Recommendation for a COUNCIL RECOMMENDATION on the 2017 National Reform Programme of Estonia and delivering a Council opinion on the 2017 Stability Programme of Estonia
Date: 2017-05-22
Institutions: European Commission, Secretariat-General
Subjects: Estonia, budget deficit, economic policy, economic reform, equal pay, fiscal policy, private investment, public service, research and development, stability programme

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   EUROPEAN COMMISSION  Brussels, 22.5.2017  COM(2017) 506 final   Recommendation for a COUNCIL RECOMMENDATION on the 2017 National Reform Programme of Estonia  and delivering a Council opinion on the 2017 Stability Programme of Estonia   
 
 
Recommendation for a 

COUNCIL RECOMMENDATION 

on the 2017 National Reform Programme of Estonia 

and delivering a Council opinion on the 2017 Stability Programme of Estonia 

THE COUNCIL OF THE EUROPEAN UNION, 

Having  regard  to  the  Treaty  on  the  Functioning  of  the  European  Union,  and  in  particular 
Articles 121(2) and 148(4) thereof, 

Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of 
the  surveillance  of  budgetary  positions  and  the  surveillance  and  coordination  of  economic 
policies,1 and in particular Article 5(2) thereof, 
Having regard to the recommendation of the European Commission,2 
Having regard to the resolutions of the European Parliament,3 

Having regard to the conclusions of the European Council, 

Having regard to the opinion of the Employment Committee, 

Having regard to the opinion of the Economic and Financial Committee, 

Having regard to the opinion of the Social Protection Committee, 

Having regard to the opinion of the Economic Policy Committee, 

Whereas: 

(1) 

On  16 November  2016,  the  Commission  adopted  the  Annual  Growth  Survey,4 
marking  the  start  of  the  2017  European  Semester  of  economic  policy  coordination. 
The priorities of the Annual Growth Survey were endorsed by the European Council 
on  9-10 March  2017.  On  16 November  2016,  on  the  basis  of  Regulation  (EU) 
No 1176/2011,  the  Commission  adopted  the  Alert  Mechanism  Report,5  in  which  it 
did  not identify Estonia as  one of the Member States for which an in-depth  review 
would  be  carried  out.  On  the  same  day,  the  Commission  also  adopted  a 
recommendation for a Council Recommendation on the economic policy of the euro 
area.  That  Recommendation  was  endorsed  by  the  European  Council  on  9-
10 March 2017 and adopted by the Council on 21 March 2017.6  

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OJ L 209, 2.8.1997, p. 1. 
COM(2017) 506 final. 
P8_ TA(2017)0038, P8_ TA(2017)0039, and P8_ TA(2017)0040. 
COM(2016) 725 final. 
COM(2016) 728 final. 
OJ C92/01, 24.3.2017, p. 1. 

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(2) 

(3) 

(4) 

(5) 

(6) 

As a Member State whose currency is the euro and in view of the close interlinkages 
between the economies in the economic and monetary union, Estonia should ensure 
the full and timely implementation of the Recommendation for the euro area that is 
reflected in recommendation 1 below. 
The 2017 country report for Estonia7 was published on 22 February 2017. It assessed 
Estonia’s  progress  in  addressing  the  country-specific  recommendations  adopted  by 
the Council on 12 July 2016, the follow-up given to the recommendations adopted in 
previous years and Estonia’s progress towards its national Europe 2020 targets. 

On  28  April  2017,  Estonia  submitted  its  2017 Stability  Programme  and  on  4  May 
2017  Estonia  submitted  its  2017 National  Reform  Programme.  To  take  account  of 
their interlinkages, the two programmes have been assessed at the same time. 

The relevant country-specific recommendations have been taken into account in the 
Member States’ programmes for the European Structural and Investment Funds (ESI 
Funds) covering the 2014-2020 period. As foreseen in the legislation governing the 
ESI Funds,8 where it is necessary to support the implementation of relevant country-
specific  recommendations,  the  Commission  may  request  a  Member  State  to  review 
and  amend  its  relevant  ESI  Funds  programmes.  The  Commission  has  provided 
further guidelines on the application of those rules.9 

Estonia  is  currently  in  the  preventive  arm  of  the  Stability  and  Growth  Pact.  In  its 
2017  Stability  Programme,  the  government  lowered  its  medium-term  budgetary 
objective  from  a  structural  balance  to  a  deficit  of  0.5%  of  GDP.  The  government 
plans  to  move  from  a  general  government  surplus  of  0.3%  of  GDP  in  2016  to  a 
deficit  of  0.5%  of  GDP  in  2017  and  0.8%  of  GDP  in  2018.  According  to  the 
estimates of the Stability Programme, this corresponds to a structural surplus of 0.2% 
of GDP in 2017 and a deficit of 0.5% of GDP in 2018, respecting the medium-term 
budgetary  objective.  However,  based  on  the  recalculated10  structural  balance,  the 
deficit  is  projected  to  amount  to  0.1%  of  GDP  in  2017  and  0.9%  of  GDP  in  2018, 
below  the  new  medium-term  budgetary  objective.  According  to  the  Stability 
Programme,  gross  government  debt  is  projected  to  remain  below  10%  of  GDP  in 
2017  and  2018.  The  macroeconomic  scenario  underpinning  these  budgetary 
projections is plausible for 2017 and 2018, but it is favourable for the later years of 
the  programme.  At  the  same  time,  there  are  risks  linked  to  the  revenue  yield 
assumptions related to the various new tax measures taking effect in 2018. 

(7) 

Based on the Commission 2017 spring forecast, the structural balance is projected to 
register  a  deficit  of  0.3%  of  GDP  in  2017,  remaining  above  the  medium-term 
budgetary objective. In 2018, Estonia is recommended to remain at the medium-term 
budgetary  objective.  Under  unchanged  policies,  there  is  a  risk  of  some  deviation 

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SWD(2017) 72 final. 
Article  23  of  Regulation  (EU)  No  1303/2013  of  the  European  Parliament  and  of  the  Council  of  17 
December  2013  laying  down  common  provisions  on  the  European  Regional  Development  Fund,  the 
European Social Fund, the Cohesion Fund, the European Agricultural Fund for Rural Development and 
the  European  Maritime  and  Fisheries  Fund  and  laying  down  general  provisions  on  the  European 
Regional Development Fund, the European Social Fund, the Cohesion Fund and the European Maritime 
and  Fisheries  Fund  and  repealing  Council  Regulation  (EC)  No  1083/2006,  OJ  L  347,  20.12.2013,  p. 
320. 
COM(2014) 494 final. 
Cyclically-adjusted  balance  net  of  one-off  and  temporary  measures,  recalculated  by  the  Commission 
using the commonly agreed methodology. 

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(8) 

(9) 

(10) 

(11) 

from  that  requirement.  Overall,  the  Council  is  of  the  opinion  that  Estonia  needs  to 
stand ready to take further measures to ensure compliance in 2018. 

Estonia  has  taken  action  to  ensure  the  provision  and  accessibility  of  high-quality 
services,  including  social  services  at  local  level  as  part  of  its  local  government 
reform.  In  particular,  Estonia  has  adopted  the  Administrative  Reform  Act  with  a 
view  to  making  it  easier  to  create  viable  local  municipalities  that  can  finance  their 
own  activities,  to  plan  development  and  growth,  and  to  offer  quality  services.  It 
successfully completed the voluntary phase of the merger of local municipalities and 
it  is  implementing  the  Social  Welfare  Act.  Some  key  steps  to  complete  the  local 
government reform have not yet been taken. The revision of the financing scheme for 
municipalities  is  still  pending.  Further  legislative  acts  on  the  responsibilities  and 
division  of  tasks  between  municipalities  and  central  government  are  still  in 
preparation. Adopting these proposals is critical to ensuring the provision of quality 
public  services  in  areas  such  as  education,  youth  work,  health  promotion  and 
transport.  

The gender pay gap in Estonia fell from 28.3 % in 2014 to 26.9 % in 2015 but is still 
the highest in the Union. The government is taking steps to further narrow the gender 
pay  gap.  In  particular,  the  2016-2023  Welfare  Plan  has  been  adopted  and  is  being 
implemented  to  tackle  gender  segregation  in  the  labour  market  and  to  fight 
stereotypes.  The  modification  of  the  Gender  Equality  Act  to  give  the  labour 
inspectorates  the  task  of  more  closely  monitoring  gender  equality  in  the  private 
sector  has  still  to  be  adopted.  The  revision  of  the  parental  leave  system  to  allow  a 
more  flexible  take-up  of  parental  leave  is  also  being  considered.  The  legislative 
change has not yet been adopted. 

Income  inequality  in  Estonia  is  high.  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  the  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 growth in 
median incomes,  leading to  problems  with  the adequacy of the social safety  net. A 
contributing  factor  is  that  benefits  (particularly  pensions,  social  assistance  and 
unemployment  benefits)  are  not  keeping  pace  with  the  growth  in  market  incomes. 
This has also resulted in a gradual increase in the at-risk-of-poverty rate from 15.8 % 
in 2010 to 21.6 % in 2015. Substantial efforts have been undertaken to make the tax 
system more progressive as of 2018, in particular for low-income earners, by raising 
the basic allowance of the personal income tax system. 

Business enterprise expenditure in research, technology and innovation increased in 
2015 to 0.69 %, but its overall level remains below EU average of 1.3 %. The share 
of  high-technology  and  knowledge-intensive  companies  remains  limited  and  the 
number  of  new  doctoral  graduates  is  low.  Wage  growth  has  consistently  exceeded 
productivity growth in recent years, affecting profits and thereby pulling investment 
growth  downwards.  Subdued  investment  in  technological  development  may  cause 
the  value-added  of  exports,  especially  goods,  to  increase  less  than  expected,  and 
poses  a  risk  to  output  growth.  The  volume  of  contract  research  between  academia 
and  businesses  increased  in  2015.  However,  cooperation  between  the  two  sectors 
remained limited despite the measures taken by the government. Estonia has further 
improved  its  business  environment,  but  the  lengthy  insolvency  proceedings  and 
recovery  rate  for  secured  creditors  remain  barriers  to  investment.  A  project  to 
improve the insolvency framework was launched in 2016 to make the process faster 

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(12) 

and  more  efficient  and  to  improve  the  rate  of  successful  demands.  However, 
amendments to the legislative framework have not yet been adopted.   

In  the  context  of  the  European  Semester,  the  Commission  has  carried  out  a 
comprehensive  analysis  of  Estonia’s  economic  policy  and  published  it  in  the  2017 
country report. It has also assessed the Stability Programme and the National Reform 
Programme and the follow-up given to the recommendations addressed to Estonia in 
previous  years.  It  has  taken  into  account  not  only  their  relevance  for  sustainable 
fiscal and socioeconomic policy in Estonia, but also their compliance with EU rules 
and guidance, given the need to strengthen the EU’s overall economic governance by 
providing EU-level input into future national decisions.  

(13) 

In  the  light  of  this  assessment,  the  Council  has  examined  the  Stability  Programme 
and its opinion11 is reflected in particular in recommendation 1 below, 

HEREBY RECOMMENDS that Estonia take action in 2017 and 2018 to: 

1. 

2. 

Pursue  its  fiscal  policy  in  line  with  the  requirements  of  the  preventive  arm  of  the 
Stability  and  Growth  Pact,  which  implies  to  remain  at  its  medium-term  budgetary 
objective in 2018. Ensure better adequacy of the social safety net. Take measures to 
reduce  the  gender  pay  gap,  in  particular  by  improving  wage  transparency  and 
reviewing the parental leave system. 

Promote  private  investment  in  research,  technology  and  innovation,  including  by 
implementing  measures  for  strengthening  the  cooperation  between  academia  and 
businesses. 

Done at Brussels, 

For the Council 
The President 

11 

Under Article 5(2) of Council Regulation (EC) No 1466/97. 

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