  ICT  sector 
specialists  were  excluded  from  the  immigration 
quota. 

Graph 3.3.4:  At-risk-of-poverty or social exclusion rate and 
its components (AROP, SMD, LWI) 

AROPE: At-risk-of-poverty or social exclusion rate (% of total 
population). People who are at-risk-of-poverty (AROP) 
and/or suffering from severe material deprivation (SMD) 
and/or living in household with zero or very low work intensity 
(LWI). AROP: At-risk-of-poverty rate (% of total population). 
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 or holiday away from home 
once a year, vi) have a car, vii) have a washing machine, 
viii) have a colour tv set, or ix) have a telephone. LWI: 
People in low work intensity households (% of population 0-
59). People living in households where the adults (excluding 
dependent children) work less than 20% of their total work-
time potential during the previous 12 months. AROPE, AROP: 
previous year income, SMD: current year, JLH: previous year.  
Source: Eurostat, EU-SILC 

3.3.3.  SOCIAL POLICY (POVERTY, SOCIAL 

ASPECTS OF SOCIAL SECURITY SYSTEMS) 

measures  to  raise  the  proportion  of  VET  students 
in  apprenticeships(13).  The  drop-outs  of  students 
enrolled 
in  apprenticeship  programmes  show 
improvement,  having  dropped  from  31.4  %  in 
2010/11 to 21.4 % in 2015/16 (the lowest point in 
six years). 

Part  of  this  lack  of  attractiveness  may  stem 
from  the  fact  that  VET  skills  at  the  upper 
secondary  level  are  not  strongly  rewarded  in 
the  labour  market.  While  employment  rates  in 
Estonia  are  strongly  correlated  with  qualification 
levels,  this  correlation  is  not  observed  in  wages: 
low-  and  medium-skilled  workers  obtain  similar 
wages,  whereas  high-skilled  workers  earn  around 
70 % more (see Graph 3.3.3)(14). 

To  mitigate  skills  shortages,  the  government  is 
taking  measures  to  strengthen  the  higher 
education  funding  model.  The  level  of  tertiary 
attainment  (ages  30-34)  exceeds  the  EU  average 
(45.3 %  in  2015  compared  to  38.7 %),  but  the 
gender  gap  remains  significant,  with  56.7 %  of 
women  obtaining  tertiary  education  compared  to 
34.5 %  for  men.  However,  the  high  drop-out  rate 
from  Bachelor’s  programmes  is  a  challenge.  The 
government  revised  the  tertiary  education  funding 
model to improve stability of funding and improve 
performance-based indicators. 

to 

A public system for monitoring and forecasting 
labour market needs and skills (OSKA) is being 
labour  market 
improve  the 
developed 
relevance of education. Overall, employability of 
recent  tertiary  education  graduates  (86.1 %  in 
2015)  and  upper  secondary  VET  graduates 
(83.5 %) is above the 2015 EU averages of 81.9 % 
respectively.  Nonetheless,  OSKA 
and  73 % 
identified shortages in certain fields and pointed to 
the  need  to  update  skills  to  meet  the  changing 
labour  market  demands.  This  is  the  first  time 
different  Estonian  economic  sectors  are  being 
systematically 
same 
methodology.  The  aim  is  to  stimulate  discussion 
on  how  the  sectors  and  skills  needed  in  these 
sectors are expected to change in the next 10 years.   

analysed 

using 

the 

(13)  The number of participants almost doubled to over 1 200 in 
2016  and  the  number  of  educational  establishments  that 
offer the training is higher than ever before. 

(14)  Other sources, based on recent graduate figures, point to a 
ratio  of  only  50  %  (Estonian  Ministry  of  Education  and 
Research).  

the 

2015, 

In 
at-risk-of-poverty-or-social-
exclusion  (AROPE)  rate  in  Estonia  stood  at 
24.2 %,  down  from  26 %  in  2014  but  still 
slightly above the EU average (see Graph 3.3.4). 
The severe material deprivation rate declined from 
6.2  to  4.5 %,  significantly  below  the  EU  average. 

22 

0510152025300506070809101112131415% of populationEEAt-risk-of-poverty-or-social-exclusion rateAt-risk-of-poverty rateSevere material deprivationPeople living in low work intensity households 
                                                           
 
3.3. Labour market, education and social policies 

indexed.  On  19th  of  January, 

old-age  pensions  is  among  the  lowest  in  the  EU. 
With  rapid  wage  growth  witnessed  over  the  past 
decades, previous wage levels are no longer in line 
with current living standards, even if pensions are 
regularly 
the 
Government  gave  guidance 
for  drafting  a 
legislative  package  on  increasing  the  adequacy  of 
the  pension  system.  It  agreed  to  raising  solidarity 
of  the  first  pillar  by  making  the  benefit  levels 
contingent on only contribution periods from 2037 
(and not on previous wage levels) and by changing 
the pension index (e.g. by basing it 100% on social 
the  number  of 
security  budget  growth  and 
pensioners from 2023). Furthermore, from 2017 an 
additional  annual  allowance  of  EUR  115  will  be 
paid to pensioners who live alone. 

Implementation  has  started  of  the  Social 
Welfare  Act,  which  governs  the  new  minimum 
standards  for  social  services  provision.  The 
possibility of centralised monitoring of local-level 
services  (for  example  by  the  Social  Insurance 
Board)  is currently  being  discussed,  with  possible 
implementation  as  of 2018.  The  2016-2020 action 
plan  for  the  2016-2023  welfare  development  plan 
contains  measures  to  make  social  services  more 
effective.  Accessibility  to  social  services  has 
already  been  increased  by  ESF-funded  projects 
joint  provision  of  services  between 
that  set 
municipalities as a precondition for participation. 

3.3.4.  HEALTHCARE SYSTEM 

than 

life  expectancy, 
Life  expectancy,  healthy 
preventable  mortality  and  mortality 
from 
cardiovascular  disease  and  cancer  in  Estonia 
the  EU  average(15).  The 
are  worse 
associated health problems impact adversely on the 
work ability and productivity of the population and 
on economic growth. Lifestyle factors are a major 
cause  of  these  health  problems.  In  response, 
Estonia’s  2009-2020  national  health  plan  puts 
major  emphasis  on  health  promotion  and  disease 
prevention.  

(15)  In Estonia, life expectancy at birth in 2014 was 77.4 years 
compared to an EU average of 80.9. Preventable mortality 
in  2013  in  Estonia  was  at  302  deaths  per  100 000 
inhabitants,  with  the  EU  average  being  204.  In  2014, 
mortality  in  Estonia  due  to  diseases  of  the  circulatory 
system  was  at  718  deaths  per  100 000  inhabitants,  as 
opposed to an EU average of 383. 

The  AROP  rate  is  particularly  high  for  people 
living on benefits (54.8 % for the unemployed, one 
of  the  highest  figures  in  the  EU  in  2015,  and 
39.8 % for retired people above 65, also among the 
highest  in  the  EU  in  2015).  However,  the  rate  of 
in-work  poverty  (10.3 %  for  age  group  18-64)  is 
also  above  the  EU  average.  The  poverty  reducing 
effect of social transfers fell sharply between 2010 
and  2015,  going  from  over  36 %  in  2010  to  just 
22 % in 2015, one of the lowest figures in the EU. 

The  level  of  the  unemployment  benefits  is 
comparatively  low  in  Estonia  (Langenbucher, 
2015).  These  have  two  components:  an  earnings-
related  unemployment  insurance  benefit  and  a 
means-tested  unemployment  allowance  funded 
from  the  state  budget.  The  levels  of  both  benefits 
are comparatively low. The minimum levels of the 
unemployment 
the 
unemployment  allowance  are  set  50%  and  35% 
respectively of the minimum wage. From 2017 the 
daily  rate  of  unemployment  allowance  is  EUR 
4.86, up from  EUR 4.41 in 2016, and the rate for 
31  days  EUR  150.66,  which  is  lower  than  the 
absolute poverty line. 

insurance  benefits 

and 

Benefits under the minimum income scheme are 
low, but have increased recently. The subsistence 
benefit  scheme  provides  a  top-up  to  household 
income (after paying for housing costs) to reach a 
certain  threshold  meant  to  guarantee  families  or 
single people a certain minimum subsistence level. 
This  threshold  level  was  raised  in  2016  from 
EUR 90  to  EUR 130  for  the  first  person  in  a 
household  and  for  every  child  and  has  remained 
unchanged in 2017.  

Child-related  benefits  have  also  recently 
increased.  Estonia  is  unusual  in  that  it  shows 
higher  poverty  and  material  deprivation  rates  for 
households  without  children  than  for  those  with 
children.  A  possible  explanation  for  this  is  that 
while spending on general social safety nets is very 
low  in  Estonia,  spending  on  family  benefits  is 
more in line with that of other EU countries. 

The  at-risk-of-poverty  (AROP)  rate  for  the 
retired  elderly  (65+)  has  increased  since  2010 
and stood at 39.8 % in 2015, one of the highest 
rates  in  the  EU.  Severe  material  deprivation  for 
this  group  stood  at  5.7 %  in  2015,  down  from 
6.7 %  in  2014  and  slightly  above  the  EU  average 
of 5.1 %. At 70 %, the median replacement rate of 

23 

 
                                                           
3.3. Labour market, education and social policies 

consultations  and  e-referrals,  and  a  central  e-
registration system for all public hospitals to be in 
place by 2017). 

The  health  system  is  fiscally  sustainable  in  the 
long run, but the adequacy of its financing is an 
issue  of  concern.  In  the  medium  to  long  term, 
healthcare spending is expected to increase by 0.6 
pp.  to  1.3  pp.  of  GDP  by  2060,  according  to  the 
2015 Ageing  Report’s  baseline  and  higher  risk 
scenario  respectively.  These  increases  are  lower 
than  in  other  EU  countries  and  show  that  the 
system  in  its  current form  is  sustainable  in purely 
fiscal  terms.  However,  the  need  for  care  is  set  to 
increase in the context of an ageing population and 
a  growing  number  of  chronically  ill  people.  For 
the  age-standardised  prevalence  of 
instance, 
diabetes  in  Estonia’s  male  population  rose  from 
around  6 %  to  approximately  8 %  between  1980 
and  2014  (WHO  Diabetes  country  profiles  2016). 
The  Estonian  Health  Insurance  Fund  has  already 
been  experiencing  some  budgetary  deficits  in 
recent years, which are for the time being covered 
by  its  reserves.  Since  the  Fund  is  currently 
financed  from  social  contributions,  a  projected 
increase 
financially  non-
share  of 
contributing  individuals  due  to  population  ageing 
could  exhaust  the  Fund’s  reserves.  These  factors 
suggest  that  the  financial  resources  of  the  health 
system  may  be  too  limited  to  provide  sufficient 
care to the population. The government has started 
discussing options to expand the revenue base for 
healthcare financing. 

the 

in 

to  unnecessary  hospitalisation 

Estonia  faces  challenges 
in  achieving  care 
integration,  coupled  with  a  shortage  of  nurses 
(World Bank, 2015 – OECD/EU, 2016). There are 
weaknesses in the coordination of care, sometimes 
leading 
and 
ambulatory  specialist  care,  and  reduced  quality  of 
patient  care  after  a  hospital  stay.  These  are 
important  aspects  in  the  context  of  an  ageing 
population  with  an  increasing  prevalence  of  non-
communicable  diseases.  The  authorities  have 
started  taking  action,  with  their  priority  being  to 
strengthen  the  capacity  and  coordination  role  of 
reform 
care.  The  2016  national 
primary 
programme  included  the  development  of  patient-
centred integrated healthcare and social services. A 
pilot  project  has  begun  to  develop  an  integrated 
model  of  social,  primary  care  and  county  hospital 
services. The Estonian Health Insurance Fund has 
published  indicators  to  measure  the  integration  of 
treatment  as  part  of 
the  hospital  network 
development  plan.  The  new  eHealth  strategy  also 
addresses the integration of health and social care 
services.  However,  Estonia  faces  a  shortage  of 
nurses, which can pose risks to the success of plans 
for  care  integration  and  management  of  chronic 
diseases(16). 

Unmet  needs  for  medical  examination  due  to 
waiting  time  continue  to  be  the  highest  among 
all  Member  States.  The  percentage  of  people  in 
Estonia who reported these unmet needs is 10.1 % 
of the population, versus an EU average of 1.1 %. 
Access  difficulties  exist  in  relation  to  specialised 
medical care, for instance in areas such as narrow 
surgical  specialties,  ophthalmology,  rehabilitation 
and  specialist  paediatrics.  Major  reasons  for  the 
long  waiting  times  are  scarce  financing  affecting 
the  capacity  of  the  system,  over-demand  by 
patients  and  lack  of  mandatory  referral  from 
primary  care  for  some  specialties.  Action  by  the 
authorities  to  improve  the  situation  includes: 
enhancing  collaboration  between  primary  care, 
regional hospitals and county hospitals in ensuring 
availability  of  specialised  medical  care  (with 
investments 
the  European  Regional 
Development Fund); training and financial support 
to  strengthen  the  healthcare  workforce;  taking 
e-
advantage  of 

services 

eHealth 

(more 

from 

(16)  With  566  practising  nurses  per  100 000  population,  the 
figure  for  Estonia  is  below  the  EU  average  of  839.  The 
ratio  of  nurses  to  doctors  is  1.7,  compared  to  an  EU 
average of 2.5 (OECD/EU, 2016). 

24 

 
                                                           
 
3.4. INVESTMENT 

3.4.1.  COMPETITIVENESS AND INVESTMENT 

Graph 3.4.2:  Estonia's exports of goods to Russia and 

Graph 3.4.1:  Export market share growth by value of goods 

and services 

exports of mineral fuels (y-o-y change in %) – 
euro/rouble exchange rate 

Source: European Commission 

(1) * About 9% of Estonia's exports are directed to Russia. 
Source: Statistics Estonia 

Market share developments 

falling 

in  2015,  Estonia’s  exports 
After 
recovered  in  2016  and  further  improvements 
are  expected  going  forward.  The  fall  in  exports 
in  2015  (Graph  3.4.1)  took  place  against  the 
background  of  two  adverse  factors:  (i)  Estonia’s 
energy  production  based  on  oil  shale  suffered  as 
global  energy  prices  fell  by  around  40 %;  (ii)  in 
parallel, a sharp depreciation of the Russian rouble 
in late 2014-early 2015 exacerbated the decline in 
exports  to  neighbouring  Russia,  which  had  been 
initiated  by  trade  sanctions  and  countersanctions 
(Graph 3.4.2). In 2015, exports of goods to Russia 
dropped  by  35 %,  even  more  than  in  the  two 
previous  years.  Moreover,  exports  of  services 
decreased  by  almost  22 %,  as  transit  trade  with 
Russia  further  contracted.  However,  while  both 
factors have been fading in importance, expansion 
to other markets already outweighs the weak trade 
with  Russia.  Consequently,  the  country’s  total 
exports  are  estimated  to  have  grown  by  around 
3.3 %  in  2016  and  are  expected  to  accelerate 
further in the medium term. 

Estonia  maintained  its  overall  competitiveness 
vis-à-vis  western  European  trading  partners, 
In  2015,  Estonia  gained 
(Graph  3.4.3). 
competitiveness 
Latvia, 
Finland, 
towards 
and  Denmark. 
Lithuania, 
Conversely, 
towards 
Sweden  and  Norway,  which  underwent  currency 
depreciation, although less severely than Russia. 

lost  competitiveness 

the  Netherlands 

it 

in 

some 

setbacks 

Estonia’s 
Despite 
impact  of  high  wage 
competitiveness,  the 
growth  on  Estonia’s  exported  value  has  been 
limited  so  far.  Labour  cost  developments  had  a 
moderate  impact  on  export  growth  from  2006  to 
2014.  Being  a  small  and  open  country,  Estonia’s 
economy is rather  an  international price-taker  and 
does not easily transfer its labour cost increases to 
foreign  customers.  In  2015,  this  was  reflected  in 
Estonia’s  stable  terms  of  trade  and  in  the  large 
discrepancy  between  its  real  effective  exchange 
rates  (unit  labour  costs-based  and  harmonised 
index  of  consumer  prices-based)  in  Graph  3.4.4. 
Estonian companies mostly internalise rapid wage 
increases,  either  by  reducing  profits,  especially  in 
the manufacturing sector, or by substituting capital 
for expensive labour. In this respect, the flexibility 
and mobility of Estonia’s labour market constitute 
the  evolution  of 
an  advantage.  Nevertheless, 
Estonian companies’ investments and profits needs 
to be monitored. 

25 

-30-20-100102030070809101112131415Rate of change y-o-y (%)Contribution: World export growth (neg. Sign)Contribution: Export growthEMS growth rate303540455055606570-40-30-20-100102030405060101112131415exports growthto Russia (allgoodscategories)(1)exports growthof mineralproducts(Estonianorigin)EUR/RUB (rhs) 
 
 
 
 
 
 
 
3.4. Investment 

Graph 3.4.3:  Dynamism and competitiveness of exports 

Graph 3.4.4:  Breakdown of real effective exchange rate 

(goods) on top-10 country destinations (2014-
2015) - Estonia 

(REER), nominal effective exchange rate 
(NEER), relative harmonised index of consumer 
prices (HICP) - Estonia 

Source: COMTRADE data (HS 1992 commodity 
classification), European Commission calculations. 

Labour costs developments 

In recent years, wages have increased at a rapid 
pace  in  Estonia.  In  2015,  the  average  salary 
increased by 6 % y-o-y. Wage growth was mostly 
driven  by  an  increase  in  real  compensation  per 
is  yet  not  backed  up  by 
employee,  and 
a 
productivity 
commensurate 
consequence,  real  unit  labour  costs  grew  6  %  in 
2015, the highest rate observed across EU Member 
States. 

growth.  As 

In  fact,  nominal  wage  growth  in  Estonia  is 
currently  faster  than  justified  by  economic 
fundamentals.  Nominal  wage  growth  in  Estonia 
has  consistently  been  above  two  benchmarks(17) 
since  2013  (Graph  3.4.5):  it  is  higher  than 
productivity  growth  and  higher  than  what  would 
have  been  required  to  keep  the  real  effective 
exchange rate at the same level. 

(17)  The first benchmark reflects the wage growth that would be 
predicted  on  the  basis  of  changes  in  labour  productivity, 
prices and the unemployment rate. The second benchmark 
reflects  the  wage  growth  that  would  be  consistent  with  a 
constant  real  effective  exchange  rate  based  on  unit  labour 
costs. 

(1) IC-42: towards 42 industrial countries, IC-37: towards 37 
industrial countries. 
Source: AMECO 

swiftly 

population 

Wage  growth  appears  to  be  driven  by  labour 
tightening,  especially  as  Estonia’s 
market 
working-age 
shrinks. 
However,  Estonia  is  currently  implementing  a 
number of far-reaching reforms to stabilise its total 
labour supply (see Section 3.3). This is expected to 
contribute to keeping excessive wage growth under 
control in the years to come. Income convergence 
towards  the  higher  wage  levels  in  Finland  and 
Sweden also plays a role. 

Minimum  wages  are  increasing  fast  as  well, 
outpacing  overall  wage  growth  over  recent 
years.  Due  to  large  income  disparities  across  the 
country,  minimum  wage  increases  can  have  a 
significant  impact  on  the  wage  bill  in  the  poorest 
regions.  Overall,  though,  the  minimum  wage  and 
its  coverage  are  still  relatively  low  in  Estonia.  In 
2016, the minimum wage stood at around 38 % of 
the  average  wage,  among  the  lowest  levels  in  the 
EU.  The  minimum  wage  is set  in  annual  bipartite 
agreements  between  the  social  partners  and  is 
brought into effect by a government decree. 

26 

SwedenFinlandRussian FederationLatviaLithuaniaUSAGermanyNorwayNetherlandsDenmark-40-35-30-25-20-15-10-5051015-30-20-100102030Market Dynamism (pp)Competitiveness (pp)-8-6-4-2024610111213141516*17*18*Rate of change y-o-y (%)NEER IC-42relative HICP (-)REER (HICP) IC-42REER (ULC) IC-37 
 
 
                                                           
 
 
3.4. Investment 

Graph 3.4.5:  Nominal wage growth in Estonia in comparison 

with wage benchmarks 

%, while FDI has come down to nearly zero in net 
terms (see also Box 3.4.1). 

The  recent  weak  productivity  growth  is  partly 
linked  to  a  decline  in  investment  by  non-
financial  corporations  in  Estonia,  especially  in 
the  utilities  sector  (water,  electricity,  etc.).  In 
2015, the lower investment activity partly reflected 
the completion of major investment projects in the 
shale oil and electricity sectors in 2013 and 2014. 
Also,  investment  has  been  affected  by  lower 
payments  of  EU  funds  since  the  end  of  the 
previous  financing  framework  (2007-2013).  In 
2017, by contrast, public investment is expected to 
rebound  as  the  bulk  of  EU  funded  projects  from 
the new programming period (2014-2020) take off.  

Source: Update of Arpaia and Kiss (2015) 

Unit  labour  costs  are  also  rising,  due  to  an 
exceptional  recent  fall  in  productivity.  The 
combined  effect  of  the  fall  in  oil  prices  and  the 
depreciation  of  the  rouble,  which  curtailed  the 
country’s exports, led to a 1.5 % decrease in output 
per  hour  worked.  However,  the  most  affected 
sectors  were  not  labour-intensive.  In  addition,  a 
stricter  obligation  for  employers  to  register  their 
workforce pushed overall employment up (+1.8 % 
in 2015), lowering measured productivity. In 2016, 
unit  labour  costs  are  estimated  to  have  grown  by 
around  5.9  %,  marking  only  a  marginal 
deceleration  from  the  previous  year.  A  more 
substantial  slowdown  to  around  3.0  %  is  forecast 
in  2017-2018  as  the  impact  of  the  mandatory  job 
registrations  should 
fade  away.  Meanwhile, 
productivity is expected to improve on the basis of 
better prospects for exports of goods and services, 
especially to Estonia’s Baltic peers and Finland. 

Investment situation 

Estonia  displays  a  relatively  high  investment 
rate,  but  this  has  recently  declined.  As  a 
catching-up  economy,  Estonia  has  a  high 
productive  investment  rate  (excluding  dwellings): 
around 25 % in the period preceding the economic 
and  financial  crisis  and  22  %  since  the  recovery, 
compared  to  15 %  for  the  euro  area.  In  recent 
times, however, the rate seems to have stalled at 20 

is  hiding 

investment  needs 

At  almost  75  %,  capacity  utilisation  in  Estonia 
appears still low to prompt further investment, 
but the share is unevenly spread across sectors 
in  higher 
and 
productivity  areas  of  the  economy.  In  an  EU 
comparison,  there  seems  to  be  room  for  a  more 
optimal  use  of  existing  investment.  Nevertheless, 
the  level  of  capital  per  worker  in  Estonia  remains 
largely  below  EU  average.  This  is  true  for 
machinery  equipment,  ICT  equipment  in  the 
manufacturing  sector,  but  most  strikingly  for 
intellectual  property  investment,  whose  level  is 
about half the EU average. Inefficient allocation of 
funds 
total  factor 
productivity. 

likely  has  an 

impact  on 

Looking  ahead,  one  of  the  risks  for  investment 
in  Estonia’s  manufacturing  sector  could  be  the 
decline  in  companies’  profits.  While  profits  are 
overall still above the EU average, they have been 
on a declining trend since 2013. In manufacturing, 
the  decline  averaged  almost  5.5 %  y-o-y  in  2012-
2013  and  accelerated  further  to  16 %  in  2015. 
However, the recent weakness of capital-intensive 
sectors(18)  was  not  shared  by  labour-intensive 
industries. 

(18)  Oil  shale-related  activities  account  for  3 %  of  Estonia’s 

GDP. 

27 

-10-5051015202530990001020304050607080910111213141516%EEPrediction based on inflation, productivity andunemploymentWage growth consistent with constant ULC-basedREERActual nominal wage growth 
 
 
                                                           
 
3.4. Investment 

Graph 3.4.6:  Profits and investment by companies in Estonia 
- Total economic activities and manufacturing 
sector 

behind  these  developments.  However,  the  small 
size of Estonia’s market and the prospect of higher 
profits  abroad  also  played  a  role.  Indeed,  the 
increase  in  nominal  unit  labour  costs  has  been  so 
far  comparatively  faster  in  Estonia  than  in  its 
Baltic  peers,  while  the  country’s  FDI  claims 
abroad  have  increased  almost  as  fast  as  liabilities 
since the end of the 2008-2010 crisis. 

Declining growth in the gross operating surplus 
of  companies  can  be  a  risk  for  investment  in 
intangible  assets.  Banks  are  often  reluctant  to 
finance R&D and innovation activities as they are 
generally  considered  risky  operations.  As  a 
consequence,  these  activities  are  mostly  funded 
from retained earnings, so a fall in gross operating 
surpluses  constitutes  a  risk.  In  Estonia,  after 
several years of progressive decline, the growth in 
the  gross  operating  surplus  turned  negative  in 
2015,  in  the  manufacturing  sector  as  a  whole,  but 
also  in  most  of  its  subsectors.  A  comparable 
situation prevailed in Estonia’s Baltic peers, while 
the  euro  area  as  a  whole  witnessed  a  relatively 
rapid 
in 
intangible  assets  has  so  far  continued  to  grow  in 
Estonia’s manufacturing sector and in about half of 
its  subsectors,  albeit  at  an  overall  declining  pace 
(still 10 % in 2015). 

recovery.  Nevertheless, 

investment 

Technological progress 

Since  the  crisis  in  2007,  Estonia  registered  a 
substantial loss in total factor productivity (-13 
%).  This  is  one  of  the  highest  in  the  EU,  second 
only  to  Greece  (-18  %).  After  the  crisis,  the 
recovery  in  total  factor  productivity  appeared 
rather  short-lived  (see  Graph  3.4.7).  In  addition, 
there are indications that Estonia’s export structure 
in  manufactured  goods  is  shifting  towards  the 
(European  Commission, 
lower  quality 
2016e).  Also, 
the 
manufacturing sector (on the basis of value added) 
has constantly declined over the years. In 2016, it 
passed  for  the  first  time  below  the  average 
productivity of Estonia’s total activities (see Graph 
3.4.8). 

total  productivity  of 

ranks 
the 

Source: Statistics Estonia 

in 

in 

capital-intensive 

In  2015-2016,  profitability constrained  tangible 
investment 
industries 
(utilities,  mining  and  agriculture),  but  half  of 
the  manufacturing  subsectors  also  started 
feeling  the  strain  (see  Graph  3.4.6).  In  2016, 
overall  profits 
the  manufacturing  sector 
continued  to  decrease  and  fell  below  the  level  of 
tangible investment in the sector. Conversely, most 
non-tradable  sectors,  except  transport  and  the 
information  and  communication  sectors 
(but 
including  construction),  registered  considerable 
and  growing  profits.  This  enabled  them  to  build 
stable tangible investment and still expand already 
sizeable  precautionary  financial  buffers,  a  new 
phenomenon  since  the  2008-2010  financial  crisis. 
These buffers are likely motivated by the uncertain 
external environment. 

Foreign direct investment growth in Estonia has 
fallen by half in recent years, which could lead 
to  more  limited  internal  sources  for  financing 
growth  ambitions  and  also  to  less  technology 
transfers. FDI growth fell from about 6 % of GDP 
in  2012  to  0.6  %  in  2015,  but partly recovered  to 
2.6  %  of  GDP  in  2016.  This  mostly  reflected 
specific  lending  practices  and  repatriation  of 
profits  towards  foreign  parent  companies  in  the 
well-capitalised  banking  sector.  However,  FDI 
growth  in  the  manufacturing  sector  remained 
below  Estonia’s  long-term  average.  Uncertain 
business  conditions,  including  a  weak  economic 
situation  in  neighbouring  Finland  and  Russia,  are 

28 

0100000200000300000400000500000600000700000800000900000Q1Q3Q1Q3Q1Q3Q1Q3Q1Q3Q1Q3Q1Q310111213141516(in thousands euros)Investment in total economic activities (4 quartersmoving average)Investment in manufacturing (4 quarters movingaverage)Profits in total economic activities (4 quarters movingaverage)Profits in manufacturing (4 quarters moving average) 
 
3.4. Investment 

Graph 3.4.7:  Total factor productivity in Estonia over 2007-

Graph 3.4.8:  Total productivity on the basis of value-added 

2015 - Index (2010 = 100) 

- Estonia's total economy and manufacturing 
sector 

Source: AMECO 

3.4.2.  BUSINESS ENVIRONMENT 

Source: Statistics Estonia 

(1) Total productivity on the basis of value added = 
((turnover – total costs) + labour costs) / total costs = value 
added / total costs 

Estonia  has  taken  steps  to  further  improve  its 
business  environment  by  running  several 
projects under an extensive state administration 
reform.  ‘Zero  bureaucracy’  aims 
to  reduce 
regulatory  burden,  bureaucracy  and  overlapping 
functions  between  different  public  bodies.  In  the 
World Bank ‘Doing business’ report 2017, Estonia 
ranks  12  out  of  190  economies.  Its  weakest 
indicators  remain  protecting  minority  investors 
(rank  53)  and  resolving  insolvency  (rank  42).  A 
project  to  improve  the  insolvency  framework  was 
launched in 2016. Its main objectives are to make 
the  process  faster  and  more  efficient,  and  to 
improve  the  rate  of  successful  demands.  The 
business  environment  is  also  weakened  by  the 
continuing  lack  of  national  rules  for  transferring 
companies’  registered  offices  into  and  out  of 
Estonia. 

3.4.3.  INFRASTRUCTURE INVESTMENT 

There  is  insufficient  funding  for  Estonia’s 
transport infrastructure to make it sustainable. 
Investments  into  transport  infrastructure  depend 
mainly  on  EU  funds  and  are  chiefly  focused  on 
small  number  of  large  projects  such  as  Rail 
Baltica. No budget revenue has been earmarked for 
transport  infrastructure  improvements,  and  thus 
infrastructure  and 
investment 
maintenance  of  existing 
is  not 
actually ensured. 

into  secondary 

infrastructure 

Coordinated implementation of the Rail Baltica 
railway  project  is  progressing,  with  the  target 
completion  date  set  at  2026.  This  project  is  of 
strategic importance to all three Baltic States and is 
a  high  priority  project  under  the  Connecting 
Europe  Facility 
instrument.  The  governments 
concerned  have  already  agreed  measures  on  the 
contracting scheme of the joint venture to run Rail 
Baltica, on appointments to its management board 
and on  staffing.  The  announced  ratification of  the 
intergovernmental  agreement  between  the  Baltic 
states  will  contribute  to  meeting  a  long-term 
commitment  at  Member  State-level  as  well  as  to 
smoother implementation of the project. 

29 

9095100105110115120070809101112131415Index -2010 = 100Total factorproductivity15.0%17.0%19.0%21.0%23.0%25.0%27.0%29.0%Economicactivities totalManufacturingsector 
 
 
 
3.4. Investment 

(Continued on the next page) 

30 

 Box 3.4.1: Investment challenges and reforms in EstoniaMacroeconomic perspective  Estonia has one of the highest ratios of investment to GDP in the EU, for both the public and the private sector (see Section 3.4). Based on the 2017 winter forecast, the investment ratio is expected to increase slightly from 2017. In terms of the assets invested in dwellings construction, investment has soared in recent years, closing in on the EU average (in % of GDP). In parallel, Estonia invests substantially more than the EU average in ‘equipment’ and ‘other construction’ (the latter reflecting construction activity by enterprises and infrastructure construction). However, Estonia invests 40 % less than the EU average in the ‘other’ category, which includes investment in intangible assets.                                                                                                                                                                Structural barriers to investment Estonia has relatively few barriers to investment compared to most other EU countries, as outlined in the table below:  Table 1:   Source:   1) Labour and skill shortages are considered a barrier to higher investment in fast growing sectors. Shortages of some types of skilled labour are more acute in a few sectors, for example IT workers. Estonia has been successful in attracting IT companies and demand for the relevant professionals has therefore increased. Although the number of IT employees has increased substantially in recent years, (1) it is hard to satisfy the rising demand for workers from the domestic labour market only. 2) The efficiency of the allocation of investment (investment in activities with higher value added) remains an issue, as investment in Estonia has been geared towards capital-intensive production with relatively low value added (see Section 3.4). The Commission analysis on investment barriers highlighted limited cooperation between businesses and academia and low RDI private investment see Section 3.5). Also, financing options for riskier early-stage projects remain limited (see Section 3.2), but Estonia has continued to make efforts to improve these aspects.                                                            (1) With 5 % of the workforce in IT activities (of which 3pps in the IT sector itself), the country currently ranks 4th among Member States. Regulatory/ administrative burdenTaxationPublic administrationAccess to financePublic procurement /PPPsCooperation btw academia, research and businessCSRJudicial systemFinancing of R&D&ICSRInsolvency frameworkBusiness services / Regulated professionsCompetition and regulatory frameworkRetailEPL & framework for labour contracts ConstructionWages & wage settingDigital Economy / TelecomEducation EnergyLegend:TransportNo barrier to investment identifiedCSRInvestment barriers that are also subject to a CSRSome progressNo progressSubstantial progressLimited progressFully addressedPublic administration/ Business environmentFinancial Sector / TaxationR&D&ISector specific regulationLabour market/ Education 
 
 
 
 
 
3.4. Investment 

Box (continued) 

31 

 3) The Commission analysis also highlighted the burdensome insolvency framework as an institutional barrier that might discourage investment. No changes have been made to the insolvency framework recently, as the analysis is still ongoing at Estonian level (see Section 3.4). 
 
 
 
 
3.5. SECTORAL POLICIES 

3.5.1.  R&D AND INNOVATION 

introduced  some  innovation  since  2013,  up  by 
6 pp. on the previous survey. 

investment 

low  private 

Despite  progress  in  implementing  R&D  and 
enterprise growth strategies, Estonia’s research 
and 
innovation  ecosystem  remains  fragile. 
Estonia  has  in  place  strategies  to  strengthen  its 
productivity,  supported  by  the  ‘implementation 
plan’ for 2016-2019. Nevertheless, key challenges 
remain: 
in  R&D, 
insufficient  cooperation  between  businesses  and 
academia, low efficiency of public R&D spending, 
shortage  of  skills,  insufficient  prioritisation  of 
research  and  innovation  investment  and  lack  of 
entrepreneurial  discovery  process.  Besides  this, 
rapidly  rising  wages  require  further  improvement 
in  non-cost  competitiveness.  To 
these 
challenges, during the years 2015-2020 more than 
600  million  euros  will  be  invested  in  R&D, 
innovation and business development. 

face 

(ii) 

support 

potential; 

To  support  R&D,  the  government  launched 
several  measures  in  2016:  (i)  the  high-growth 
business  development  programme  for  firms  with 
strong 
public 
procurement of innovation; (iii) measures to boost 
the  use  of  financial  instruments.  In  addition,  an 
‘Industrial Policy Green Book’ is being developed 
by  the  Ministry  of  Economic  Affairs.  The  Book 
includes  proposals  for  R&D,  with  the  aim  of 
raising  Estonia’s  R&D  investment  and  position  in 
the value chain.      

for 

Graph 3.5.1:  Patent application to the European Patent 

Office (by priority year and per million people 
of active population) 

Investment in R&D 

Business  investment  in  R&D  remains  low, 
mainly  due  to  a  low  share  of  high  technology 
and knowledge-intensive companies(19). In 2015, 
R&D  intensity  increased  marginally  to  1.50 %  of 
GDP  (from  1.45 % 
in  2014)  and  business 
enterprise  expenditure  in  R&D  reached  0.69 % 
(from  0.63  in  2014).  The  Estonian  economy 
remains dominated by SMEs in traditional sectors 
with 
is 
concentrated in a few large companies. Many firms 
are  involved  in  contract  manufacturing  as  a 
prevalent  business  model  and  foreign  investment 
in  business  R&D  in  Estonia  remains  low  (0.06 % 
of GDP in 2015). 

limited  needs  for  R&D.  Investment 

the  2016 

Investment  in  intangible  assets  in  Estonia  is 
low.  It  accounts  for  9.5 %  of  total  investment 
compared to an EU average of 19.6 %. According 
(20),  Estonian 
to 
Innobarometer 
companies are less likely to invest in research and 
development.  However,  the  share  of  companies 
investing  in  software  development  is  increasing. 
Only  half  of  companies  reported  that  they  had 

(19)  The  value  added  in  medium  high-tech  manufacturing 
stands at 2.8 % of total value added in 2014, well below the 
EU average of 5.5 %. 

(20)  Flash  Eurobarometer  433  —  Innobarometer  2016  —  EU 
business  innovation  trends:  the  Innobarometer  is  a  survey 
on activities and attitudes related to innovation. Each year, 
it  gathers  opinions  and  feedback  from  the  general  public 
and  European  businesses  and  provides  a  unique  source  of 
direct information on innovation for policymakers. 

Source: Eurostat 

Cooperation between business and academia 

The 
cooperation  between  public  R&D 
institutions and private companies increased in 
2015,  but  its  volume  remains  limited.  Research 
contract  between  public  R&D  institutions  and  the 
private  sector  increased  by  24  %.  However  the 
share  of  R&D  funded  by  business  and  performed 
by  public  research  organisations  (as  a  percentage 
of total R&D expenditure) was 2.4 % in 2015, well 
below the EU-28 average. Patent application from 
Estonia was low and continued its downward trend 
(Graph 3.5.1). Also, the royalties and licence fees 
paid abroad by Estonian companies were far below 
those of Nordic countries and declining (see Graph 
the  number  of  public-private 
3.5.2).  Finally, 

32 

010020030040050060070005060708091011121314EuropeanUnion (28countries)EstoniaLatviaLithuaniaFinlandSweden 
 
                                                           
 
3.5. Sectoral policies 

scientific co-publications per million population is 
one of the lowest in the EU(21). 

Graph 3.5.2:  Charge for the use of intellectual property from 

abroad as % of GDP 

to 

the  government 

in  areas  addressed  by 
strategy 
from  2017 

launched 
The  Estonian  Government  has 
measures 
science-business 
improve 
cooperation.  These  include  support  to  public 
research  organisations  for  applied  research  and 
development  of  products  in  cooperation  with 
the  smart 
business 
(‘NUTIKAS’). 
specialisation 
Additionally, 
is 
changing the baseline funding formula of research 
institutions  to  provide  incentives  for  public-  and 
private-sector  contract  research.  A  specialised  ad 
hoc expert group formed by the Estonian Research 
Council  has  recommended  increasing  the  baseline 
funding to 50 % (from the current 20 % in 2015). 
In  2016,  the  share  of  baseline  funding  constituted 
27 % and it is gradually increasing. In addition, the 
‘ADAPTER’ platform was launched in April 2016 
as a one-stop shop for companies willing to engage 
in  research  with  Estonian  universities.  Finally, 
doctoral  studies  in  cooperation  with  enterprises 
and  support 
in 
technology  development  centers  and  clusters  are 
being implemented. 

to  participate 

for  business 

Higher education and research 

the 

and 

ageing 

population 

The 
low 
attractiveness  of  research  careers  in  Estonia 
remain  key  bottlenecks.  Estonia  has 
a 
comparatively  low  number  of  PhD  graduates(22). 
The  number  of  new  graduates  in  science  and 
engineering  (per  1000  population  aged  25-34)  is 
also low. Estonia has launched initiatives in recent 
years  to  address  the  scarcity  of  highly  qualified 
improve  researchers’  mobility 
employees  and 
between the public and private sectors. The ruling 
coalition  agreement  includes  provision  for  more 
scholarships  for  doctoral  students  and  the  aim  is 
also  to  double  the  monthly  sum  of  scholarship. 
However, the national target of 300 PhD graduates 
per year by 2020 remains ambitious. 

(21)  Estonia  ranks  22nd  and  was  on  a  downward  trend  of 

17.9 % during 2007-2015. 

(22)  Estonia  ranked  20th  in  the  EU-28  for  new  doctoral 

graduates in 2014.  

Source: Eurostat 

Internationalisation and excellence 

The  relatively  low  efficiency  of  public  R&D 
spending  is  linked  to  a  lack  of  economies  of 
scale  and  of  critical  mass  in  research  areas. 
Estonia has to some extent improved the quality of 
its  scientific  production  since  2000.  However  the 
low  level  of  scientific  excellence  remains  a 
challenge  as  highly  cited  publications(23)  remain 
below EU average (compared to the level of public 
R&D intensity that is above EU average). Estonia 
also showed progress in the internationalisation of 
its  research  system.  Despite  the  close  economic 
integration  of  Estonia’s  manufacturing  industry 
with  the  Nordic  economies  there  is  insufficient 
cooperation in R&D and innovation. 

The smart specialisation framework 

Estonia  is  working  to  improve  implementation 
of  smart  specialisation.  The  task  of  running  the 
entrepreneurial  discovery  process  was  transferred 
from  the  Estonian  Development  Fund  to  the 
Ministry  of  Economic  Affairs  in  June  2016. 
Subsequently, Estonia developed an action plan for 
securing  a  continuous  entrepreneurial  discovery 
process.  The  plan  for  2017 
to  enhance 
monitoring of growth areas, update the growth area 
reports from 2014 and strengthen links with other 

is 

(23)  The share of Estonian scientific publications among the top 
10 % most cited worldwide was only 7.3 % in 2013 vs an 
EU average of 10.5 %. 

33 

0.00%0.10%0.20%0.30%0.40%0.50%0.60%0.70%0.80%0.90%1112131415 
 
                                                           
 
                                                           
regions.  Estonia  is  also  planning  to  launch  value 
chain  research.  Successfully  implementing  these 
plans  is  likely  to  help  prioritise  investments  in 
R&D and innovation in domains with potential for 
growth.  Under  the  2016  ‘RITA’  programme, 
specialised  R&D  civil  servant  profiles  have  been 
created  in  line  ministries  to  help  deliver  R&D 
in  smart 
priorities  closer 
specialisation  areas.  It  should  also  contribute  to 
less 
fragmented  R&D  governance,  although 
success  will  depend  on  the  availability  of  R&D 
funds in line ministries. 

to  business  needs 

R&D funding streams after 2020 

From 2007 to 2013, Structural Funds accounted 
for 50 to 60 % of all public R&D spending and 
continue  being  a  major  share  of  it  during  the 
2014-2020  programming  period.  This  raises 
questions  as  to  the  medium-term  to  longer-term 
sustainability  of  public  R&D  investments.  The 
government launched in June 2016 a task force on 
research  funding  and  management,  which 
is 
expected  to  make  proposals  in  2017  on  the  long-
term  financing  and  management  of  Estonia’s 
research and higher education system. 

3.5.2.  DIGITAL ECONOMY AND SOCIETY 

The  fast  uptake  of  digital  technology  by  the 
public  sector  continues.  In  the  Digital  Economy 
and  Society  Index  2016  Estonia  ranks  seventh  in 
the EU. It is the best performing country in digital 
public services, climbing from fourth place in 2015 
to  first  in  2016.  The  country  also  ranks  high  in 
digital skills and internet use, including for online 
cross-border  shopping  (22 %).  In  contrast,  the 
uptake of digital technology by businesses is well 
below the EU average (22nd). Only 12 % of SMEs 
sell  online  and  6 %  use  the  internet  for  cross-
border  sales.  According  to  Eurostat  data(24),  the 
main reasons preventing Estonian companies from 
online  sales  are:  (i)  the  nature  of  their  goods  or 
services  (i.e.  not  suitable  for  web  sales);  and  (ii) 
logistics. 

(24)  Eurostat,  Obstacles  for  web  sales,  all  enterprises  without 

financial sector with 10 or more employees. 

3.5. Sectoral policies 

3.5.3.  COMPETITION IN PRODUCT AND 

SERVICES MARKETS 

(Estlink  2). 

infrastructure 

Estonia  performs  well  on  the  OECD  product 
market  regulation  index.  It  ranks  seventh  in  the 
EU and its score has improved from 1.37 in 2008 
to  1.29  in  2013.  Competition  in  Estonia’s  energy 
market  has  substantially  improved  in  recent  years 
with  the  liberalisation  of  the  country’s  electricity 
and  gas  markets  and  the  construction  of  new 
energy 
Improved 
electricity interconnection with Latvia will further 
the 
strengthen  security  of  supply  and  boost 
effectiveness  and  competitiveness  of  energy 
markets  in  the  entire  Baltic  region.  Constructing 
the  Baltic  connector  natural  gas  pipeline  between 
increasing 
Finland  and  Estonia 
diversification  and  security  of  supply  and  ending 
Estonia’s 
the  gas  sector.  The 
Connecting Europe Facility’s financing agreement 
on  the  Baltic  connector  pipeline  project  has 
ensured  that  there  is  agreement  to  build  this  gas 
pipeline linking Finland and Estonia.   

is  vital  for 

isolation 

in 

The  level  of  restrictiveness  (25)  of  regulated 
professions  in  Estonia  is  generally  low.  It  is 
lower  than  the  EU  average  among  the  seven 
professions  analysed,(26)  except  for  the profession 
of patent agent, where it is higher (27). The national 
action  plan  submitted  by  Estonia  under  a  mutual 
evaluation  exercise  of  regulated  professions  states 
that  there  is  no  need  for  major  reforms,  while  at 
the  same  time  it  acknowledges  a  possibility  for 
even further reduction in regulation. 

Estonia has become the first EU Member State 
to  cooperate  with  collaborative  economy 
platforms  for  tax  purposes.  The  Estonian  Tax 
and  Customs  Board  has  established  a  cooperation 
sector  collaborative 
strategy  with 

transport 

(25)  Regulatory  barriers  include,  for  example,  reserves  of 
requirements, 
activities, 
multidisciplinary 
chamber 
membership,  authorisation  schemes  and  professional 
indemnity insurance. 

and 
restrictions, 

voting 
compulsory 

shareholding 

(26)  Tourist guide, real estate agent, patent agent, lawyer, civil 

engineer, architect, accountant.  

(27)  The European Commission has developed a new composite 
indicator on restrictiveness of most existing barriers to the 
access to and exercise of regulated professions. It is based 
on  data  collected  from  Member  States,  complemented  by 
desk  research.  This  new  indicator  has  many  similarities 
with  the  Commission’s  indicator  assessing  the  barriers  in 
business services published in 2015, but also differs from it 
in certain aspects. See European Commission (2016f). 

34 

 
                                                           
                                                           
3.5. Sectoral policies 

particular,  new  vehicles  purchased  in  Estonia 
remain the most environmentally unfriendly in the 
EU  with  an  average  CO2  emission  of  137  grams 
per  kilometre  compared  to  the  EU-28  average  of 
119  grams  in  2015.  An  energy  labelling  scheme 
for  new  passenger  cars  has  been  introduced, 
requiring all new cars to be labelled based on their 
consumption of fuel and CO2 emission. However, 
transport-related  taxation  (excluding  fuel  taxes) 
that  could  improve  energy  efficiency  or  reduce 
emissions  remains  among  the  lowest  in  the  EU. 
There  is,  however,  government  discussion  about 
introducing  a  car  registration  tax  and  a  road 
charging  scheme  for  goods  vehicles  above  12 t  in 
2017.  There  are  no  plans  to  introduce  a  road 
charging scheme for vehicles under 12 t. 

to 

trains 

and  upgrades 

Estonia has made progress on promoting public 
transport.  The  introduction  of  new  inter-city  and 
suburban 
support 
infrastructure  (such  as  waiting  room)  has  brought 
about  a  sizeable  (57 %)  increase  in  the  use  of 
passenger trains. Similarly, the introduction of free 
public transport in Tallinn has increased the use of 
is  also 
transport  by  13 %.  Estonia 
public 
promoting  country-wide  multimodal  ticketing  and 
fast  payment  solutions  and  is  in  the  process  of 
changing  its  Public  Transport  Law  to  legalise  the 
use  of  the  collaborative  economy  in  passenger 
transport. 

Waste management 

Recycling  has 
increased.  The  amount  of 
municipal waste generated in Estonia in 2015 was 
below  the  EU  average.  Estonia  has  significantly 
increased  recycling  rate  of  municipal  waste  from 
18  %  in  2013  to  31  %  in  2014,  however  this 
tendency was not maintained in 2015 (it decreased 
to  28  %).  A  recent  study  assessing  separate 
collection  in  EU  capitals  has  rated  Tallinn  as  the 
second  best  performing  capital  in  the  EU.  In 
parallel,  the  construction  of  an  incineration  plant 
and  several  mechanical  biological 
treatment 
facilities  has  led  to  a  significant  reduction  of 
landfilled municipal waste: from 14 % of the total 
waste  in  2013  to  8  %  in  2015.  As  a  result,  the 
incineration  of  municipal  waste  has  increased 
dramatically from 18 % in 2012 to 59 % in 2015, 
becoming  the  main  municipal  waste  treatment 
option. However, this hinders recycling and poses 
a risk to Estonia's attainment of its 2020 recycling 
target of 50 %. 

economy  platforms  such  as  Uber  and  Taxify  to 
simplify  tax  declaration  processes  for  drivers  and 
prevent  tax  evasion.  The  agreement  allows  car-
sharing drivers to opt into a system where drivers’ 
income  data  can  be  sent  to  the  tax  office  and 
automatically added to the tax return. 

3.5.4.  ENERGY, RESOURCE AND CLIMATE 

CHANGE 

Estonia is on track to reach its 2020 targets on 
greenhouse  gas  emissions  and  renewable 
energy.  For  the  greenhouse  gas  reduction  target, 
national  projections  indicate  Estonia  will  exceed 
its 2020 target by about 13 percentage points with 
existing  measures(28).  For  renewable  energy, 
Estonia is already above its 25 % target for 2020. 

Estonia has achieved levels of primary and final 
energy consumption that are below its national 
targets,  but  keeping  these  levels  until  2020  will 
remain  a  challenge.  As  a  producer  of  electricity 
and  heating  from  oil  shale,  Estonia  will  likely 
remain  the  most  carbon-intensive  economy  in  the 
EU, and keep one of the highest carbon intensity in 
energy  use.  Indeed,  international  oil  prices  are  on 
the  rise,  making  the  country's  oil  shale  sector 
competitive  again.  Therefore,  Estonia's  primary 
energy consumption is expected to increase again. 
In parallel, there is a big energy saving potential in 
residential  buildings,  energy  distribution,  service 
sector  and  transport.  Estonia  has  made  some 
progress  on  a  number  of  legislative  initiatives 
fostering  energy  efficiency(29).  Furthermore,  the 
three  climate-  and 
government  has  prepared 
energy-related 
strategy  documents, 
which  are  currently  under  discussion  in  the 
Parliament(30). 

long-term 

Furthermore,  greenhouse  gas  emissions  and 
transport  have 
energy  consumption 
increased since 2005. The proportion of transport 
In 
emissions  has 

to  11.8 %(31). 

increased 

from 

(28)  European Environment Agency (2016a).  
(29)  The Energy Sector Regulation draft act, draft amendments 
to the Electricity Market Act, the District heating draft act, 
amendment proposal to the Liquid Fuel Act, Estonia is also 
proceeding  with  a  wide-scale  roll-out  of  smart  metering 
systems for electricity. 

(30)  Estonian  Climate  Policy  2050.  Estonian  Climate  Chance 
Adaptation  Development  Plan  2030,  Energy  Development 
Plan 2030. 

(31)  European Environment Agency (2016b). 

35 

 
                                                           
3.6. PUBLIC ADMINISTRATION 

3.6.1.  LOCAL GOVERNMENT REFORM 

is 

currently  undertaking 

Estonia 
local 
government  reform  to  improve  local  public 
services  and  governance  and  achieve  efficiency 
gains.  The  previous  structure  of  local  governance 
led to uneven quality and access to public services. 
This  was  explained  by  the  small  size  of  many 
municipalities  and  their  resulting  limited  financial 
means and ability to attract a competent workforce 
at municipal level. 

The  ongoing  local  government  reform  initiated 
by the previous government is continuing under 
the  new  administration.  The  legislative  acts  on 
the  responsibilities  and  division  of  tasks  between 
municipalities  and  central  government  are  in 
preparation.  Also,  there  is  no  proposal  yet  on 
revising  the  financing  scheme  for  municipalities. 
The new administration announced in its coalition 
agreement  that  it  intends  to  increase  the  revenue 
base and financial autonomy of local governments, 
but no details are known yet. 

As  part  of  Estonia’s  local  government  reform, 
the Administrative Reform Act  was adopted  in 
July 2016. The aim of the Act is to make it easier 
to  create  viable  local  municipalities  that  can 
finance their own activities, plan development and 
growth,  and  offer  quality  services.  The  Act 
governs  the  process  of  merging  municipalities, 
which had a voluntary phase until the end of 2016 
from 
and 
1 January 2017)(32).  During  the  compulsory  phase 
of the reform, the government will submit merger 
proposals  to  municipalities  that  do  not  meet  the 
minimum size criterion laid down in the Act. The 
usual  merger  grants  already  in  place  before  the 
reform were doubled during the voluntary phase of 
the reform. However, during the compulsory phase 
no merger grants will be paid. 

compulsory 

starting 

phase 

a 

the  right 

The  Administrative  Reform  Act 
includes 
several  support  measures  intended  to  make 
implementation  more  straightforward.  The  Act 
has  provisions  on  compensating  municipal  heads 
made  redundant,  and  support  is  also  available  for 
consultancy  and  analysis  on  merger  options. 
Municipalities  retain 
legal 
challenges  against  government  decisions  to  issue 
merger proposals. The mergers are expected to be 
in 
elections  on 
the 
15 October 2017.  A  proposal  to  abolish  county 
governments  was  adopted  in  January.  Under  the 
proposal,  new 
tasks  on  public 
transportation,  regional  development  and  business 
promotion  are  assigned 
local 
governments, e.g. through joint municipal bodies. 

the  new 

collective 

to  file 

as  of 

force 

local 

to 

(32)  During 

local 
the  voluntary  merger  process  160 
municipalities out of total 213 decided to merge, reducing 
the  number  of  municipalities  to  100.  Four  islands  have 
applied  for  exemption  and  23  local  municipalities  exceed 
the  minimum  criterion  without  having  to  merge.  Only  26 
local municipalities will receive merger proposals from the 
government. 

to 

tax 

transferred 

Currently,  local  government  has  very  limited 
powers  and  incentives  to  increase  revenues(33). 
The  personal  income  tax  rate  and  the  share  of 
income 
local  government 
authorities  are  set  by  central  government.  Local 
government  can  set  the  land  tax  rate  applied  to 
their territory with a ceiling at 2.5 % of the taxable 
land  value.  However,  the  taxable  land  value  has 
not  been  re-evaluated  since  2001.  Apart  from  tax 
revenue,  the  Equalisation  Fund  scheme  ensures 
quasi-automatic  redistribution  of  revenue  to  the 
poorest  municipalities.  The  current  financing  mix 
local  government  does  not  create  strong 
of 
incentives for attracting businesses and developing 
entrepreneurship.  Also,  the  low  autonomy  in 
setting the tax base might limit local governments’ 
ability  to  provide  services.  Nevertheless,  local 
government’s  aggregate  fiscal  performance 
is 
sound,  due 
imposed  on 
individual  municipalities  limiting  the  size  of  their 
deficits and how much debt they can incur. 

legal  restrictions 

to 

3.6.2.  PUBLIC EMPLOYMENT 

In  addition  to  the  local  government  reform, 
another  notable  ongoing  initiative  is  to  reduce 
public  employment  in  step  with  the  decline  in 
the  working-age  population.  The  previous 
government set a target to limit employment in the 
general  government  sector  to  12 %  of  the  labour 
force  (which  is  approximately  the  current  level). 
As  the  population  and  labour  force  are  shrinking, 
the 
this 
government  sector  will  be  needed.  The  policy  is 
aimed at mitigating the mounting labour shortages 

that  a  further  reduction 

implies 

in 

(33)  Currently,  local  government  revenues  mainly  rely  on 
personal income tax and central government transfers. Tax 
revenue  comes  predominantly  from  personal  income  tax 
(92.3 %) and a smaller share from land tax (6.3 %). 

36 

 
 
                                                           
                                                           
3.6. Public administration 

in the private (business) sectors and keeping longer 
term  public  expenditure  pressures  in  check.  The 
new  government  has  not  announced  any  major 
changes  to  the  previous  policy.  Beyond  the  local 
government  reform,  several  measures  are  planned 
as  part  of  the  effort  to  reduce  public-sector 
employment:  these  include  consolidating  school 
and  hospital  networks,  centralising  state  support 
services  and  several  other  public  functions  and 
making  provision  for  a  wider  range  of  ‘smart’ 
public  services  (e-services).  In  addition, 
the 
government has launched a ‘zero bureaucracy task 
force’  to  reduce  red  tape  in  public  administration 
and beyond. 

3.6.3.  PROCUREMENT 

in 

9%  of  procedures  an  Estonian  public  entity  buys 
on  behalf  of  another.  Aggregated  purchasing  at 
demand  level  does  not  only  lead  to  better  prices 
(savings  ranging  from  15%  to  50%),  but,  more 
importantly,  to  better  quality  thanks  to  economics 
of  scale  also 
terms  of  expertise,  human 
resources  and  know-how.    Moreover,  under  the 
state  administration  reform  some  steps  have  been 
taken 
the 
Centralised Purchasing Body. This would improve 
the  professionalisation  of  public  procurement 
around 
In  particular,  public 
the 
the  health  sector  still  needs 
procurement 
improvement  in  terms  of  professionalisation  and 
the correct application of rules. 

the  narrow  scope  of 

country. 
in 

to  expand 

in 

2016, 

country 

Price  is  still  the  preferred  criterion  by  the 
Estonian  contracting  authorities.  Estonia  scores 
well above the EU average for its publication rate 
of  public  tenders.  As  a  result  of  the  ongoing 
reform, 
improved 
the 
significantly  with  regards  to  the  use  of  the  most 
tender  criteria  for 
economically  advantageous 
evaluating public tenders. Yet, in about 65% of the 
public  procurement  procedures,  the  price  was  the 
only  award  criteria  thus  discouraging  competition 
on  the  basis  of  quality  and  innovation.(34)  In 
addition, Estonia is one of the few countries which 
has  not  adopted  a  national  action  plan  on  green 
public procurement. The target for uptake of green 
public procurement is set at 15 % by 2018. 

More  innovative  solutions  in  the  public  sector 
are  on  the  way.  In  2016, 
the  government 
implemented  a  pilot  project  for  procurement  of 
to 
innovation  solutions.  The  project  aimed 
to 
encourage  public  bodies 
introduce  more 
innovation  by  providing 
them  with  financial 
incentives  to  procure  innovative  solutions  and 
guidance  on  how  to  go  about  doing  this.  An 
awareness  campaign  ran  in  parallel.  After  its 
successful  conclusion,  a  new  round  is  under 
preparation.  In  addition,  a  new  e-procurement 
module providing information about innovation in 
tenders is being developed. 

Estonia  is  in  line  with  the  EU  average  with 
regards  to  cooperative  procurement.  In  about 

(34)  (European Commission, forthcoming) 

37 

 
                                                           
 
3.6. Public administration 

38 

 Box 3.6.1: Selected highlights: 'Work Ability' reform and high performance in international skills survey'Work Ability' reform: Estonia’s working-age population and labour force continue to shrink, particularly as a result of low birth rates, ageing and health-related exits from the labour force. Due to a rapid increase in the take-up of incapacity for work pensions and the need to bring back people to the labour market and keep them there, a reform was necessary and was recommended by the Commission in 2013 and 2014 country-specific recommendations. Estonia has committed itself to carrying out a ‘Work Ability’ reform, which concerns around 10 % of the Estonian working-age population, with better activation support services based on an individual approach. Implementation started in 2016. From January of that year, labour market rehabilitation services have been offered and, from July, assessments of work ability have started. The reform is fully operational since January 2017 and includes re-assessments of earlier claimants’ health conditions. Transition from the old scheme to the new one should last until 2021, but the reform has already positively changed attitudes towards people with reduced working ability, making it easier for them to find and keep a job. Outcomes of the reform will be more visible in the next couple of years. The Estonian target is for approximately 15 000 people with reduced work ability to have found a job presumably by 2020.  High performance in international skills survey: Estonia’s success in PISA (see Section 3.3.1) can be explained by a mix of policy measures and the overall societal context, which places great value on education. Public spending on education is traditionally high and several efforts to improve efficiency have been made.  Curricula were revised to emphasise problem-solving and critical thinking.  Overall, Estonian schools have considerable autonomy, including decisions about school finances, education priorities, implementation of the curricula and defining learning outcomes. Several measures were taken to ensure equity and inclusiveness of the system. Investments targeted at Russian-language schools seek to close the performance gap between Estonian and Russian speaking students. Providing counselling and personalised support for weaker students were embedded into school policy. To increase the quality of instruction and support teachers’ professional development, counselling centres were developed. At the same time, salaries have been increasing steadily in an attempt to increase the attractiveness of the teaching profession.  
 
 
 
 
 
ANNEX A 

Overview Table 

2016 Country-specific recommendations (CSRs) 

Commitments                                                       Summary assessment(35) 

CSR 1:  

Ensure  the  provision  and  accessibility  of  high-
quality  public  services,  especially  social  services, 
inter  alia  by  adopting  and 
at 
local 
implementing 
local  government 
reform.  

the  proposed 

level, 

Adopt  and  implement  measures  to  narrow  the 
gender  pay  gap,  including  those  foreseen  in  the 
Welfare Plan. 

Estonia  has  made  some  progress  in  addressing 
CSR 1: 

Some  progress  in  ensuring  the  provision  and 
accessibility of high-quality social services at local 
level.  Implementation  is  ongoing  for  the  Social 
Welfare Act and the measures under the 2016-2020 
action plan for the 2016-2023 welfare development 
plan. 

Some  progress  in  adopting  and  implementing  the 
local  government  reform.  The  Administrative 
Reform  Act  was  adopted  in  July  2016.  The 
voluntary merger of municipalities, lasting until the 
end  of  2016  was  successful,  leading  to  an  initial 
decrease in the number of municipalities from 213 
to 100. 

Limited progress in reducing the gender pay gap. 
The  2016-2023  welfare  development  plan  and  its 
2016-2020 action plan were adopted in June 2016. 
One  out  of  the  plan’s  four  main  areas  aims  at 
ensuring 
and 
opportunities  for  men  and  women  in  all  areas  of 
society.  Due  to  the  late  approvals,  the  progress on 
implementing  specific  measures  to  reduce  the 
gender pay gap is delayed.  

responsibilities 

rights, 

equal 

The  amendments  to  the  Gender  Equality  Act  are 

(35)  The following categories are used to assess progress in implementing the 2016 country-specific recommendations: 

No progress: The Member State has not credibly announced nor adopted any measures  to address the CSR. Below a number of 
non-exhaustive typical situations that could be covered under this, to be interpreted on a case by case basis taking into account 
country-specific conditions: 

•  no  legal,  administrative,  or  budgetary  measures  have  been  announced  in  the  National  Reform  Programme  or  in  other  official 
communication  to  the  national  Parliament  /  relevant  parliamentary  committees,  the  European  Commission,  or  announced  in 
public (e.g. in a press statement, information on government's website);  
• no non-legislative acts have been presented by the governing or legislator body;   
•  the  Member  State  has  taken  initial  steps  in  addressing  the  CSR,  such  as  commissioning  a  study  or  setting  up  a  study  group  to 
analyse possible measures that would need to be taken (unless the CSR explicitly asks for orientations or exploratory actions), 
while clearly-specified measure(s) to address the CSR has not been proposed. 

Limited progress: The Member State has: 
• announced certain measures  but these only address the CSR to a limited extent;    
and/or 
• presented legislative acts in the governing or legislator body but these have not been adopted yet and substantial non-legislative 

further work is needed before the CSR will be implemented;  

• presented non-legislative acts, yet with no further follow-up in terms of implementation which is needed to address the CSR. 
Some progress: The Member State has adopted measures that partly address the CSR  
and/or the Member State has adopted measures that address the CSR, but a fair amount of work is still needed to fully address the 
CSR  as  only  a  few  of  the  adopted  measures  have  been  implemented.  For  instance:  adopted  by  national  parliament;  by 
ministerial decision; but no implementing decisions are in place. 

Substantial progress: The Member State has adopted measures that go a long way in addressing the CSR and most of which have 

been implemented. 

Full implementation: The Member State has implemented all measures needed to address the CSR appropriately. 

39 

 
 
                                                           
 
 
 
A. Overview Table 

expected  to  enable  the  Labour  Inspectorate  to 
monitor gender equality in the private sector. They 
are planned for March. Also important are changes 
to  the  parental  leave  system  to  improve  flexibility 
and 
care 
equal 
responsibilities  between  women  and  men.  The 
government discussed and gave political guidelines 
on  the  scope  and  timetable  of  the  parental  leave 
system on 26th January.  

ensure  more 

sharing  of 

CSR 2:  

private 
and 

research, 
in 
Promote 
development 
including  by 
strengthening  cooperation  between  academia  and 
businesses. 

investment 
innovation, 

Estonia  has  made  some  progress  in  addressing 
CSR 2: 

Private  investment  in  R&D  is  bottoming  out  at 
0.69 % GDP. Cooperation between businesses and 
academia  remains  weak.  However,  Estonia  has 
made some progress in addressing the CSR: 

on 

axis 

research, 

At  the  end  of  2016,  Estonia  had  already  selected 
ERDF operations worth EUR 277 million under the 
technological 
priority 
development  and  innovation  of  the  Operational 
Programme for Cohesion Policy Funds 2014-2020. 
This  is  equivalent  to  43 %  of  the  total  ERDF 
budget  (EUR  642  million)  for  the  axis  concerned. 
Estonia  also  finalised  in  2016  the  remaining  legal 
acts for the activities under this axis. 

In  2016,  the  government  launched  a  business 
development  programme  for  firms  with  high-
growth potential, launched specific support for the 
public procurement of innovation and promoted the 
instruments.  An 
financial 
increased  use  of 
‘Industrial  Policy  Green  Book’  is  also  being 
developed. 

There  will  be  further  support  to  public  research 
organisations for applied research and development 
of  products  in  cooperation  with  business,  in  areas 
addressed  by  the  smart  specialisation  strategy. 
Changes  are  being  introduced  to  the  baseline 
funding of public research organisations to provide 
incentives for contract research with business. The 
share  of  institutional  funding  and  project-based 
financing  for  research  will  be  gradually  raised  to 
50/50 (under the ruling coalition agreement). 

Specialised  R&D  civil  servant  profiles  have  been 
created in line ministries in 2016 under the ‘RITA’ 
programme.  The  aim  is  to  help  deliver  R&D 
in  smart 
priorities  closer 

to  business  needs 

40 

 
A. Overview Table 

specialisation areas. 

Finally,  doctoral  studies 
in  cooperation  with 
entreprises  and  support  for  business  to  participate 
in technology development centres and clusters are 
being implemented. 

Europe 2020 (national targets and progress) 

Employment rate target set in the 2013 NRP: 76 %  The Estonian national target for employment (20-64 
age group) is set at 76 %, which means bringing an 
additional 38 000 people into employment compared 
to  2009.  In  2013  the  employment  rate  was  73.3 %; 
in  2014  it  was  74.0 %  and  in  2015  76.5 %.  In  the 
first three quarters of 2016, the figure was 76.7 % on 
average. The 2020 target rate of 76 % was surpassed 
in  2015,  and  will  be  surpassed  again  in  2016.  For 
Q1-Q3 2015, the figure was 76.5 %. 

R&D  target  set  in  the  2013 NRP:  3 %  of  GDP,  of 
which 2 % for the private sector. 

In  2015,  R&D  investment  in  Estonia  recovered 
slightly to  1.5 %  of GDP,  up  from  1.43 %  in  2014, 
but remained below the EU average of 2 % of GDP. 

Business  enterprise  expenditure  in  R&D  increased 
from 0.63 in 2014 to 0.69% in 2015. 

Greenhouse  gas  emissions,  base  year  1990:  +11  % 
in 2020 compared to 2005 (in non-ETS sectors) 

2020 target:+11 % 

According to preliminary estimates, greenhouse gas 
the  EU 
in  sectors  not  covered  by 
emissions 
Emissions  Trading  System  decreased  by  3 % 
between 2005 and 2015. 

According to the latest national projections based on 
existing measures, non-ETS emissions will decrease 
by  2 %  between  2005  and  2020.  The  target  is 
consequently expected to be met with a margin of 13 
pps.  

With  a  renewable  energy  share  of  27.9 %  in  2015, 
Estonia  is  already  above  its  25 %  target  for  2020. 
Between  2011  and  2015,  Estonia  was  the  first  EU 
Member  State  to  develop  a  nationwide  network  of 
fast-charging points for electric vehicles.  

Renewable energy target set in the 2013 NRP: 25 % 

41 

 
 
 
A. Overview Table 

Energy  efficiency  target:  stabilisation  of  the  final 
energy consumption at the 2010 level, i.e. 2.8 Mtoe 
(or  the  derived  primary  energy  consumption  of  6.5 
Mtoe. 

Estonia reduced its primary energy consumption by 
-6.3% from 6.57 Mtoe in 2014 to 6.16 Mtoe in 2015. 
Final  energy  consumption  decreased  by  -2%  from 
2.82 Mtoe in 2014 to 2.77 Mtoe in 2015. 

Even  if  Estonia  has  already  achieved  levels  of 
primary  and  final  energy  consumption  which  are 
below the indicative national 2020 targets (6.5 Mtoe 
in  primary  energy  consumption  and  2.8  Mtoe  in 
final energy consumption), keeping these levels until 
2020 will remain a challenge. 

Early school leaving target: 9.5 % of the 18-24 year-
olds  with  at  most  lower  secondary  education  and 
who  are  currently  not  in  further  education  or 
training. 

The  EU 2020  target  is 9.5 %.  In  2014,  the  rate  was 
11.4 % and in 2015 11.2 %. 

The  early  school  leaving  rate  was  16.8 %  in  rural 
areas and 12.5 % in towns and suburbs, as compared 
with 4.9 % in cities. The rate for men (13.2 %) was 
still  higher  than  the  rate  for  women  (9 %)  (2015 
Eurostat data). 

Tertiary education target: 40 % of those aged 30-34 
having successfully completed tertiary education 

In  2015,  the  rate  was  45.3 %.  However,  there  is  a 
significant gender gap (56.7 % for women compared 
with 34.5 % for men).  

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

A  reduction  in  the  at-risk-of-poverty  rate  from 
17.5 %  in  2010  (income  year)  to  15 %  in  2020 
(income  year)  would  equate  to  there  being  36 248  
fewer people at risk of poverty in absolute terms. 

The  number  of  people  at  risk  of  poverty  in  2015 
increased  (partly  because  income  growth  in  the 
bottom  deciles  was  below  median  income  growth). 
This  meant  that  the  country  moved  further  away 
from its national poverty reduction target of 15 %. 

At-risk-of-poverty rate (survey year): 2015: 21.6 % 

2013: 
2014: 
2015: 21.6 % 

18.6 %  
21.8 % 

See additional contextual indicators at: http://ec.europa.eu/education/monitor. 

See additional contextual indicators at: http://ec.europa.eu/education/monitor 

42 

 
 
ANNEX B 

MIP Scoreboard 

Table B.1:  MIP SCOREBOARD for Estonia 

Flags: i: see metadata.  
(1) Unemployment rate: for 2008 i = Eurostat back-calculation to include 2011 Population Census results. 2) Youth 
unemployment rate: for 2008 i = Eurostat back-calculation to include 2011 Population Census results. 
Source: European Commission, Eurostat and Directorate-General for Economic and Financial Affairs (for real effective 
exchange rate), and International Monetary Fund 

43 

Thresholds201020112012201320142015Current account balance, (% of GDP) 3 year average-4%/6%-1.51.90.4-0.3-0.50.9-35%-71.2-54.8-51.1-50.1-46.7-40.9Real effective exchange rate - 42 trading partners, HICP deflator3 years % change±5% & ±11% 4.6-0.8-3.63.14.76.4Export market share - % of world exports5 years % change-6%9.724.87.610.421.28.5Nominal unit labour cost index (2010=100)3 years % change9% & 12% 13.8-2.6-1.18.210.814.46%2.12.63.27.713.16.814%-7.6-1.16.84.04.53.3133%140.4120.4117.8115.9116.7116.660%6.66.19.710.210.710.1Unemployment rate3 year average10%11.914.213.010.38.77.416.5%-8.9-0.610.410.513.08.1-0.2%0.70.50.81.20.51.90.5%5.35.41.8-3.8-3.8-3.12%22.810.4-6.5-14.2-7.4-7.8Activity rate - % of total population aged 15-64 (3 years change in p.p)Long-term unemployment rate - % of active population aged 15-74 (3 years change in p.p)Youth unemployment rate - % of active population aged 15-24 (3 years change in p.p)External imbalances and competitivenessNew employment indicatorsNet international investment position (% of GDP)Deflated house prices (% y-o-y change)Total financial sector liabilities (% y-o-y change)Private sector credit flow as % of GDP, consolidatedPrivate sector debt as % of GDP, consolidatedGeneral government sector debt as % of GDPInternal imbalances 
 
 
 
 
 
ANNEX C 

Standard Tables 

Table C.1: 

Financial market indicators 

(1) Latest data Q2-2016. 
(2) Quarterly values are not annualised. 
* Measured in basis points. 
Source: European Commission (long-term interest rates); World Bank (gross external debt); Eurostat (private debt); ECB (all 
other indicators) 

44 

201120122013201420152016Total assets of the banking sector (% of GDP)114.1109.7105.6108.6114.8115.0Share of assets of the five largest banks (% of total assets)90.689.689.789.988.6-Foreign ownership of banking system (% of total assets)89.234.333.332.032.5-Financial soundness indicators:1)              - non-performing loans (% of total loans)4.53.01.92.61.91.8              - capital adequacy ratio (%)19.423.223.141.835.434.8              - return on equity (%)2)22.911.710.79.76.86.7Bank loans to the private sector (year-on-year % change)-3.5-0.42.74.59.310.1Lending for house purchase (year-on-year % change)-1.50.21.22.94.55.2Loan to deposit ratio144.5134.4128.9124.0122.1125.7Central Bank liquidity as % of liabilities0.10.30.20.30.40.2Private debt (% of GDP)120.4117.8115.9116.7116.6-Gross external debt (% of GDP)1) - public3.17.07.78.07.27.5    - private46.049.447.549.346.244.8Long-term interest rate spread versus Bund (basis points)*------Credit default swap spreads for sovereign securities (5-year)*102.4101.358.657.158.358.5 
 
 
 
 
 
C. Standard Tables 

Table C.2: 

Labour market and social indicators 

(1) The unemployed persons are all those who were not employed but had actively sought work and were ready to begin 
working immediately or within 2 weeks. 
(2) Long-term unemployed are those who have been unemployed for at least 12 months. 
(3) Not in education, employment or training. 
(4) Average of first three quarters of 2016. Data for total unemployment and youth unemployment rates are seasonally 
adjusted. 
Source: European Commission (EU Labour Force Survey). 

45 

201120122013201420152016 4Employment rate(% of population aged 20-64)70.672.273.374.376.576.7Employment growth (% change from previous year)6.51.61.20.82.90.6Employment rate of women(% of female population aged 20-64)67.869.470.170.672.672.6Employment rate of men (% of male population aged 20-64)73.575.176.778.380.581.0Employment rate of older workers (% of population aged 55-64)57.560.562.664.064.566.0Part-time employment (% of total employment, aged 15-64)9.39.28.98.39.59.9Fixed-term employment (% of employees with a fixed term contract, aged 15-64)4.53.53.53.13.43.9Transitions from temporary to permanent employment60.563.465.059.142.9:Unemployment rate1 (% active population, age group 15-74)12.310.08.67.46.26.7Long-term unemployment rate2 (% of labour force)7.15.53.83.32.42.0Youth unemployment rate (% active population aged 15-24)22.420.918.715.013.113.7Youth NEET3 rate (% of population aged 15-24)11.612.211.311.710.8:Early leavers from education and training (% of pop. aged 18-24 with at most lower sec. educ. and not in further education or training)10.610.39.711.411.2:Tertiary educational attainment (% of population aged 30-34 having successfully completed tertiary education)40.239.542.543.245.3:Formal childcare (30 hours or over; % of population aged less than 3 years)15.014.018.014.0:: 
 
 
 
 
 
C. Standard Tables 

Table C.3: 

Labour market and social indicators (continued) 

(1) People at risk of poverty or social exclusion: individuals who are at risk of poverty and/or suffering from severe material 
deprivation and/or living in households with zero or very low work intensity. 
(2) At-risk-of-poverty rate: proportion of people with an equivalised disposable income below 60 % of the national equivalised 
median income.  
(3) Proportion of people who experience at least four of the following forms of deprivation: not being able to 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: proportion of people aged 0-59 living in households where the 
adults (excluding dependent children) worked less than 20 % of their total work-time potential in the previous 12 months. 
(5) For EE, CY, MT, SI and SK, thresholds in nominal values in euros; harmonised index of consumer prices = 100 in 2006 (2007 
survey refers to 2006 incomes). 
Source: For expenditure for social protection benefits ESSPROS; for social inclusion EU-SILC. 

46 

Expenditure on social protection benefits (% of GDP)201020112012201320142015Sickness/healthcare4,74,34,24,14,4:Disability1,91,81,71,81,8:Old age and survivors7,76,86,66,66,6:Family/children2,21,91,71,61,6:Unemployment0,70,50,50,50,4:Housing0,00,00,00,00,0:Social exclusion n.e.c.0,10,10,10,10,1:Total17,415,514,814,714,9:of which: means-tested benefits0,10,20,10,10,1:Social inclusion indicators201020112012201320142015People at risk of poverty or social exclusion1 (% of total population)21,723,123,423,526,024,2Children at risk of poverty or social exclusion  (% of people aged 0-17)24,024,822,422,323,822,5At-risk-of-poverty  rate2 (% of total population)15,817,517,518,621,821,6Severe material deprivation rate3  (% of total population)9,08,79,47,66,24,5Proportion of people living in low work intensity households4 (% of people aged 0-59)9,010,09,18,47,66,6In-work at-risk-of-poverty rate (% of persons employed)6,57,98,37,611,810,0Impact of social transfers (excluding pensions) on reducing poverty36,529,729,426,823,222,3Poverty thresholds, expressed in national currency at constant prices5290427642812296531513428Gross disposable income (households; growth %)-0,99,46,03,16,93,5Inequality of income distribution (S80/S20 income quintile share ratio)5,05,35,45,56,56,2GINI coefficient before taxes and transfers48,449,248,648,951,6:GINI coefficient after taxes and transfers31,331,932,532,935,6: 
 
 
 
 
C. Standard Tables 

Table C.4: 

Product market performance and policy indicators 

(1) The methodologies for this indicator, including the assumptions, are shown in detail at: 
http://www.doingbusiness.org/methodology.  
(2) Average of the answer to question Q7B_a. [Bank loan]: If you applied and tried to negotiate for this type of financing over 
the past six months, what was the outcome? Answers were scored as follows: zero if received everything, one if received 
most of it, two if only received a limited part of it, three if refused or rejected and treated as missing values if the application is 
still pending or the outcome is not known. 
(3) Percentage population aged 15-64 having completed tertiary education. 
(4) Percentage population aged 20-24 having attained at least upper secondary education. 
(5) Index: 0 = not regulated; 6 = most regulated. The methodologies of the OECD product market regulation indicators are 
shown in detail at: http://www.oecd.org/competition/reform/indicatorsofproductmarketregulationhomepage.htm. 
(6) Aggregate OECD indicators of regulation in energy, transport and communications. 
Source: European Commission; World Bank — Doing Business (for enforcing contracts and time to start a business); OECD (for 
the product market regulation indicators); SAFE (for outcome of SMEs' applications for bank loans). 

47 

Performance Indicators201020112012201320142015Labour productivity (real, per person employed, year-on-year % change)Labour productivity in industry12.60-1.815.997.799.26-3.02Labour productivity in construction23.68-5.687.84-8.57-8.33-13.22Labour productivity in market services4.68-0.995.650.21-0.38-2.04Unit labour costs (ULC) (whole economy, year-on-year % change)ULC in industry-12.63-0.667.562.89-3.874.84ULC in construction-6.98-11.123.4515.912.823.54ULC in market services-5.040.093.430.735.1111.68Business Environment201020112012201320142015Time needed to enforce contracts1 (days)425.0425.0425.0425.0425.0425.0Time needed to start a business1 (days)6.56.56.56.54.53.5Outcome of applications by SMEs for bank loans2na0.89na0.910.660.19Research and innovation201020112012201320142015R&D intensity1.582.312.121.731.451.50Total public expenditure on education as % of GDP, for all levels of education combined5.665.164.824.92nanaNumber of science & technology people employed as % of total employment505051515151Population having completed tertiary education3303132323333Young people with upper secondary level education4848381848483Trade balance of high technology products as % of GDP-1.58-0.67-0.88-0.32-0.33-0.35Product and service markets and competition200320082013OECD product market regulation (PMR)5, overallna1.371.29OECD PMR5, retailna1.401.50OECD PMR5, professional servicesna1.811.79OECD PMR5, network industries63.342.602.40 
 
 
 
 
C. Standard Tables 

Table C.5:  Green growth 

General explanation of the table items: 
All macro intensity indicators are expressed as a ratio of a physical quantity to GDP (in 2005 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 material 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   
Weighting of energy in HICP: the proportion of "energy" items in the consumption basket used for the construction of the HICP 
Difference between energy price change and inflation: energy component of HICP, and total HICP inflation (annual % 
change) 
Real unit energy cost: real energy costs as a percentage of total value added for the economy 
Environmental taxes over labour taxes and GDP: from European Commission'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) 
Real unit energy costs for manufacturing industry excluding refining : real costs as a percentage of value added for  
manufacturing sectors 
Share of energy-intensive industries in the economy: share of gross value added of the energy-intensive industries in GDP 
Electricity and gas prices for medium-sized industrial users: consumption band 500–20 00MWh and 10 000–100 000 GJ; figures 
excl. VAT. 
Recycling rate of municipal waste: ratio of recycled and composted municipal waste to total municipal waste 
Public R&D for energy or for the environment: government spending on R&D for these categories as % of GDP 
Proportion of greenhouse gas (GHG) emissions covered by EU Emission Trading System (ETS) (excluding aviation): based on 
greenhouse gas emissions (excl land use, land use change and forestry) as reported by Member States to the European 
Environment Agency 
Transport energy intensity: final energy consumption of transport activity (kgoe) divided by transport industry gross value 
added (in 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. consumption of 
international bunker fuels 
Aggregated supplier concentration index:  covers oil, gas and coal. Smaller values indicate larger diversification and hence 
lower risk 
Diversification of the energy mix: Herfindahl index over natural gas, total petrol products, nuclear heat, renewable energies 
and solid fuels. 
* European Commission and European Environment Agency 

Source: European Commission (Eurostat) unless indicated otherwise 

48 

Green growth performance201020112012201320142015MacroeconomicEnergy intensity kgoe / €0,420,390,370,400,390,36Carbon intensity kg / €1,801,731,571,731,63-Resource intensity (reciprocal of resource productivity)kg / €3,022,992,873,022,872,71Waste intensity kg / €1,72-1,78-1,69-Energy balance of trade % GDP-1,5-0,4-1,3-2,2-2,1-Weighting of energy in HICP%13,2613,9314,6914,4214,4313,65Difference between energy price change and inflation %3,91,37,27,4-4,6-4,1Real unit of energy cost% of value added15,214,915,615,714,6-Ratio of environmental taxes to labour taxesratio0,170,170,170,160,16-Environmental taxes% GDP2,92,72,72,52,7-Sectoral Industry energy intensity kgoe / € 0,260,250,230,250,200,19Real unit energy cost for manufacturing industry excl. refining% of value added13,913,513,514,213,3-Share of energy-intensive industries in the economy% GDP12,2212,2411,7612,6013,5713,42Electricity prices for medium-sized industrial users€ / kWh0,070,070,080,100,090,09Gas prices for medium-sized industrial users€ / kWh0,030,030,040,040,040,03Public R&D for energy % GDP0,020,020,020,010,010,01Public R&D for environmental protection% GDP0,070,050,030,040,040,05Municipal waste recycling rate%18,223,319,117,931,328,3Share of GHG emissions covered by ETS*%72,972,369,773,571,167,7Transport energy intensitykgoe / €1,010,950,940,930,981,05Transport carbon intensitykg / €2,902,772,722,732,86-Security of energy supplyEnergy import dependency%13,612,017,011,98,97,4Aggregated supplier concentration indexHHI80,274,779,673,076,7-Diversification of energy mixHHI0,470,490,450,480,49- 
 
 
 
 
REFERENCES 

of 

Estonia 

Bank 
23, 
http://www.eestipank.ee/en/publication/financial-stability-review/2016/financial-stability-review-22016-0 
. 

Financial 

Stability 

2/2016, 

(2016), 

Review 

20, 

p. 

European  Central  Bank  (2016),  The  Household  Finance  and  Consumption  Survey,  Wave  2,  Frankfurt, 
https://www.ecb.europa.eu/pub/pdf/scpsps/ecbsp18.en.pdf?d2911394a25c444cd8d3db4b77e8891a . 

European Commission (forthcoming), EU Single Market Scoreboard 2016. 

European  Commission  (2017),  COM(2016)820  Communication  of  the  Commission  of  10  January  2017 
on  reform  recommendations  for  regulation  in  professional  services  and  accompanying  staff  working 
COM(2016)436, 
document 
http://www.google.lu/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&ved=0ahUKEwio4vS8y-
_RAhUBWxQKHZMSAlEQFggbMAA&url=http%3A%2F%2Fec.europa.eu%2FDocsRoom%2Fdocume
nts%2F20505%2Fattachments%2F3%2Ftranslations%2Fen%2Frenditions%2Fnative&usg=AFQjCNHS
HdJeitXmB0sfGbb63KgREMiUuw&bvm=bv.145822982,d.d24 . 

European 
Report, 
http://ec.europa.eu/taxation_customs/sites/taxation/files/resources/documents/taxation/gen_info/economic
_analysis/tax_structures/2016/econ_analysis_report_2016.pdf . 

Commission 

Taxation 

(2016a), 

Trends 

European Commission (2016b), Study and Reports on the VAT Gap in the EU-28 Member States: 2016 
Final Report,  https://ec.europa.eu/taxation_customs/sites/taxation/files/2016-09_vat-gap-report_final.pdf 
. 

European 
http://ec.europa.eu/europe2020/pdf/csr2016/cr2016_sweden_en.pdf .  

Commission 

(2016c), 

Country 

Report 

2016 

for 

Sweden, 

European 
Commission 
http://ec.europa.eu/DocsRoom/documents/17822. 

(2016d), 

European 

Innovation 

Scoreboard, 

European 
http://ec.europa.eu/europe2020/pdf/csr2016/cr2016_estonia_en.pdf. 

Commission 

(2016e), 

Country 

Report 

2016 

– 

Estonia. 

European Commission (2016f), Challenges to Member States Investment Environments, SWD(2015)400 
final 
- 
environments/index_en.htm and http://ec.europa.eu/europe2020/pdf/csr2016/cr2016_estonia_en.pdf. 

http://ec.europa.eu/europe2020/challenges-to-member-states-investment 

(2014), 

Commission 

European 
http://www.google.lu/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&ved=0ahUKEwjRvJLyze_RAhV
BtBQKHeeDAUIQFggbMAA&url=http%3A%2F%2Fec.europa.eu%2FDocsRoom%2Fdocuments%2F1
6121%2Fattachments%2F10%2Ftranslations%2Fen%2Frenditions%2Fnative&usg=AFQjCNHuU_CLH
N6XiuzBwnOc_fVaDe7YFA&bvm=bv.145822982,d.d24 . 

Factsheet- 

Business 

Small 

Act 

Estonia, 

European Environment Agency (2016a), Progress towards Greenhouse Gas Emission Targets: Data and 
Methodology,  November  2016,      http://www.eea.europa.eu/themes/climate/trends-and-projections-in-
europe/annex-1-progress-towards-greenhouse . 

European  Environment  Agency  (2016b),  Greenhouse  Gas  –  Data  Viewer,  December  2016, 
http://www.eea.europa.eu/data-and-maps/data/data-viewers/greenhouse-gases-viewer . 

Eurostat, European Business Survey Data. 

49 

 
 
References 

Eurostat, Obstacles for Web Sales.  

Langenbucher, K. (2015), How demanding are eligibility criteria for unemployment benefits, quantitative 
indicators  for  OECD  and  EU  countries”,  OECD  Social,  Employment  and  Migration  Working  Papers, 
No. 166, OECD Publishing, Paris. http://dx.doi.org/10.1787/5jrxtk1zw8f2-en . 

OECD/EU  (2016),  Health  at  a  Glance:  Europe  2016  –  State  of  Health  in  the  EU  Cycle,  OECD 
Publishing, Paris. http://dx.doi.org/10.1787/9789264265592-en 

Tax  Foundation  (2016),  International  Tax  Competitiveness  Index,  https://taxfoundation.org/2016-
international-tax-competitiveness-index . 

World  Bank  (2016),  Doing  Business  2016:  Measuring  Regulatory  Quality  and  Efficiency,  Washington, 
D.C.: World Bank. DOI: 10.1596/978-1-4648-0667-4. 

World  Bank  Group 
https://www.haigekassa.ee/sites/default/files/Maailmapanga-uuring/summary_report_hk_2015.pdf . 

of  Health  Care 

(2015),  The 

Integration 

State 

in  Estonia, 

World  Health  Organisation  Regional  Office  for  Europe  (2015),  Better  non-communicable  disease 
outcomes: challenges and opportunities for health systems – Estonia Country Assessment, Copenhagen. 

50