COMMISSION STAFF WORKING DOCUMENT Country Report Estonia 2018 Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN CENTRAL BANK AND THE EUROGROUP 2018 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
Date: 2018-03-07
Institutions: European Commission, Secretariat-General
Subjects: Estonia, economic situation, education, investment, labour market, macroeconomics, public finance, social policy, structural adjustment, tax system

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 7.3.2018 SWD(2018) 205 final  COMMISSION STAFF WORKING DOCUMENT Country Report Estonia 2018 Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN CENTRAL BANK AND THE EUROGROUP 2018 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(2018) 120 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 

Annex A: Overview Table 

Annex B: Macroeconomic Imbalance Procedure Scoreboard 

Annex C: Standard Tables 

References 

LIST OF TABLES 

Table 1.1: 

Key economic, financial and social indicators ― Estonia 

Table 2.1: 

CSR progress ― Estonia 

Table 3.2.1: 

Financial soundness of banks 

Table B.1: 

The MIP scoreboard for Estonia (AMR 2018) 

Table C.1: 

Financial market indicators 

Table C.2: 

Headline Social Scoreboard indicators 

Table C.3: 

Labour market and education indicators 

Table C.4: 

Social inclusion and health indicators 

Table C.5: 

Product market performance and policy indicators 

Table C.6: 

Green growth 

LIST OF GRAPHS 

Graph 1.1: 

Real GDP and growth contributions 

Graph 1.2:  Quarterly harmonised index of consumer prices (HICP) inflation (y-o-y % change) 

1 

3 

8 

11 

11 

14 

17 

27 

33 

38 

41 

42 

48 

7 

9 

14 

41 

42 

43 

44 

45 

46 

47 

3 

3 

 
 
 
 
 
Graph 1.3: 

Real effective exchange rate 

Graph 1.4: 

Breakdown of external position (current and capital accounts) 

Graph 1.5: 

Export market share, goods and services, nominal 

Graph 1.6: 

Net lending/borrowing by sector 

Graph 1.7: 

Employment by sector 

Graph 2.1:  Overall multiannual implementation of 2011-2017 CSRs to date 

Graph 3.2.1:  Credit growth 

Graph 3.2.2:  Business financing sources 

Graph 3.2.3:  Wage growth in construction vs total economy 

Graph 3.3.1:  Key labour market indicators 

Graph 3.3.2: 

Impact of work ability reform on unemployment (by disability class) 

Graph 3.3.3:  Gender pay gap in unadjusted form 

Graph 3.3.4:  Corrective power of taxation and social transfers, 2016 

Table 1:  

QUEST simulation results 

Graph 3.4.1:  Breakdown of the gap with the Euro Area 

Graph 3.4.2:  Breakdown of absolute growth in Estonia, 2005-2016 

Graph 3.4.3:  Foreign direct investment, sum of net inflows (% of GDP) 

Graph 3.4.4: 

Investment rates (total) 

Graph 3.4.5: 

Investment rates (public and private) 

Graph 3.4.6: 

Investment in intellectual property products 

Graph 3.4.7:  Resolving insolvency indicators 

Graph 3.4.8:  Nominal wage growth in Estonia in comparison with wage benchmarks 

Graph 3.5.1:  Highly-cited publications(*) 

Graph 3.5.2:  R&D expenditure and sector of performance and source of funds (2015) 

Graph 3.5.3:  Wholesale electricity prices 

Graph 3.5.4:  Market concentration index for power generation 

LIST OF BOXES 

Box 2.1: Tangible results delivered through EU support to structural change in Estonia 

Box 3.3.1: Monitoring performance in light of the European Pillar of Social Rights  

Box 3.3.2: Personal Income Tax reform in Estonia 

Box 3.4.1: Investment challenges and reforms in Estonia 

Box 3.5.1: Policy highlights:  e-governance 

4 

4 

5 

5 

6 

8 

14 

15 

16 

17 

19 

20 

21 

22 

27 

27 

28 

28 

28 

29 

31 

32 

34 

34 

37 

37 

10 

18 

22 

30 

36 

 
 
 
 
 
EXECUTIVE SUMMARY 

Estonia's  strong  economic  growth  and  high 
employment  offer  a  window  of  opportunity  to 
pursue key reforms. Effective policies to address 
the risks associated with demographic decline and 
bottlenecks  in  Estonia's  social  protection  system, 
as  well  as  in  research  and  innovation,  would 
enable better use of resources, including of human 
the  country's  growth 
capital 
potential.(1)  

thereby  raising 

An  improving  external  outlook  and  a  recovery 
in 
investment  boosted  Estonia’s  real  GDP 
growth to above 4 % in 2017. Real GDP growth 
is  forecast  to  settle  at  around  3 %  in  2018-2019 
once the initial boost from the investment recovery 
passes.  Exports  and  private  consumption  are 
expected  to  continue  adding  strongly  to  growth, 
although inflation and a tight labour market could 
weigh on their development. Estonia has loosened 
its  fiscal  policy,  as  new  expenditure  plans  are  not 
fully  covered  by  revenue  increases.  In  structural 
terms  the  deficit  is  expected  to  significantly 
increase to about 1.5 % of GDP in 2018 and 2019. 

employment 

Estonia's  labour  market  has  performed  well, 
and 
labour  market 
and 
participation  have  been  high,  but  a  falling 
labour  supply  imposes  challenges.  Backed  by  a 
favourable  economic  environment,  unemployment 
has declined since 2010 and is currently among the 
lowest in the EU (6.8 % in 2016 and 6% in 2017). 
However,  unemployment  is  expected  to  increase 
moderately  in  the  coming  years  as  the  ‘Work 
Ability’  reform  activates  people  with  reduced 
ability for work who might not become employed 
immediately. In the medium term, the working-age 
population  is projected  to  shrink  considerably.  As 
a  result,  the  pressure  on  the  cost  of  labour  is 
expected  to  rise.  Some  challenges  also  arise  from 
skills shortages.  

The  poverty  risk  among  the  older  people  has 
increased, largely because pensions have not kept 
pace  with  economic  growth.  Pension  adequacy  is 

(1)  This  report  assesses  Estonia’s  economy  in  the  light  of  the 
European Commission’s Annual Growth Survey published 
on 22 November 2017. In the survey, the Commission calls 
on  EU  Member  States  to  implement  structural  reforms  to 
make the European economy more productive, resilient and 
inclusive.  In  so  doing,  Member  States  should  focus  their 
efforts  on  the  three  elements  of  the  virtuous  triangle  of 
economic  policy  —  boosting 
investment,  pursuing 
structural reforms and ensuring responsible fiscal policies. 

1 

likely  to  become  a  bigger  problem  due  to  rising 
dependency ratios. Long-term care needs and costs 
are fuelled by the rapid ageing of the population. 

Productivity  growth  in  Estonia  has  picked  up 
recently,  but  not  to  the  extent  seen  before  the 
crisis.  Labour  productivity  growth  has  halved 
compared  to  pre-crisis  growth  rates  and  lags 
behind  the  wage  growth.  The  gap  between  labour 
productivity  and  wages  narrowed  in  the  first  half 
of  2017  as  the  growth  in  productivity  became 
faster and exceeded that in real wages for the first 
time in several years. At the same time, the overall 
slowdown  in  investment  rates  to  the  EU  average 
levels suggests that the fast catching up phase may 
be  over.  Going  forward,  the  challenge  will  be  to 
use  the  scarce  resources  more  productively  to 
maintain  the  country’s  growth  model.  However, 
weak  performance  in  innovation  and  low  private 
research  and  development  investment  give  rise  to 
concerns  about  the  economy’s  ability  to  expand 
the proportion of knowledge-intensive activities. 

Estonia  has  made  some  progress  in  addressing 
the  2017  country-specific  recommendations. 
There  has  been  some  progress  with  making  the 
social safety net more adequate and some progress 
reducing  the  gender  pay  gap,  but  more  time  is 
needed  to  see  the  impact  of  taken  measures. 
Estonia  has  made  some  progress  in  promoting 
private  investment  in  research  and  development, 
and  in  stepping up  cooperation  between  academia 
and business.  

Regarding its national targets under the Europe 
2020  strategy,  Estonia  met  its  employment  rate 
target of 76% and also its tertiary education target 
already  in  2015.  It  is  also  performing  well  on 
renewable  energy,  energy  efficiency  and  reducing 
greenhouse  gas  emissions.  However,  there  is 
underperformance  on 
school 
leaving,  and  on  meeting  the  national  targets  for 
reducing poverty and R&D expenditure. 

reducing  early 

indicators  of 

Estonia performs relatively well on a number of 
the  Social  Scoreboard 
the 
supporting the European Pillar of Social Rights, 
while challenges remain. Estonia's labour market 
is  performing  well  notwithstanding 
the 
coverage  of  unemployed  people  by  active  labour 
market policies appears to be low. A high level of 
unmet  need  for  medical  care  is  reported.  Social 
protection  and  inclusion  is  undermined  by  the 

that 

 
 
                                                           
 
Executive summary 

challenges  remain.  Students  possess  a  good 
level  of  basic  skills  and  tertiary  educational 
attainment  is  above  the  EU  average.  But  the 
early  school  leaving  rate  remains  high.  Drop-
out  among 
first-year  students  of  upper 
secondary  vocational  education  and  training  is 
particularly  high.  Although  participation  in 
adult learning is rapidly increasing, it is rather 
limited  among  the  low-skilled.  The  appeal  of 
and interest in obtaining a PhD degree is rather 
limited but this may change as PhD allowances 
have been increased. Measures are underway to 
address  the  high  drop-out  rates  in  higher 
education.   

  In  order  to  sustain  growth  without  losing 
competitiveness,  Estonia's  challenge  is  to 
have a sufficient productivity growth. In the 
medium  term,  convergence  of  domestic  wages 
with  those  of  higher-wage  countries  together 
with  falling  labour  supply  appears  to  be  the 
main  drivers  of  wage  growth.  While  the  risks 
of  competitiveness  losses  have  been  contained 
so  far,  the  lack  of  effective  measures  to 
increase  labour  productivity  puts  at  risk  the 
prospect  of 
income  convergence 
towards the EU average.  

further 

links, 

  Estonia’s  weak  productivity  growth  can  be 
linked to its moderate performance on R&D 
and innovation. While the economy has some 
high  value-added  and  knowledge-intensive 
intensity,  science-
activities,  private  R&D 
business 
and 
innovation 
and 
technological  capacity  of  companies  remain 
low,  weakening  Estonia's  productivity.  Public 
sector  expenditure  on  R&D  has  been 
traditionally  above  the  EU  average,  however 
insufficient  prioritisation  of  public  R&D 
remains a challenge. Broader focus on the role 
of  the  human  capital  and  skills  in  fostering 
innovation  can  be  key  to  expanding  Estonia’s 
growth 
enabling 
since 
framework  conditions, 
including  business 
environment  and  e-government  perform  well. 
However,  lengthy  and  inefficient  insolvency 
procedures remain an obstacle to investment. 

capacity 

other 

relatively  low  effectiveness  of  social  transfers  in 
reducing  poverty.  This  has  implications  also  for 
income  inequality,  which  remains  relatively  high, 
despite recent improvements.  

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

  Providing a more adequate social safety net 
supported  by  better 
service  provision 
remains a major challenge for Estonia. Tax-
cutting  measures  are  creating  employment 
incentives  for  the  low  income  earners  but  will 
not  significantly  alleviate  the  inequality.  Steps 
are  being  taken  to  provide  more  adequate 
pensions,  subsistence  allowances,  and  higher 
family  allowances,  yet  an  increasing  share  of 
the  population  is  at  risk-of-poverty.  The  areas 
with 
financing  are 
inadequate 
pensions, disability benefits and long-term care 
services.  The  ongoing  administrative  reform 
could  improve  the  delivery  of  high-quality 
services. 

the  most 

  Estonia  faces  challenges 

and 

health 

in  relation  to 
occupational 
to 
access 
healthcare. The state of health of the working 
population suggests that working conditions do 
not  entirely  enable  people  to  lead  longer 
healthy working lives. Access to healthcare due 
to    waiting  times  for  specialised  medical  care 
remains a challenge. Measures are being taken 
and  reforms  are  considered  to  improve  the 
situation;  however,  their  impact  will  require 
time to materialise.  

  The  gender  pay  gap  remains  one  of  the 
highest  in  the  EU  despite  some  measures. 
The parental leave and benefits system will be 
made more flexible and will provide one month 
is 
leave  exclusively  for  fathers.  This 
of 
expected to shorten women's long career breaks 
that  contribute  to  the  gender  pay  gap.  The 
planned 
improve  wage 
transparency would only apply to public sector 
entities. These measures appear to be steps into 
the  right  direction  but 
their  effectiveness 
remains to be seen.    

legislation 

to 

  Estonia  is  generally  performing  well  on 
education  and  training,  but  a  number  of 

2 

 
 
1.  ECONOMIC SITUATION AND OUTLOOK 

GDP growth 

Graph 1.2:  Quarterly harmonised index of consumer 

prices (HICP) inflation (y-o-y % change) 

investment’s 

Estonia’s  economic  growth  in  2017  is  expected 
to  have  surged  to  over  4 %  (Graph  1.1). 
Domestic  demand  was  the  main  growth  driver, 
with 
growth 
particularly  strong,  which  was  due  largely  to  a 
significant pick-up in EU-funded investments from 
a  low  point  in  2016.  In  addition,  strong  external 
demand  supported  a  broad-based  rise  in  exports 
and industrial production. 

contribution 

to 

Graph 1.1: 

Real GDP and growth contributions 

Forecasts for 2017-2019 are based on the assumption of no 
change in policy 
Source: European Commission 

investments 

Estonia’s real GDP growth is forecast to slow to 
around 3 % in 2018 and 2019, as the boost from 
EU  funded 
levels  off.  Domestic 
demand  is  projected  to  remain  the  growth  driver 
during  this  period.  In  2018,  both  household 
consumption  and  investment  are  set  to  increase 
swiftly (see Boxes 3.3.2 and 3.4.1). 

Inflation 

Driven  by  excise  hikes  and  a  rise  in  global 
prices  for  food  and  energy,  inflation  peaked  at 
3.7 %  in  2017,  above  the  euro  area  average. 
Inflation  is  forecast  to  slow  in  2018  and  2019  to 
around  3 %  (see  Graph  1.2)  as  global  commodity 
prices stabilise and the rises of the excise taxes are 
smaller in those years. 

3 

* based on ECFIN Autumn Forecast 2017 
Source: European Commission 

Financial sector 

The  banking  sector  is  robust,  supported  by  a 
framework. 
prudential 
strengthened 
Profitability  of  banks  remains  relatively  high  and 
non-performing loans are limited. Lending growth 
to  corporations  has  expanded  moderately  since 
2012  and  picked  up  to  about  5  %  year-on-year  in 
the  first  half  of  2017.  Lending  to  households  has 
also  picked up  steadily  since  2012 on  the  back of 
mortgage  loans.  In  the  first  half  of  2017,  loans  to 
households  and  loans  for  housing  both  grew  by 
more than 6 % year-on-year. 

Cost competitiveness 

Estonia  is  a  small  open  economy,  making  it 
dependent  on  external  demand  and  its  own 
competitiveness.  On  average, 
trade 
accounts  for  80 %  of  GDP  in  Estonia,  almost 
double the 42 % average for the EU-28. 

foreign 

Estonia’s  cost  competitiveness  compared  to  the 
EU  has  been  continuously  declining.  The 
favourable  economic  outlook  combined  with  the 
tightening  of  the  labour  market  have  put  constant 
pressure on the compensation per employee, which 
has, 
outpaced 
productivity  growth.  This  has,  in  turn,  resulted  in 
rising unit  labour  costs and an  appreciation  in  the 
real  effective  exchange  rate  compared  to  the  EU 

significantly 

2012, 

since 

-6-4-20246810121011121314151617*18*19*%, ppsInventories investmentInvestment (GFCF)ConsumptionNet exportsReal GDP growth-2-101234513Q213Q414Q214Q415Q215Q416Q216Q417Q217Q4*18Q2*18Q4*19Q2*19Q4*% change yoyEnergyUnprocessed foodProcessed foodServicesNon-energy ind. goodsHICP 
 
 
 
1. Economic situation and outlook 

Graph 1.4: 

Breakdown of external position (current and 
capital accounts) 

Source: European Commission 

The continued current account surplus suggests 
that part of the loss in cost competitiveness has 
been compensated by improvements in non-cost 
competitiveness  (see  Section  3).  Estonia's  export 
market  share  increased  in  2000s,  and  quickly 
recovered  after  the  financial  crisis.    The  country 
performs  well  on  microeconomic  factors  that  also 
influence  competitiveness,  such  as  the  business 
environment  and  labour  market  flexibility  (2),  as 
well as on access to finance. 

(2)  See Country Report 2017. 

and the other Baltic States (see Graph 1.3). In the 
first  half  of  2017,  labour  productivity  increased 
faster than real labour costs for the first time after 
several years, responding to a recovery in external 
demand.  Real  unit  labour  costs  went  down  by 
2.1%  in  the  first  quarter  of  2017,  and  by  0.8%  in 
the  second  quarter.  Also,  the  inflow  of  foreign 
direct  investment  has  moderated  since  2010  and 
has fallen recently, in contrast to developments in 
the EU overall. 

Graph 1.3: 

Real effective exchange rate 

Source: European Commission 

loss 

In  spite  of 
in  cost 
the  continued 
competitiveness,  Estonia’s  current  account 
balance  remains  in  surplus.  According  to  the 
European Commission’s autumn 2017 forecast, the 
current  account  is  projected  to  show  a  surplus  of 
around  2 %  of  GDP  over  2018-2019.  This  will 
mainly come from exports of services, which have 
grown  faster  over  recent  years  than  exports  of 
goods.  The  trade  balance  for  goods  has  been  in 
deficit  every  year  over  recent  decades.  Reflecting 
surplus,  Estonia’s  net 
the  current  account 
international 
investment  position  has  become 
significantly  less  negative  than  during  the  2008 
boom years (see Table 1.1). 

4 

80901001101201301400001020304050607080910111213141516Index, 2000=100EELTLVEU28-20-15-10-505101507080910111213141516% of GDPCapital account (KA)  Trade balance - services  Trade balance - goodsTrade balanceCurrent account balance (CA)Net lending/borrowing (CA+KA) 
 
 
                                                           
1. Economic situation and outlook 

reform.  On  the  expenditure  side,  an  investment 
programme of 0.4 % of GDP over 2018-2020 will 
begin, as will several new spending programmes in 
healthcare,  education  and  social  funding.  Public 
debt  is  expected  to  remain  very  low  and  stable  at 
around 9 % of GDP. 

Labour market 

Estonia’s  good  labour  market  performance 
masks  the  challenge  of  its  shrinking  working-
age  population  (see  Section  3.4.1).  Over  the  last 
years, the dynamism of wages and the large supply 
of  job  offers,  together  with  reforms  to  social 
insurance, such as a rise in the pension age and the 
Work  Ability  reform,  have  led  to  an  increase  in 
labour market participation. At 76.6 % in 2016, the 
employment  rate  (for  20-64-year-olds)  exceeded 
the  Europe  2020  and  national  targets.  In  2017, 
employment  picked  up  in  all  sectors  except  in 
agriculture and the public sector (Graph 1.7). The 
latter has been affected by government downsizing 
plans  designed  to  bring  employment  in  public 
administration  in  line  with  demographic  trends. 
Unemployment has been falling since 2010 and is 
currently  among  the  lowest  in  the  EU.  According 
to  demographic  projections, 
the  working-age 
population  will  continue  to  decline  in  the  coming 
years. 

Wages are growing fast on the back of buoyant 
economic  growth  and  a  shrinking 
labour 
supply. In 2016, average monthly gross wages and 
salaries stood at EUR 1 146, an increase of 7.6 % 
from 2015. This is the largest annual change since 
2008.  In  the  first  half  of  2017,  wage  growth 
slowed somewhat to 6.2%. Wage growth is partly 
linked  to  the  increasingly  tightening  of  the  labour 
market. According to survey-based data (European 
Commission,  2017),  in  Estonia  a  higher  share  of 
companies  report  that  the  shortage  of  labour  is  a 
major  factor  constraining  their  business  than  in 
other  EU  Member  States.    This  share  has  been 
increasing since 2009. Labour shortages have been 
identified 
in  science, 
in  managerial 
technology  and  engineering, 
positions,  and  in  legal  and  healthcare  professions 
(OECD,  2017)  (3).  According  to  survey  data, 
unmet demand for labour is particularly high in the 
ICT  sector,  despite  an  increase  in  the  number  of 
students and graduates. 

in  many  sectors,  e.g. 

(3)  OECD Economic Surveys: Estonia 2017 

Graph 1.5: 

Export market share, goods and services, 
nominal 

Source: MIP Scoreboard 

Graph 1.6:  Net lending/borrowing by sector 

NIPSH stands for non-profit institutions serving households 
Source: European Commission 

Public finance 

The  budget  is  expected  to  remain  in  a  small 
nominal  deficit  in  2017-2019,  despite  robust 
economic growth. According to the Commission’s 
autumn  2017  forecast,  in  structural  terms  the 
deficit  is  estimated  to  be  more  significant,  at 
around  1.5 %  of  GDP  over  the  same  period.  In 
2018,  several  new  tax  measures  are  due  to  take 
effect, most notably a lowering of personal income 
taxes, which are offset by excise hikes (on alcohol, 
tobacco  and  fuels)  and  corporate  income  tax 

5 

901001101201301400001020304050607080910111213141516Index, 2000=100EELTLV-8-6-4-20246808091011121314151617*18*% of GDPHouseholds and NPISHGeneral governmentCorporationsTotal economy 
 
 
 
                                                           
1. Economic situation and outlook 

Graph 1.7: 

Employment by sector 

Source: Eurostat 

Social issues 

Despite  some  recent  improvements,  income 
inequality in Estonia remains relatively high. In 
2016,  the  Social  Scoreboard  showed  that  the  net 
income  of  the  top  20 %  of  households  was  5.6 
times  higher  than  that  of  the  poorest  20 %,  while 
the  EU  average  was  5.2.  This  is  accompanied  by 
worsening at-risk-of-poverty rate since 2010 which 
is particularly affecting older people, disabled and 
jobless  households.  Relatively  low  spending  on 
social protection and the limited capacity of the tax 
and  benefit  system  to  redistribute  wealth  may 
explain  the  high  income  inequality.  A  personal 
income  tax  reform  was  adopted  in  2017  to  make 
the  system  more  progressive.  Simulations  show 
that  its  effect  on  reducing  income  inequality  is 
expected to be limited (see Box 3.3.2). 

Estonia  does  relatively  well  in  ensuring  equal 
opportunities  among  the  different  population 
groups.  In  comparison  to  other  EU  countries,  in 
Estonia  the  link  between  the  risk of  child  poverty 
and  the  educational  background  of  parents  is 
relatively  weak.  Likewise, 
in 
students’  school  performance  that  are  due  to  their 
socioeconomic  background  are  the  smallest  in  the 
EU. However, access to healthcare is problematic, 
as reflected in the high and increasing incidence of 
unmet  healthcare  needs  caused  by  waiting  times 
for specialised care.  

the  variations 

6 

-30-20-1001020304012Q112Q313Q113Q314Q114Q315Q115Q316Q116Q317Q117Q3ThousandsAgricultureIndustryConstructionTradable servicesNon-tradable servicesPublic sectorTotal 
 
 
 
1. Economic situation and outlook 

Table 1.1: 

Key economic, financial and social indicators ― Estonia 

(1) NIIP excluding direct investment and portfolio equity shares  
(2) Domestic banking groups and stand-alone banks, EU and non-EU foreign-controlled subsidiaries and EU and non-EU 
foreign-controlled branches. 
Source: Eurostat and ECB as of 30 Jan 2018, where available; European Commission for forecast figures (Winter forecast 2018 
for real GDP and HICP, Autumn forecast 2017 otherwise) 

7 

2004-072008-122013-1420152016201720182019Real GDP (y-o-y)8.4-1.52.41.72.14.33.32.8Potential growth (y-o-y)5.60.82.02.62.53.12.92.7Private consumption (y-o-y)9.6-3.03.44.64.4...Public consumption (y-o-y)4.51.12.63.31.9...Gross fixed capital formation (y-o-y)13.3-4.1-3.8-2.9-1.2...Exports of goods and services (y-o-y)14.85.42.6-0.74.1...Imports of goods and services (y-o-y) 16.62.02.8-1.85.3...Contribution to GDP growth:Domestic demand (y-o-y)10.5-3.21.22.32.4...Inventories (y-o-y)0.2-0.41.1-1.30.7...Net exports (y-o-y)-2.62.2-0.10.9-0.7...Contribution to potential GDP growth:Total Labour (hours) (y-o-y)0.1-1.00.30.90.80.80.50.3Capital accumulation (y-o-y)3.41.41.30.90.81.21.21.2Total factor productivity (y-o-y)2.00.40.50.80.81.01.11.2Output gap8.6-2.01.61.00.51.82.22.2Unemployment rate7.211.68.06.26.86.97.78.5GDP deflator (y-o-y)7.83.62.51.21.64.33.62.9Harmonised index of consumer prices (HICP, y-o-y)4.64.51.90.10.83.73.12.6Nominal compensation per employee (y-o-y)15.63.75.63.35.96.45.55.2Labour productivity (real, person employed, y-o-y)6.50.11.4-1.21.8...Unit labour costs (ULC, whole economy, y-o-y)8.53.64.24.54.02.62.52.7Real unit labour costs (y-o-y)0.70.01.63.32.4-1.5-1.0-0.2Real effective exchange rate (ULC, y-o-y)6.70.84.12.43.42.72.20.9Real effective exchange rate (HICP, y-o-y)2.01.02.70.81.60.42.9.Savings rate of households (net saving as percentage of net disposable income)-9.04.45.37.47.3...Private credit flow, consolidated (% of GDP)21.50.54.63.05.9...Private sector debt, consolidated (% of GDP)104.8133.7116.9115.2115.4...of which household debt, consolidated (% of GDP)36.149.739.840.341.4...of which non-financial corporate debt, consolidated (% of GDP)68.784.177.274.974.0...Gross non-performing debt (% of total debt instruments and total loans and advances) (2).5.62.31.91.5...Corporations, net lending (+) or net borrowing (-) (% of GDP)-6.91.20.40.5-0.10.50.90.6Corporations, gross operating surplus (% of GDP)32.729.831.128.226.627.727.828.0Households, net lending (+) or net borrowing (-) (% of GDP)-6.41.81.42.31.82.42.42.5Deflated house price index (y-o-y).-10.710.37.13.8...Residential investment (% of GDP)5.43.13.74.44.8...Current account balance (% of GDP), balance of payments-12.7-1.00.42.01.91.71.51.4Trade balance (% of GDP), balance of payments-8.02.92.84.03.9...Terms of trade of goods and services (y-o-y)1.8-0.31.00.60.90.70.30.0Capital account balance (% of GDP)1.23.11.82.11.1...Net international investment position (% of GDP)-78.9-66.5-48.5-39.8-37.1...Net marketable external debt (% of GDP) (1)-16.9-16.910.116.919.8...Gross marketable external debt (% of GDP) (1)79.993.378.678.575.1...Export performance vs. advanced countries (% change over 5 years)57.530.423.39.5-3.5...Export market share, goods and services (y-o-y)7.91.42.1-7.85.9...Net FDI flows (% of GDP)-6.4-5.0-1.70.6-2.4...General government balance (% of GDP)2.3-0.80.30.1-0.3-0.2-0.4-0.5Structural budget balance (% of GDP).0.1-0.3-0.1-0.4-1.1-1.4-1.5General government gross debt (% of GDP)4.46.810.410.09.49.29.19.1Tax-to-GDP ratio (%)30.832.832.333.934.733.734.034.0Tax rate for a single person earning the average wage (%)19.819.119.618.518.3...Tax rate for a single person earning 50% of the average wage (%)15.215.416.515.610.2...forecast 
 
 
 
2.  PROGRESS WITH COUNTRY-SPECIFIC RECOMMENDATIONS 

the 

the 

in  a 

introduction  of 

implementation  of 
to  Estonia 

the 
Progress  with 
in 
recommendations  addressed 
2017(4)  has  to  be  seen 
longer-term 
perspective  since 
the 
European  Semester  in  2011.  Looking  at  the 
multi-annual  assessment  of  the  implementation  of 
the  CSRs  since  these  were  first  adopted,  96 %  of 
all the CSRs addressed to Estonia have recorded at 
least 'some progress'. 18 % of these CSRs recorded 
'substantial  progress'  (see  Graph  2.1).  Substantial 
progress has been achieved in several areas of the 
labour  market, 
introducing 
incentives to work in relation to the Work Ability 
reform.  

instance  by 

for 

Graph 2.1:  Overall multiannual implementation of 2011-

2017 CSRs to date 

* The overall assessment of the country-specific 
recommendations related to fiscal policy excludes 
compliance with the Stability and Growth Pact.  
** 2011-2012: Different CSR assessment categories.  
*** The multiannual CSR assessment looks at the 
implementation since the CSRs were first adopted until the 
2018 Country Report. 
Source: European Commission 

labour  market  policy  measures 

Over  the  years,  Estonia  has  taken  substantial 
measures  to  address  challenges  in  the  labour 
market.  It  has  adopted  and  is  implementing  the 
Work  Ability  reform  to  employ  people  with 
reduced work ability, modified and introduced new 
to 
active 
long-term 
successfully  bring 
unemployed  to  the  labour  market.  These  are  all 
important steps to address the overall challenge of 
the shrinking labour force and tap into the potential 
of inactive people. Estonia has also taken action to 
improve  work  incentives  by  reducing  the  tax 
burden on labour for all income groups, including 
low-income earners. It has lowered the personal  

the  young  and 

(4)  For  the  assessment  of  other  reforms  implemented  in  the 

past, see in particular section 4.1, 4.2, 4.3 and 4.5. 

income,  corporate  income  tax  and  unemployment 
insurance  contribution  rates,  abolished  the  fringe-
benefit tax on work–related studies and introduced 
a  refund  for  low-income  earners.  Though  the 
gender  pay  gap  remains  highest  in  the  EU,  the 
government has for many years fostered access to 
childcare  by  offering  finances  and  modifying 
the  2016-2023 
legislation.  Implementation  of 
Welfare Plan helps to tackle gender segregation in 
the  labour  market  and  to  fight  stereotypes.  The 
impact of the reforms however remains to be seen. 

in 

Comprehensive reforms have been taken in the 
field  of  education  and  training.  Since  2013, 
Estonia  has  adopted  reforms 
the  higher 
education,  vocational  education  and  training  and 
continues to rationalise school network to meet the 
demographic  change.  The  government  has  taken 
steps  to  facilitate  the  transition  from  education  to 
employment  -  it  is  implementing  the  Lifelong 
Learning  Strategy  2014-2020  and 
the  Adult 
Education  Act  adopted  in  2015.  The  Vocational 
Education and Training programme for 2015-2018 
in  vocational 
helps 
education  and  training  and  apprenticeships  where 
the dropout rates remain a matter for concern. 

increase  participation 

to 

the 

The  local  government  reform  has  been  an 
important  step  towards  improving  Estonia's 
administrative  capacity.    For  years,  a  mismatch 
between 
fiscal  capacity  and  devolved 
responsibilities  of  small  municipalities  hindered 
the provision of accessible and quality services. In 
2016,  Estonia  adopted  and  is  now  implementing 
the  local  government  reform  that  is  expected  to 
create  viable  local  municipalities  that  can  offer 
quality services. 

Estonia  has  taken  measures  to  strengthen  the 
research  and  innovation  system  over  the  past 
years,  but  the  low  level  of  R&D  intensity, 
especially  in  the  business  sector,  remains  a 
cause of concern. National authorities adopted the 
third Estonian R&I strategy in 2014 -“Knowledge-
based  Estonia  2014-2020”,  which  aims  at 
addressing  some  CSRs  in  the  field  of  R&D  – 
mainly  internationalisation  and  specialisation  of 
the  R&D  system.  The  Estonian  government  has 
also  put  in  place  several  measures  to  improve 
science-business  cooperation.  Nevertheless,  the 
weak  level  of  knowledge  transfer  from  the  public 
research  system  to  the  private  sector  and  the  low 

8 

 
 
 
 
                                                           
Table 2.1: 

CSR progress ― Estonia 

Estonia (CSRs are euro area relevant) 

Overall assessment of progress with 2017 CSRs:  
Some progress 

CSR  1:  Pursue  its  fiscal  policy  in  line  with  the 
requirements  of  the  preventive  arm  of  the  Stability  and 
Growth  Pact,  which  entails  remaining  at  its  medium-
term budgetary objective in 2018. Improve the 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.   

 

 

 

 

Some progress in improving the adequacy of 
the social safety net 
Some  progress  in  reducing  the  gender  pay 
gap 
Limited  progress 
transparency 
Some progress in reviewing the parental leave 
system   

improving  wage 

in 

  Promote  private 

CSR  2: 
investment,  research, 
technology  and  innovation,  including  by  implementing 
measures  for  strengthening  the  cooperation  between 
academia and businesses 

 

progress 

Some progress 
private 
Some 
investment  in  research,  development  and 
innovation 
Some  progress  in  strengthening  cooperation 
between academia and businesses 

promoting 

in 

 

1) This does not include an assessment of compliance with the Stability and Growth Pact. 
Source: European Commission 

and 

reform 

increase 

improve  resource  efficiency  of  enterprises,  foster 
administrative 
the 
effectiveness of the justice system. ESI Funds have 
been  instrumental  in  improving  labour  market 
relevance  of  the  education  and  training  systems, 
reforming  the  general  education  school  network, 
and  helping 
energy 
country 
consumption  and  shift  towards  a  low-carbon 
economy (see Box 3.4.1). 

stabilise 

the 

can 

from 

request 

Member  States 
the 
Commission  technical  support  to  prepare, 
implement  growth-enhancing 
design,  and 
structural  reforms.  The  Structural  Reform 
Support  Service  (SRSS)  provides,  in  cooperation 
with  the  relevant  Commission  services,  tailor-
made technical support, which does not require co-
financing  and  is  provided  at  a  Member  State's 
request. The support addresses priorities identified 
in  the  context  of  the  EU  economic  governance 
process  (i.e.,  implementation  of  country-specific 
recommendations),  but  the  scope  of  the  SRSS 
support is wider as it can also cover reforms linked 
to  other  Commission  priorities,  or 
reforms 
undertaken  at  the  initiative  of  Member  States. 
Estonia  has  requested  technical  support  from  the 
SRSS  to  help  implement  reforms  in  the  financial 
sector,  by 
for 
improving 
companies in particular. 

financing  options 

technological  capacity  of  firms  continue  to  drag 
down Estonia's innovation performance. 

(5) 

the 

2017 

Estonia  has  made  some  progress 
in 
country-specific 
addressing 
recommendations.  Estonia  has  made  some 
progress  regarding  reduction  of  the  gender  pay 
gap:  modifications  to  the  parental  leave  and 
benefits  system  will  be  implemented  over  the 
period  2018-2020  and  there  are  plans  to  improve 
wage  transparency  in  public  sector  entities.  Some 
steps  are  being  taken  to  provide  more  adequate 
pension,  subsistence  allowance  and  higher  family 
allowances  but  social  safety  nets  still  do  not 
provide  adequate  income  support,  especially  for 
the  older  people.  Several  measures  have  been  put 
in place to close the performance gap in R&I in the 
private sector and to strengthen academia-business 
cooperation. 

European  Structural  and  Investment  (ESI) 
Funds  are  pivotal  in  addressing  key  challenges 
to inclusive growth and convergence in Estonia. 
ESI  funds  facilitate  investment  in  R&D,  enhance 
cooperation  between  business  and  academia, 

(5)  Information  on  the  level  of  progress  and  actions  taken  to 
address  the  policy  advice  in  each  respective  subpart  of  a 
CSR is presented in the Overview Table in the Annex. This 
overall  assessment  does  not  include  an  assessment  of 
compliance with the Stability and Growth Pact. 

9 

 
 
                                                           
 
 
 
 
2. Progress with country-specific recommendations 

Box 2.1: Tangible results delivered through EU support to structural change in Estonia 

Estonia is a beneficiary of European Structural and Investment Funds (ESI Funds) support and can receive 
up to EUR 4.4 billion until 2020. This represents around 3 % of GDP annually over the period 2014-2018 
and 44% of public investment (1). By 31 December 2017, an estimated EUR 2.5 billion (57 % of the total) 
was allocated to projects on the ground. This has paved the way for over 830 enterprises to cooperate with 
research institutions; over 4000 firms are being supported; the capacity of childcare infrastructure is raised 
to accommodate 640 more children. Compared with 2007-2013 the use of financial instruments is planned to 
increase by 57%. 

ESI  Funds  help  address  structural  policy  challenges  and  implement  country-specific  recommendations. 
Actions financed cover, among others, facilitating private sector R&D&I activity (a programming target is 
to  increase  private  sector  R&D  expenditure  up  to  2%  of  GDP  by  2023);  enhancing  cooperation  between 
business and academia; improving resource efficiency of enterprises, and fostering economic development 
of regions. Public services quality, including via local government reform and support to the effectiveness of 
the  justice  system  is  also  being  improved.  Access  to  high-speed  internet  for  the  whole  population  is 
underway.  Investment  in  sustainable  transport  is  expected  to  improve  connections  between  different 
transport and mobility nodes, and to double the number of train passengers per year (from 4.2m in 2013 to 
8.4m in 2023). The Work Ability Reform is expected to bring an estimated 15 000 currently unemployed or 
inactive  persons,  with  reduced  work  ability,  to  employment  by  2020,  services  for  activation  have  been 
offered already to 21 468 people. Support is provided to improve labour market relevance of education and 
training systems; and reforming the general education school network. The Funds are also helping to make 
the shift towards a low-carbon economy to stabilise energy consumption in 2020 at the 2010 level. 

Various  reforms  were  undertaken  already  as  precondition  for  ESI  Funds  support (2).  Smart  Specialisation 
Strategy  framework  for  research  and  innovation  was  developed  to  foster  specialisation  in  domains  with 
strong  market  potential.  This  has  also  helped  improve  cooperation  between  entrepreneurs,  public  R&D 
institutions, clusters and competence centres to better enable the enterprises create new innovative products 
and  services.  The  national  transport  plan  has  allowed  the  timely  preparation  of  projects,  implemented  not 
only  with  support  from  ESI  Funds,  but  also  from  the  Connecting  Europe  Facility  (CEF),  European 
Investment Bank (EIB) loans and national funding.  The mapping of healthcare investment needs prepared 
the  ground  for  concentrating  specialised  care  into  competence  centres  and  establishing  a  network  of  first-
contact healthcare centres.  

Estonia  is  also  advancing  the  take  up  of  the  European  Fund  for  Strategic  Investments  (EFSI).    As  of 
December  2017,  overall  financing  volume  of  operations  approved  under  the  EFSI  amounted  to  EUR  112 
million,  which  is  expected  to  trigger  total  private  and  public  investment  of  EUR  803  million.  More 
specifically, 5 projects involving Estonia have been approved so far under the Infrastructure and Innovation 
Window  (including  4  multi-country  projects),  amounting  to  EUR  43  million  in  EIB  financing  under  the 
EFSI.  This  is  expected  to  trigger  about  EUR  111  million  in  investments.  Under  the  SME  Window,  6 
agreements with  financial  intermediaries  have  been  approved  so far. European  Investment  Fund financing 
enabled by the EFSI amounts to EUR 69 million, which is expected to mobilise approximatively EUR 691 
million in total investment. Some 5 222 smaller companies or start-ups will benefit from this support. SMEs 
rank first in terms of operations and volume approved, followed by transport and R&D. 

Funding  under  Horizon  2020,  the  Connecting  Europe  Facility  and  other  directly  managed  EU  funds  is 
additional to the ESI Funds. By the end of 2017, Estonia has signed agreements for EUR 208  million for 
projects under the Connecting Europe Facility.  

(1)  Public investment is defined as gross fixed capital formation + investment grants + national expenditure on agriculture 

and fisheries. 

(2)  Before  programmes  are  adopted,  Member  States  are  required  to  comply  with  a  number  of  so-called  ex-ante 
investments  areas. 

the  majority  of  public 

improving  conditions 

for 

conditionalities,  which  aim  at 
https://cohesiondata.ec.europa.eu/countries/EE 

10 

 
 
3.  REFORM PRIORITIES 

3.1.  PUBLIC FINANCES AND TAXATION 

3.1.1.  BUDGETARY  DEVELOPMENTS  AND  FISCAL 

FRAMEWORK  

Estonia  has  loosened  its  fiscal  policy  over  the 
past  year,  as  new  expenditure  plans  from  2018 
onwards  are  not  fully  covered  by  revenue 
increases.  For  2018, 
the  government  has 
announced  tax  reforms  that  shift  taxation  from 
labour to consumption. On the expenditure side, it 
has  increased  funding  for  policy  priorities  in 
healthcare,  education  and  social  funding.  The 
government  has  also  announced  an  investment 
programme of 0.4 % of GDP each year over 2018-
2020.  This  will  finance  infrastructure  in  transport 
and information and communications technologies, 
as  well  as  some  specific  housing  and  tourism 
projects. 

Estonia's nominal fiscal position is set to remain 
in  a  small  deficit,  but  its  structural  deficit  is 
expected to increase more substantially to about 
1.5 % of GDP in 2018 and 2019(6). According to 
the  Commission  autumn  forecast,  the  nominal 
deficit  remains  practically  unchanged  between 
2016  and  2019  at  slightly  below  ½  %  of  GDP 
(European  Commission,  2017a).  However,  given 
that  in  structural  terms  the  deficit  is  estimated  by 
the Commission to be substantially larger, Estonia 
risks missing its budgetary targets. 

pension  income  as  a  share  of  average  wage  at 
retirement (the gross average replacement ratio) is 
projected  to  remain  almost  unchanged  in  the 
future.  However,  pensions  are  relatively  low  and 
pension adequacy is a concern because the share of 
the  elderly  population  at  risk  of  poverty  is  higher 
in  Estonia  than  the  EU  average  (see  also  Section 
3.3.2.).  

in  structural 

The  cornerstone  of  Estonia’s  fiscal  framework 
is  the  budget  balance  rule  (medium-term  fiscal 
targets) 
terms.  By  contrast, 
expenditure  rules  or  binding  expenditure  targets 
fiscal 
are  not  used,  which  may 
framework’s  ability  to  counter  cyclical  factors  in 
the  economy.  The  Fiscal  Council(8)  assesses  the 
macroeconomic  and  public  finance  forecasts  used 
for  budgetary  planning  and  monitors  compliance 
with the budgetary rules. 

limit 

the 

bill and 20% to the CPI, and secondly, because part of the 
social  contributions  and  associated  pension  rights  are 
switched  to  the  mandatory  private  individual  (second-
pillar) pensions to fund the transition to two-pillar pension 
system.  Thus,  total  pension  expenditure  (public  plus 
private)  as  a  share  of  GDP  remains  broadly  stable  as  the 
decline in public pension spending is  mostly  compensated 
by  the  growing  private  individual  pensions  (see  European 
Commission, "Ageing Report 2018" forthcoming). 

(8)  http://www.eelarvenoukogu.ee. 

to 

and 

risks 

Medium- 
the 
long-term 
sustainability  of  public  finances  are  low,  given 
the current very low level of public debt. Long-
term fiscal sustainability risks are also assessed as 
low  because  spending  pressures 
to 
population  ageing  are  contained.  Notably,  public 
pension  expenditure  (including  the  new  working 
replacing  disability 
ability  benefits 
pensions)  as  a  share  of  GDP  is  projected  to  fall 
steadily  through  2070,  mainly  due  to  a  decline  in 
the  average  public  (first-pillar)  pension  vis-à-vis 
average  wages (7).  The  total  (public  plus  private) 

that  are 

related 

(6)  Essentially,  the  currently  good  economic  times  have  a 
‘windfall  effect’  on  the  fiscal  position.  Discounting  this 
positive effect arising from the favourable economic cycle, 
the  underlying  fiscal  position  is  estimated  to  be  weaker 
than the nominal balance. 

(7)  This occurs because first, public pensions grow at a slower 
pace than wages because they are indexed 80% to the wage 

11 

 
 
                                                           
                                                                                   
3.1. Public finances and taxation 

14 % (from a standard tax rate of 20 %) for regular 
profit  distribution.  The  aim  is  to  make  Estonia’s 
business  environment  more  attractive  to  foreign 
investors and to encourage companies to distribute 
their  excess  retained  earnings  on  a  regular 
basis (11). In addition, from 2018 Estonian resident 
credit  institutions  are  subject  to  an  advance 
corporate  income  tax  obligation.  The  purpose  of 
this  new  provision  is  to  provide  the  state  budget 
with  more  regular  income  tax  revenues.  The  tax 
rate  is  14 %  and  it  will  be  calculated  and  paid 
quarterly on accrued profits. 

Some features of Estonia’s corporate tax system 
might  be  used  by  multinational  companies  for 
aggressive tax planning. Such features include in 
particular  the  lack  of  certain  anti-abuse  rules  (12) 
and  of  withholding  taxes  on  dividend  and  interest 
payments  (13)  which  may  lead  to  those  payments 
escaping tax altogether, if they are also not subject 
to  tax  in  the  recipient  jurisdiction.  This  may 
facilitate  aggressive  tax  planning.  In  a  recent 
study (14)  on 
theoretical  dividend 
repatriation  route,  Estonia  appears  as  a  possible 
conduit  country  for  repatriating  dividends.  The 
provisions  of  the  Anti-Tax  Avoidance  Directives 
will have to be transposed into national law by the 
end  of  2018  and  2019.  This  will  introduce  new 
anti-abuse  rules.  It  will  be  important  to  assess  to 
what  extent  the  transposition  of  these  Directives 
will limit the scope for aggressive tax planning in 
Estonia. 

the  best 

Estonia taxes property and transport much less 
heavily than the EU average. Recurrent property 
taxes,  which  are  least  detrimental  to  growth, 
amounted to 0.3 % of GDP in 2015. Total revenue 
from  property  taxes  stood  at  0.4 %  of  GDP  in 
2015.  This  is  the  second  lowest  in  the  EU  and 
considerably lower than the EU average of 2.6 %. 
There  has  been  no  re-evaluation  of  land  value 

(11)  Profit distribution is deemed to be regular if the amount of 
the  distribution  does  not  exceed  the  average  distributed 
profits from the last 3 years subject to taxation in Estonia. 
(12)  Estonian tax law has extensive general anti-avoidance rules 
but  lacks  anti-abuse  rules  such  as  interest  limitation  and 
thin  capitalisation  rules  and  controlled  foreign  companies 
rules.  These  rules  should  be  adopted  by  Member  States 
according  to  the  Anti-Tax  Avoidance  Directive  (Council 
Directive (EU) 2016/1164 of 12 July 2016).  

(13)  Ramboll  Management  Consulting  and  Corit  Advisory 

(2016). 

(14)  van’t Riet and Lejour (2017). 

3.1.2.   TAXATION FRAMEWORK  

Estonia’s  overall  tax  burden  stands  at  about 
35 %  (European  Commission,  2017b)  of  GDP, 
below  the  40 %  average  for  the  EU.  In  2017, 
indirect  taxes  are  projected  to  have  amounted  to 
15 % of GDP (compared to 13.5 % for the EU) and 
direct taxes to about 8 % of GDP (against 13 % for 
the EU).  

is 

Estonia  has  a  comparatively  efficient  tax 
administration,  which 
supported  by 
information and communications technology to 
facilitate  tax  compliance.  According  to  "Paying 
taxes 2018"  report in 2016 it took 50 hours a year 
for a business to comply with its tax obligations — 
the  most  efficient  outcome  in  the  EU.  The  time 
needed  to  comply  with  and  obtain  VAT  refunds 
and to comply with corporate income tax (CIT) is 
among 
EU 
(PricewaterhouseCoopers,  2018).  This  efficiency 
reflects  the  extensive  use  of  ICT:  e-filing  of  tax 
returns  is  widespread  and  pre-filing  of  personal 
income  tax  returns  is  widely  used.  Overall,  tax 
compliance  is  relatively  good  and  improving.  For 
example, between 2013 and 2015 the VAT gap(9) 
in  Estonia  narrowed  by  over  two  thirds.  At  4.9 % 
of  the  VAT  total  tax  liability  in  2015,  it  was 
considerably lower than the EU average of 12.8 % 
(Center for Social and Economic Research, 2017). 

lowest 

the 

the 

in 

Incentives in the tax system 

Estonia’s  tax  system  has  a  relatively  growth-
friendly  structure,  with  comparatively 
low 
direct  taxes.  Also,  as  companies  can  deduct  all 
business-related  expenses,  and  there  is  no  CIT  on 
retained profits(10), the CIT system is supportive of 
investment  in  research  and  development,  even 
though 
that 
specifically  favour  R&D  activities.  While  this 
encourages  high  levels  of  investment,  there  is  no 
incentive  to  prioritise  R&D  over  other  types  of 
investment.  Some  changes  to  CIT  will  be  applied 
in  2018,  including  a  reduction  in  the  tax  rate  to 

there  are  no  special  provisions 

(9)  The  tax  gap  is  the  difference  between  the  amount  of  tax 
actually  collected  and  the  estimated  amount  of  tax  that  is 
theoretically collectable based on tax legislation. 

(10)  CIT  is  charged  only  on  profits  that  are  distributed  as 
dividends,  share  buy-backs,  capital  reductions,  liquidation 
proceeds  or  deemed  profit  distributions  (such  as  transfer 
pricing adjustments, expenses and payments not related to 
business, gifts, donations and entertainment expenses). 

12 

 
                                                           
                                                           
3.1. Public finances and taxation 

reform has reduced the number of local authorities 
from 213 to 79, but the next stage of the reform is 
still  pending.  This  aims  to  balance  the  financial 
resources  and  responsibilities  of  the  new  local 
entities.  Local  government’s  revenue  base  is 
dependent  on  decisions 
the  central 
government  level.  Sustainability  of  financing  is 
inevitable  for  providing  quality  services  and 
guaranteeing their universal delivery at local level. 

taken  at 

(local tax base) to take into account the growth in 
market prices since 2001. 

In  2016,  environmental  taxes  amounted  to 
3.1 %  of  GDP,  above  the  EU  average  of 
2.4 %(15).  Most  revenues  come  from  taxes  on 
energy.  However,  Estonia  does  not  have  any 
vehicle  taxation  apart  from  a  circulation  tax  for 
heavy  goods  vehicles  and,  beginning  in  2018,  a 
new  heavy  goods  vehicle  road  usage  charging 
scheme.  As  a  result,  receipts  from  transport  taxes 
(excluding fuel taxes) amounted to only 0.06 % of 
GDP, the second lowest in the EU(16). At the same 
time,  new  vehicles  purchased  in  Estonia  are  the 
most  environmentally  unfriendly  in  the  EU,  with 
average  CO2  emissions  of  134  grams  per 
kilometre,  above  the  EU  average  of  118  grams  in 
2016 (European Environment Agency, 2016). 

Estonia  continues  to  reduce  the  tax  burden  on 
labour and adds an element of progressivity as 
of  2018.  In  2018,  the  personal  income  tax  (PIT) 
tax-free allowance will increase significantly from 
EUR  180  to  EUR  500  per  month.  The  tax-free 
allowance  for  people  earning  more  than  the 
average  salary  will  decrease  steadily  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.  Still,  the  level  of 
progressivity 
and 
contributes  little  to  reduce  overall  disposable 
income  inequality  (see  Box  3.3.2).  However,  the 
reform  should  help  to  reduce  the  previously 
relatively high tax wedge (17) for low-wage earners 
and benefit both low- and medium-earner groups. 

relatively 

remains 

low 

Funding of municipalities  

Local  authorities’  ability  to  influence  their 
revenues  is highly  constrained,  which  can  limit 
their  capacity  to  provide  sustainably  high-
quality  services.  The  recent  local  government 

(15)  Eurostat: 

Environmental 

tax 

revenues 

(http://ec.europa.eu/eurostat/web/products-datasets/-
/sdg_17_50) 

(16)  As of 2018, heavy goods vehicles in Estonia will be subject 
to  road  usage  fees  that  will  partly  depend  on  their 
emissions. 

(17)  The tax wedge on labour represents the difference between 
the  total  labour  cost  of  employing  a  worker  and  the 
worker’s net earnings. It is defined as personal income tax 
and  employer  and  employee  social  contributions  (net  of 
family  benefits)  as  a  percentage  of  total  labour  costs  (the 
wage and employer social contributions). 

13 

 
                                                           
 
 
 
 
 
 
 
3.2.  FINANCIAL SECTOR 

3.2.1.  BANKING SECTOR 

The  Estonian  banking  sector  is  stable  and  well 
capitalised. The average capital adequacy ratio in 
June  2017  was  the  highest  in  the  EU,  largely  due 
to  the  highest-quality  Tier  1  capital  instruments 
(Table  3.2.1).  The  non-performing  loan  ratio 
remained  low  at  2 %.  The  good  quality  of  banks’ 
loan  portfolios  underpins  their  good  profitability. 
The  average  return-on-equity  ratio  is  11.1 %  and 
the  return  on  assets  1.5 %  (2016),  well  above  the 
EU  averages  of  3.5 %  and  0.2 %,  respectively. 
Regarding liquidity, since 2010 banks have halved 
their reliance on funding from their Swedish parent 
banks by replacing it with local deposits. However, 
the  loan-to-deposit  ratio  remains  above  100 %, 
indicating  a  remaining  deposit  funding  gap  in 
banks’ balance sheets. This can be filled by parent 
bank  funding  or  financing  on  the  capital  market. 
According to the Bank of Estonia (18), a downturn 
in  the  Nordic  economies  is  the  main  risk  to 
financial stability at the current juncture.  

Table 3.2.1: 

Financial soundness of banks 

*ECB aggregated balance sheet: loans excl. to government 
and MFI / deposits excl. from government and MFI. 
** For comparability only annual values are presented. 
Source: ECB CBD 

Credit  growth  is  moderate.  Since  early  2016, 
lending  to  corporations  has  fallen  from  annual 
growth rates of close to 10 % to 4 % in June 2017 
(Graph  3.2.1).  Lending  to  households  has  been 
picking  up  steadily  since  2012  on  the  back  of 
increasing  mortgage  loans.  In  June  2017,  both 
loans  to  households  and  mortgage  loans  were 
growing  at  6 %  annually.  Financial  regulations  to 
mitigate  risks  to  the  financial  system  as  a  whole 
have  been  tightened  over  recent  years  and  the 
possibility  of  deducting  mortgage 
interest 
payments  from  tax  bills  has  been  reduced.  If  the 
credit  market  were  to  show  significant  growth  or 

(18)  Eesti Pank (2017), Financial Stability Review 2/2017. 

housing  prices  picked  up  again,  the  Bank  of 
Estonia  could  consider  suggesting  new  macro-
prudential  measures  such  as  a  counter-cyclical 
capital buffer. 

Graph 3.2.1:  Credit growth 

Source: ECB 

Concentration in the financial sector is high but 
there  are  no  visible  signs  that  it  is  impeding 
access  to  finance.  Over  80 %  of  the  market 
belongs  to  three  large  banks.  The  high  level  of 
concentration in the financial sector could result in 
a lack of competition on the financial market. Still, 
the  ample  liquidity  of  banks  is  providing  easy 
access to credit. Only about 6 % of Estonian SMEs 
consider  access  to  finance  their  most  important 
problem,  in  line  with  the  EU  average  of  7  %(19). 
However,  bank  margins  for  mortgage  loans  are 
high relative to the euro area average and the gap 
in the average credit cost between Estonia and the 
euro area has been widening recently. At the same 
time,  micro  enterprises,  newly  created  companies 
or  firms  established  in  the  countryside  may  have 
bigger  constraints 
the  financial 
resources  they  need,  notably  due  to  insufficient 
collateral.  The  proportion  of  SMEs  pointing  to 
insufficient  collateral  or  guarantees  as  the  main 
obstacle  to  getting  necessary  financing  is  double 
the EU average (26 % vs 13 %). 

in  obtaining 

Access  to  finance  in  Estonia  is  supported  by 
initiatives.  The  Kredex 
several  government 
loan  programme 
agency  runs  a  subordinated 
through  commercial  banks.  It  also 
delivered 

(19)  SAFE survey 2017. 

14 

(%)20102011201220132014201520162017Q2Non-performing debt9.34.53.01.92.61.91.51.9Non-performing loans----3.22.21.72.0Non-performing loans NFC----2.82.92.43.0Non-performing loans HH----4.03.02.22.1Coverage ratio85.053.475.075.337.742.546.830.0Loan to deposit ratio*162.8144.5134.4128.9124.0122.1122.5123.3Tier 1 ratio12.718.522.822.741.334.933.835.3Capital adequacy ratio16.319.423.223.141.835.434.435.9Return on equity**3.622.911.710.79.76.811.1-Return on assets**0.43.12.01.81.61.11.5--6-4-20246810121416Jan-12Jun-12Nov-12Apr-13Sep-13Feb-14Jul-14Dec-14May-15Oct-15Mar-16Aug-16Jan-17Jun-17% yoyTotal private Non-financial corporationsHouseholdsMortgage credit 
 
 
 
 
                                                           
 
                                                           
3.2. Financial sector 

contributes  to  two  capital  market  instruments 
aiming  to  provide  an  additional  push  to  the 
Estonian start-up ecosystem. The Baltic Innovation 
Fund  (BIF)  has  been  a  success  story.  In  2017,  it 
managed to raise EUR 325 million, more than one 
third  of  this  from  local  pension  funds.  Moreover 
the  fund  managers  of  EstFund  have  been  selected 
and are expected to start investing in 2018 through 
a  venture  capital  fund,  an  expansion  capital  fund 
and  a  business  angel  co-investment  fund  (see 
Country Report 2017). 

Graph 3.2.2:  Business financing sources 

is  keen  on  pursuing  a  regional 
Estonia 
approach 
to  developing  capital  markets. 
Harmonising  the  legal  framework  among  the 
Baltic  neighbours  may  create  an  inventory  of 
financial  products  such  as  covered  bonds, 
investment  funds  and  securitisation  assets.  The 
objective  is  to  increase  the  size  of  these  market 
segments  in  order  to  attract  investors.  With  this 
goal,  in  November  2017  the  Ministry  of  Finance 
signed  a  Memorandum  of  Understanding  with  its 
peer  ministries  from  Latvia  and  Lithuania  on 
regional  capital  market  development.  Estonia  has 
also  shown  a  keen  interest  in  developing  new 
financial  services  such  as  crowdfunding  and 
financial technology financing hubs as it is already 
one of the EU’s frontrunners in the digital market 
and cybersecurity. This is increasing the choice of 
financing  options  in  the  economy,  bringing  in 
innovation and creating new jobs. 

Local investors are needed to support the local 
economy.  Estonian  companies  are  small  and  thus 
unattractive  for  European  and  global  financial 
investors.  On  the  other  hand,  Estonian  pension 
funds  have  accumulated  assets  which  are  now 
worth  EUR  3.5  billion  (16  %  of  GDP).  This  is 
equivalent  to  the  sum  of  the  stock  market’s 
capitalisation of EUR 2.5 billion and private equity 
and  venture  capital  assets  of  EUR  1  billion. 
However,  due  to  the  regulation  and  the  lack  of 
investment  opportunities,  less  than  10  %  of  the 
pension 
local.  For 
investment 
comparison,  in  the  euro  area  the  average  share  of 
investment in local assets is 59 % for bonds and 43 
%  for  equity(21).  In  2015,  the  government  passed 
some  measures  to  increase  the  domestic  focus  for 
pension fund investments. 

funds’ 

is 

Estonia  has  requested  technical  support  from 
the  Commission’s  Structural  Reform  Support 
Service to help implement reforms in the financial 
sector. In  particular  it  wants to  improve  financing 
options  for  companies  and  support  capital  market 
development. 

(21)  DNB  Working  Paper  (2016):  International  investment 
positions  revisited:  Investor  heterogeneity  and  individual 
security  characteristics.  See  also  European  Commission 
(2017): 2017 Country Report: The Netherlands. 

Source: ECB, European Commission, Invest Europe 

and 

capital 

markets 

to  benefit 

illiquid.  The 

remain 
Estonian 
stock 
underdeveloped 
exchange’s  capitalisation  has  fallen  to  10  %  of 
GDP  (see  Graph  3.2.2)  and  trading  volume  has 
shrunk  considerably  since  2007.  Initial  public 
offering (IPO) activity peaked in 2005-2007 when 
from  EU 
Estonia  was  starting 
membership,  but  the  volume  has  now  tapered  off 
to  one  to  two  new  issues  per  year.  Two  state-
owned  enterprises  plan  to  arrange  IPOs    2018(20). 
Both  will  be  partial  privatisations  through  the 
stock  exchange.  Estonia  lacks  a  government  bond 
market and the commercial bond market is poorly 
developed.  The  establishment  of  a  unified 
exchange — NASDAQ Baltics covering the stock 
exchanges  in  Tallinn,  Riga  and  Vilnius  —  has 
triggered harmonisation of the three markets. 

(20)  Port  of  Tallinn  and  Eesti  Energia  renewable  energy  unit 

Enefit 

15 

0102030405060Listedshares; 2016Debtsecurities;2016MFI loans;2016Grossoperatingsurplus:corporations;2016% of GDPEEEU 
 
                                                           
                                                           
3.2. Financial sector 

Housing market 

House  price  increases  slowed  down  over  2016- 
2017 as housing supply caught up with demand. 
Housing  construction  remained  buoyant  in  2017, 
while construction investment picked up over 2017 
in  the  other  sectors  of  the  economy  as  well.  As  a 
result,  price  pressures  in  the  construction  sector 
have  resurfaced,  but  not  to  the  degree  seen  in  the 
2008  boom  (see  Graph  3.2.3).  Growth  in  lending 
for  house  purchases  continues  (see  Graph  3.2.1) 
but  is  still  broadly  in  line  with  GDP  and  wage 
growth.  Overall,  considering  that  house  price 
pressures  have  eased  and  lending  growth  is  still 
relatively  moderate,  risks  stemming  from  the 
housing market are contained.  

Graph 3.2.3:  Wage growth in construction vs total economy 

Source: Statistics Estonia 

16 

-20-10010203040020304050607080910111213141516%yoyAll sectors totalConstruction 
 
 
 
 
3.3.  LABOUR MARKET, EDUCATION AND SOCIAL POLICIES 

3.3.1.  LABOUR MARKET CHALLENGES 

Graph 3.3.1:  Key labour market indicators 

Labour market 

Activity  and  employment  rates  in  Estonia  are 
well above the EU average. In 2016, employment 
continued  to  grow  in  line  with  GDP  growth  with   
2  000  more  jobs  created.  The  employment  rate  in 
2016 stood at 76.6 %, way above the Europe 2020 
and  national  targets.  Over  the  last  few  years, 
activity  rates  have  also  increased,  partly  due  to 
increases in the retirement age and the more recent 
2017  Work  Ability  reform.  Unemployment  has 
been  steadily  declining  since  the  second  half  of 
2010 and is currently among the lowest in the EU 
(6.8  %  in  2016),  with  the  falling  trend  also 
long-term 
affecting  young  people  and 
unemployed  (Graph  3.3.1).  On  the  back  of  strong 
economic  growth  (see  Section  1.),  unemployment 
fell  further  to  6  %  in  2017,  from  7.3  %  a  year 
earlier,  equivalent  to  11  000  less  unemployed 
persons.  However,  unemployment  is  expected  to 
increase  moderately  in  the  coming  years  as  the 
Work Ability reform brings increasing numbers of 
people  with  reduced  work  ability  back  into  the 
labour market. 

the 

The  good  labour  market  performance  masks  a 
the 
real  structural  bottleneck  caused  by 
shrinking working age population. Demographic 
projections  anticipate  Estonia's  population  will 
decline  due  to  low  birth  rates,  similarly  to 
the  EU(22). 
return 
developments 
migration  has  started  to  offset  the  net  outward 
migration that prevailed during the last decade, but 
it is not enough to reverse the demographic trend. 
According to Eurostat, the working age population 
will shrink by 51 000 persons in 2025(23). 

Inward 

in 

Activity rate and Employment rate (% of population), total, 
ages 20-64. 
Unemployment rate and long-term unemployment rate (% 
of labour force), total, ages 15-74. 
Youth unemployment rate (% of labour force), total, ages 
15-24. 
NEET: Not in employment, education or training (% of 
population), total, ages 15-24. 
Source: Eurostat 

The  Work  Ability  reform 
is  effectively 
increasing labour supply. The reform introduced 
new  rules  for  beneficiaries  of  work  allowance 
which are in effect since July 2016. New measures 
are  helping  to  make  people  with  partial  ability  to 
work 
to  become  more  active.  The  Estonian 
authorities  anticipated  that  overall  around  12  000 
previously  inactive  people  became  active  by  end-
2017.  However,  as  this  vulnerable  group  takes 
longer to find employment, the unemployment rate 
is  forecast  to  rise.  The  reform  effects  will  take 
some time to show its full effect.  

(22)  Employment  and  Social  Developments  in  Europe,  Annual 
Review  2017,  European  Commission,  Luxembourg: 
Publications Office of the European Union, 2017. 
(23) Eurostat population projections, (20-64, for the period 

2015-2025) 
http://ec.europa.eu/eurostat/tgm/table.do?tab=table&init=1
&plugin=1&pcode=tps00002&language=en 

17 

727476788082840510152025303501020304050607080910111213141516%%Activity rate 20-64 (rhs)Unemployment rate 15-74 (lhs)Long-term unemployment rate 15-74 (lhs)Youth unemployment rate 15-24 (lhs)NEET rate 15-24 (lhs) 
 
                                                           
 
 
 
 
                                                                                   
 
3.3. Labour market, education and social policies 

Box 3.3.1: Monitoring performance in light of the European Pillar of Social Rights  

The  European  Pillar  of  Social  Rights,  proclaimed  on  17  November  2017  by  the  European  Parliament,  the 
Council and the European Commission, sets out 20 key principles and rights to benefit citizens in the EU. In 
light of the legacy of the crisis and changes in our societies driven by population ageing, technological change 
and new ways of working, the Pillar serves as a compass for a renewed process of convergence towards better 
working and living conditions. 

It  has  a 

improving  on 

Estonia performs relatively well on a number of 
indicators  of  the  Social  Scoreboard(24) 
the 
supporting the European Pillar of Social Rights, 
while  challenges  remain.  Estonia's  labour  market 
the  back  of  strong 
has  been 
economic  growth. 
relatively  high 
employment rate and a rather low rate of youth not 
in  education,  employment  or  training  (NEET). 
Nevertheless,  the  self-reported  unmet  need  for 
medical  care  shows  worsening  trends.  Social 
transfers  do  not  appear  effective  in  reducing 
poverty in the EU. The weak social safety net has 
had implications for both poverty and inequality in 
Estonia,  although  both  indicators  show  signs  of 
improvement.  

In 2015, Estonians reported high rates in the EU 
of unmet need for medical care. This is caused by 
high  waiting  times  for  specialist  care  due  to  weak 
care  coordination.  The  assessment  of  the  patient 
pathways  points  to  avoidable  specialist  treatment 
and hospitalisation in the current system. 

Estonia  is  has  a  promising  policy  for  providing 
support and outreach to youth under the Youth 
Guarantee  scheme.  Over  4000  workshops  have 
been  organised  from  2015  to  July  2017  for  young 
people aged 15 or above who are about to enter the 
labour  market  and  start  their  working  lives  (e.g. 
how the labour market functions, what to consider when looking for a job or planning a career, and what are 
the possibilities to get labour market related help, if such a need arises) Partnerships for the Youth Guarantee 
are in place, bringing together the public employment service with employers and education providers. An IT 
solution  will  aggregate  data  from  numerous  national  registries  and  identify  NEET  youth.  This  will  enable 
social workers to approach and inform these young people of available services in different municipalities.  

(24) The Social Scoreboard includes 14 headline indicators, of which 12 are currently used to compare Member States performance. 
The indicators "participants in active labour market policies per 100 persons wanting to work" and "compensation of employees 
per hour worked (in EUR)" are not used due to technical concerns by Member States. Possible alternatives will be discussed in 
the relevant Committees. GDHI: gross disposable household income. 

18 

 
                                                           
 
 
3.3. Labour market, education and social policies 

Graph 3.3.2:  Impact of work ability reform on 

unemployment (by disability class) 

less  mobile  to  fill  vacancies  in  other  parts  of  the 
country. 

Gender pay gap 

The  parental  leave  system  is  one  of  the  factors 
behind  the  persistently  high  gender  pay  gap. 
Though decreasing since 2013, the gender pay gap 
in Estonia is still the highest in the EU at 26.9 % in 
2015  (EU  average  16.3  %).  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.  The  length  of  the  parental  leave, 
combined  with  the  fact  that  parental  leave  is 
primarily  taken  up  by  women,  contribute  to  the 
gender  pay  gap  since  women  interrupting  their 
careers  to  take  care  of  children  have  less  chances 
to find or come back to better paid jobs. 

Changes  to  the  parental  leave  system  are 
currently  under  way.  Since  2016,  the  parental 
leave  system  is  regulated  by  the  Family  Benefits 
Act, which consolidates all previous legislation on 
family  benefits.  The  parental  benefit  reform 
adopted  in  December  2017  will  be  implemented 
over  the  period  2018-2020.  It  aims  to  introduce 
greater  flexibility  for  workers  to  combine  the 
parental benefit with employment(27), and provides 
one  month  of  parental  leave  exclusively  for 
fathers. In 2016, 9 % of fathers took parental leave 
and the reform is expected to facilitate greater use 
of this possibility. The government plans to discuss 
the second stage of the reform in spring 2018. This 
is  likely  to  concern  further  changes  in  maternity 
leaves and benefits.  

to 

plans 

government 

The 
introduce 
transparency  requirements  to  reduce  the  wage 
gap  in  the  longer  term.  The  planned  changes  to 
the  Gender  Equality  Act  (due  to  be  approved  by 
the  government  in  spring  2018)  are  a  step  in  the 
right  direction  that  will  require  public  sector 
entities  to  make  their  payrolls  transparent.  An  IT 
tool is expected to be developed in 2019 to analyse 
the  wage  differences  between  genders  in  both  the 
public  and  private  sectors.  If  the  tool  finds 

(27)  The  possibility  to  combine  part-time  work  with  parental 
leave and the increased ceiling for permitted employment-
related  income  while  receiving  parental  benefit  could 
encourage  parents 
from 
employment.   

shorter  breaks 

to  have 

Source: European Commission's calculations 

Overall,  the  participation  in  active  labour 
market policies (ALMP) appears to be low. The 
proportion  of  the  unemployed  who  contact  the 
public  employment  service  in  search  of  a  job  in 
Estonia is above EU average (54 % in 2016 vs 46 
%  EU  average)(25).  However,  with  only  5  %  of 
people  wanting  to  work  actually  benefiting  from 
ALMP  support,  there  are  indications  that  Estonia 
had 
levels  of 
participation  in  ALMPs  in  the  EU.  This  was 
coupled  with  one  of 
levels  of 
expenditure on ALMP in the EU (0.1 % of GDP in 
2015). Nevertheless, while still below EU average, 
in  2016  there  were  strong  signs  of  improvement, 
with ALMP participation and expenditure reaching 
16 % and almost 0.2 % of GDP respectively.  

in  2015  one  of 

lowest 

lowest 

the 

the 

Nonetheless,  the  personalised  ALMP  provision 
for  those  who  are  registered  as  unemployed  in 
Estonia  is  effective.  The  service  is  based  on  a 
system  of  individual  action  plans  (JIA).  The 
effectiveness  of  this  policy  seems  to  be  greater 
than  in  the  rest  of  the  EU.  For  example,  in  2015, 
37  %  of  long-term  unemployed  with  a  JIA 
regained  employment,  compared 
the  EU 
average of 14 %, and Estonia also has the highest 
estimated  probability  in  the  EU  of  the  long  term 
unemployed  finding  work  (20  %  in  2016)(26). 
Additional  measures  are  planned  for  regions  with 
high  unemployment  and  where  the  labour  is  also 

to 

(25)  Based on EU-Labour Force Survey data. See also figure 37 

in the 2018 Draft Joint Employment Report. 

(26)  According  to  the  Indicator  Framework  for  Monitoring  the 
Council  Recommendation  on  the  integration  of  the  long-
term unemployed into the labour market. 

19 

9113375400500010000150002000025000300003500040000Jul 16Oct 16Jan 17Apr 17Jul 17Oct 17total number of registered unemployed with reduced ability for workat the end of monthPeople with reduced ability for work at the end of month 
 
                                                           
                                                           
3.3. Labour market, education and social policies 

discrepancies  in  data  broken  down  by  gender,  the 
employer  will  be  obliged  to  provide  explanations. 
Where  the  discrepancy  cannot  be  justified,  the 
employer  will  have  to  introduce  changes  or  could 
be fined. The success of the reform depends on the 
detailed regulation and its actual implementation. 

Graph 3.3.3:  Gender pay gap in unadjusted form 

the 

childcare 

established 

More childcare and day-care options for people 
with  disabilities  will  be  provided  in  2018. 
Beyond 
facilities 
supported by EU funds, there are plans to support 
more flexible childcare services at irregular hours,. 
Access  to  childcare  for  disabled  children  has 
improved.  However,  in  2016  over  20  %  of  carers 
for  adult  family  members,  mostly  women,  still 
could  not  go  out  to  work  because  care  provision 
was  lacking  or  too  costly.  In  2018,  day-care  and 
week-care  places  for  people  with  mental  health 
issues  and  severe  multiple  disabilities  will  be 
created.  The  reforms  are  expected  to  help  women 
with care responsibilities to seek employment. 

is  because 

Care responsibilities and related career breaks, 
mainly  taken  by  women,  might  increase  the 
gender  gap  in  pensions.  Currently,  Estonia's 
gender  gap  in  pensions  is  the  lowest  in  the  EU. 
This 
the  current  generation  of 
pensioners  did  not  have  long  career  breaks  for 
the  proportion  of 
raising  children.  However, 
women who were outside the labour market due to 
care  responsibilities  was  over  30  %  in  2016, 
compared to less than 20 % in the EU. This could 
lead to an increasing pension gap in the future(28). 
Provisions  are  in  place  to  recognise  people's 
previous care responsibilities when they reach old 
age  and  to  provide  partial  compensation  for  the 
consequent  gap  in  the  state  funded  pension.  The 
planned  reform  of  the  parental  leave  system  is 
expected to narrow the gender pay gap and so ease 
gender pension gap concerns in the long term. 

(28)  Espenberg et al (2014) have estimated that the pension gap 
in  Estonia  between  women  and  men  who  have  children 
would be 19 % in 2047. 

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 

3.3.2.  SOCIAL POLICY (POVERTY, SOCIAL 

ASPECTS OF SOCIAL SECURITY SYSTEMS) 

into 

taking 

account 

Estonia spends less on social protection than its 
EU peers and its social safety net is inadequate, 
particularly 
the 
increasingly  ageing  population.  Per  capita 
spending  on  social  protection  and  weighted 
spending on social protection are among the lowest 
in  the  EU.  The  impact  of  social  transfers  on 
reducing  poverty  amounted  to  25  %  in  2016,  i.e. 
below  the  EU  average  of  33  %.  Meanwhile,  the 
risk  of  poverty  or  social  exclusion  has  been 
increasing  overall  since  2010  and  reached  the  EU 
average  of  about  24  %  in  2016.  The  increase  has 
been  driven  mainly  by  a  big  rise  in  monetary 
poverty  since  2010-  the  at  risk  of  poverty  rate 
stands around 22 % making Estonia to become one 
of the poor performers in the EU despite it having 
been below the EU average in 2010. This relative 
poverty rate is particularly high for people living in 
jobless households; at 78 % it is the highest in the 
EU.  Latest  information  on  poverty  and  income 
inequality  indicate  that  no  significant  changes  are 

20 

051015202530EECZDEATGBSKPTFILVEU28NLFRBGDKESLTCYHUSEIEMTHRSIPLBEROITLUPercentage20152010 
                                                           
 
expected  in  the  at-risk-of  poverty  rate  for  income 
reference  year  2016(29).  However,  as  concerns 
unemployment benefits, Estonia ranks close to EU 
average  for  indicators  related  to  adequacy  and 
coverage,  while  maximum  duration  (for  a  1-year 
work record) is comparatively high (30). Moreover, 
the  self-employed  have  access  to  unemployment 
benefits  and  other  aspects  of  social  protection. 
Risk of poverty or social exclusion for people with 
disabilities  is  high  at  39.4  %.  In  addition,  the  at-
risk-of-poverty-or-social-exclusion  gap  between 
people  with  disabilities,  mostly  older  people,  and 
those without is also higher than the EU average in 
Estonia at 20.9 percentage points (EU average 10.1 
percentage  points).  At  the  same  time  family 
allowances  have  been  increased,  especially  for 
larger  families  and  this  has  reduced  relative 
poverty among children. 

Income 
inequality  remains  relatively  high 
(Graph  3.3.4)  despite  recent  improvements.  In 
2016,  the  income  of  the  top  20  %  of  households 
was 5.6 times higher than that of the poorest 20 %, 
and improvement from 6.2 in 2015. This is higher 
than  the  EU  average.  Low  spending  on  social 
protection  and  the  limited  redistribution  capacity 
of  the  tax  and  benefits  system  to  redistribute 
wealth  (Graph  3.3.4)  are  the  main  drivers  of  the 
inequality. Recent reforms to personal income tax 
(see Box 3.3.2) are expected to have only a limited 
impact on reducing income inequality.  

(29)  In  order  to  monitor  in  a  timelier  manner  the  effectiveness 
of  social  policies  in  the  Member  States,  Eurostat,  on  the 
basis  of  statistical  and  econometric  models,  has  produced 
experimental  flash  estimates  for  income  reference  year 
2016. These complement the EU-SILC data and can be used 
in  preliminary  analysis  until  the  final  EU-SILC  data 
becomes  available.  As  any  estimate,  these  flash  estimates 
should be interpreted with caution – their accuracy depends 
on  various  factors  therefore  they  cannot  be  expected  to 
match perfectly EU-SILC 2017 results. 

(30)  According  to  the  benchmarking  exercise  in  the  area  of 
unemployment  benefits  and  active  labour  market  policies 
conducted  within  the  EMCO  Committee.  See  the  Draft 
Joint  Employment  Report  2018,  European  Commission, 
2017 for details. 

3.3. Labour market, education and social policies 

Graph 3.3.4:  Corrective power of taxation and social 

transfers, 2016 

(1) Difference between the Gini coefficients for market 
income inequality (i.e. before tax and benefits) and 
disposable income inequality (i.e. after tax and benefits). 
Income data are adjusted for household size (equalisation). 
The scale of Gini coefficient is from 0 to 100. The value 0 
corresponds to perfect equality (same income to 
everybody) while 100 corresponds to maximum inequality 
(all income distributed to only one person and all the others 
have nothing. 
(2) No 2016 data available for IE, IT, and LU, 2015 data used 
instead. 
(3) EU average is calculated as the population-weighted 
average of individual national figures. 
(4) EU-SILC 2016 data are based on income generated in 
2015 (with the exception of IE and UK. 
Source: European Commission, Tax Policies in the EU: 2017 
Survey (forthcoming) , based on Eurostat data 

tested  (EU  average 

The  minimum  income  system  became  slightly 
more generous. According to Eurostat, in Estonia 
only around 1% of all social protection benefits are 
means 
is  10.6%).  The 
subsistence  benefit(31),  which  is  well  below  the 
poverty threshold and low compared to the income 
of low wage earners, is the most used means tested 
benefit  (ESPN  2018).  It  was  increased  from  2018 
and 
the  system  became  more  flexible.  The 
subsistence level increased from EUR 130 to EUR 
140  for  the  first  adult  in  each  household  and  to 
EUR  168  for  each  minor..  This  increase  was 
accompanied by incentives for people to return to 
work.  These  entail  allowing  benefits  to  overlap 
with  income  from  employment  for  a  limited 
period.  Further  changes  also  apply  from  2018  for 
sole-proprietors. They receive similar tax treatment 
to  companies,  increasing  their  social  protection. 
While  these  are  steps  in  the  right  direction,  their 
impact on reducing poverty and inequality remains 
to be seen. 

(31)  At  50  %  of  poverty  threshold  as  demonstrated  by 
benchmarking exercise of the Social Protection Committee 
in 2017. 

21 

0.00.10.20.30.40.50.6051015202530FIBESIIEDKCZATNLHUSEDEUKFRLUHRSKELPTMTITROPLESCYEELTLVBGEU-28Decrease of Gini index in %Decrease of Gini index in absolute valuesDecrease of Gini in absolute valuesDecrease of Gini in percentage 
                                                           
 
                                                           
3.3. Labour market, education and social policies 

Box 3.3.2: Personal Income Tax reform in Estonia 

Previous  Country  Reports  have  flagged  the  relatively  high  tax  wedge  for  low  income  earners  in 
Estonia.  In  late  2016,  the  government  adopted  a  package  of  measures  in  the  area  of  taxation. 
Important changes were to be introduced in the personal income tax (PIT)(1) by establishing tax 
progressivity  in  favour  of  low  wage  earners(2).  This  box  summarises  the  results  of  an  ex-ante 
assessment  of  the  macroeconomic  impact  of  the  PIT  reform  using  the  European  Commission's 
QUEST  model,  and  an  assessment  of  distributional  effects  of  the  reform  obtained  using  the 
EUROMOD methodology.  

According  to  QUEST  simulations(3),  the  PIT  reform  will  result  in  a  2  percentage  points  lower 
average labour tax rate on employees. This lower tax wedge will increase incentives to work, with 
the  highest  employment  effects  for  the  low-  and  medium  skilled.  The  cumulative  effect  on 
employment for the five years following the reform is 0.7 % above the baseline scenario. The tax 
free allowance will increase disposable net incomes while reducing upward pressures on real gross 
wages. The upward effect on consumption is rather limited, as the boost to consumption coming 
from higher net incomes is countered by the rise in consumption taxes and inflation (consumption 
tax rises are technically included into the QUEST model because in reality the budgetary cost of 
the PIT reform was offset by various other tax rises). The cumulative effect of the reform on GDP 
is expected to be positive (0.4 % over the baseline in five years). 

Table 1: QUEST simulation results 

Years 

GDP 

Employment 

- low skilled 

- medium skilled 

- high skilled 

Real wages 

- low skilled 

- medium skilled 

- high skilled 

Consumption 

Consumer prices, incl. VAT 

1 

0.10 

0.20 

0.32 

0.29 

0.08 

-0.31 

-0.41 

-0.38 

-0.19 

0.05 

0.88 

2 

0.21 

0.43 

0.69 

0.61 

0.16 

-0.54 

-0.72 

-0.66 

-0.32 

0.07 

0.76 

3 

0.29 

0.56 

0.92 

0.79 

0.21 

-0.57 

-0.79 

-0.69 

-0.31 

0.14 

0.69 

4 

5 

0.34 

0.36 

0.63 

1.03 

0.87 

0.24 

0.65 

1.08 

0.91 

0.25 

-0.54 

-0.51 

-0.77 

-0.74 

-0.66 

-0.63 

-0.27 

-0.24 

0.19 

0.65 

0.22 

0.63 

Shock to average labour tax-rate on employees 

-2.07 

-2.07 

-2.07 

-2.07 

-2.07 

Comment: all figures express changes in percentages over the baseline; government balance figures are percentage points 

over the baseline.  
EUROMOD  simulations(4)  allow  for  examining  the  potential  income-based  and  distributional 
effects of the reform. It is found that the PIT reform would only slightly reduce at-risk-of-poverty 
rates and income inequalities as measured by Gini coefficient(5). In aggregate terms, four out of 
five households will be affected by the reform, and majority will be winners (71.6 %). Between 
4th and 7th income decile most of the households will be winners (see Graph 1). The losers will be 
concentrated  in  the  two  top  deciles,  but  there  are  also  winners  in  the  richest  households,  for 
example if the household is composed of both high and low income earners. There are relatively 
few  winners  in  the  lowest  income  quintiles  because  many  of  them  depend  on  pensions  or 
subsistence  social  benefits  and  are  less  affected  by  the  PIT  reform.  Therefore,  the  reform  will 
only have a limited impact on reducing poverty and income inequality for the very lowest income 

22 

 
 
3.3. Labour market, education and social policies 

groups.  

Note:  Affected  households  are  those  whose  equalised  disposable  income  changes  with  the  reform;  they  are  defined  as 
winners, if their income increases, and losers if it decreases. Only changes above 1 EUR/month are considered.  

(1)  Some  other  elements  of  the  reform  concern  non-taxable  pension,  levels  of  social  benefits,  changes  in  the  rules  for 

submission of tax declarations, and other similar issues. 

(2)  As  of  2018,  the  following  changes  in  the  personal  income  taxes  apply:  (a)  non-taxable  income  (also  called  'tax  free 
allowance')  for  low  and  medium  wages  to  increase  from  180  euro  to  500  EUR/month;  (b)  for  income  2  100 
EUR/month  and  above,  no  tax  free  allowance;  (c)  for  incomes  above  1  200  EUR/month,  tax  free  allowance  will 
decrease gradually and reach zero at income 2100 euro/month; (d) the abolishment of Pensioners' tax allowance. 
(3)  The simulation includes the changes to PIT, but since it was in reality offset by other tax rises in the budget, the model 
also includes rises to indirect/consumption taxes fully offsetting the PIT reform costs.  This is a simplification of the 
actual  taxation  changes  that  came  into  force  in  2018  (various  excise  rises,  corporate  income  tax  reform),  given  the 
limitations of the QUEST model. 

(4)  EUROMOD analysis also includes simulation of the reintroduction of joint taxation and the additional allowance of 2 

160 /year if joint annual income not above 50 400 EUR. The total size of the shock is 1.33 % of GDP. 

(5)  The at-risk-of-poverty rate at 60 % of the national median income is reduced marginally by the reform from 21.4 % to 
19.5 % of population. The at-risk-of-poverty rate is highest in households without children with one adult older than 
65,  standing  at  75.9  %.  The  reform  will  reduce  this  to  72.5  %.  The  reform  decreases  slightly  the  Gini  equalised 
disposable income from 0.33 to 0.32. 

Pension adequacy 

The government is taking steps to address risks 
to  the  future  sustainability  of  the  pension 
system. It plans to link the official retirement age 
to  life  expectancy  from  2027.  It  also  plans  to 
abolish  special  pensions  for  members  of  the 
defence  forces,  prosecutors,  police  and  border 
guard  officials  as  well  as  special  retirement 
regimes  for  workers  in  arduous  or  hazardous  jobs 
from 2020. It is proposing to change how pensions 
are  calculated  to  weaken  the  link  between  the 
statutory  pension  benefit  and  wage  levels.  If 
approved, the changes will be implemented over a 
transition  period  from  2020  to  2026.  The  draft 
legislation is expected in the first quarter of 2018. 
In October 2017, an additional annual allowance of 
EUR 115 was paid for the first time to pensioners 

who  live  alone.  This  reduced  the  relative  poverty 
rate of these pensioners by 5.5 percentage points. 

income 

The  Estonian  pensioners' 
level 
compared  to  their  pre-retirement  wage  or 
average incomes in the country is lower than on 
average in the EU-28. Pensions currently amount 
to  45  %  of  late-career  work  income  in  Estonia, 
while in the EU it is 58 %(32). The relative median 
disposable income of those aged 65 and above was 
60  %  of  the  income  of  those  aged  below  65  in 
2016  –which  is  also  among  the  lowest  values  in 

(32)  Aggregate  Replacement  Ratio  (ARR)  indicator  is  defined 
as the ratio of the median individual gross pensions of 65-
74  age  category  relative  to  median  individual  gross 
earnings  of  50-59  age  category,  excluding  other  social 
benefits. EU aggregate figures are calculated as population-
weighted averages of national values. 

23 

010203040506070809010012345678910Graph 1: Share of affected households (winners and losers) by incomeWinnersLosersSource: Joint Research Centre, calculations based on the EUROMOD model 
 
 
                                                           
3.3. Labour market, education and social policies 

the  relatively 

the  EU-28(33).  Reflecting 
low 
pensions,  Estonia  has  one  of  the  highest  rates  of 
risk of poverty or social exclusion for older people 
(aged 65 years or over) in the EU (41.4 % versus 
the  EU-28  average  of  18.3  %  in  2016).  However, 
while  the  depth  of  poverty(34)  has  increased  in 
Estonia since 2013, it is still lower than in the EU 
on  average.  This  is  because  the  majority  of 
pensioners with lower pensions still have incomes 
close to the relative poverty line. This also helps to 
limit  the  severe  material  deprivation  rate(35)  of 
older  people  aged  65  or  over,  which  is  even 
slightly  below  the  EU  average  (5.4  %  in  Estonia, 
5.9 % in EU in 2016). 

in  Estonia, 

Ensuring  adequate  pensions  in  the  future  will 
in 
remain  a  major  challenge 
particular  for  people  with  short  professional 
careers  or  with  low  earnings,  and  for  disabled 
people  or  those  receiving  only  residence-based 
is  a 
national  pensions.  Ageing  population 
growing  concern:  the  old-age  dependency  ratio 
(20-64)  for  Estonia  is  projected  to  rise  by  29.1 
percentage points (from 31.5 % in 2016 to 60.6 % 
in 2056) and it will be above the EU average (56.6 
% in 2056) (36). 

Social dialogue 

Social partners' capacity to participate in policy 
making  is  improving.  Government  authorities 
engage  social  partners  and  other  interest  groups 
and  the  public  in  the  decision-making  process 
through an e-consultation system for a broad range 
of  stakeholders.  This  in  practice  allows  for  active 
participation,  although  there  are  calls  for  a  more 
formal  tripartite  consultation  process.  To  improve 
the social partners' capacity to participate in policy 

(33)  Relative  median disposable income indicator is defined as 
the  ratio  of  the  median  equivalised  disposable  income  of 
persons  aged  60  and  over  to  the  median  equivalised 
disposable  income  of  persons  aged  between  0  and  59.  It 
takes into consideration all incomes. 

(34)  Measured  by  the  poverty  gap,  indicating  the  extent  to 
which  the  incomes  of  those  below  the  poverty  line  fall 
short of that poverty line. 

(35)  Severe  Material  Deprivation  (SMD)  is  defined  as  the 
enforced inability to pay for at least four of the deprivation 
items:  (1)  pay  rent/mortgage  utility  bills  in  time;  (2)  keep 
home adequately warm; (3) meet unexpected expenses; (4) 
eat meat, fish or a protein equivalent every second day; (5) 
one  week  holiday  away  from  home;  (6)  own  a  car;  (7)  a 
washing machine; (8) a colour TV; (9) a telephone. 

(36)    People aged 65 or above relative to the population aged 

20-64, The 2018 Ageing Report 

making,  a  measure  funded by  EUR 470 000 from 
the  European  Social  fund  is  being  implemented. 
The  activities  supported  are  targeted  towards 
improving  social  partners'  analytical  capabilities 
and  the  involvement  of  their  members,  and  to 
strengthen their internal structure.  

3.3.3.  HEALTHCARE 

The  health  status  of  Estonian  people 
is 
improving  but  some  challenges  remain.  Life 
expectancy  in  Estonia  is  increasing  and  child 
mortality  is  falling,  rapidly  closing  the  gap  with 
the respective EU averages. However, healthy life 
expectancy,  preventable  mortality  and  mortality 
from cardiovascular disease and cancer in Estonia 
are  worse  than  the  EU  average.  This  limits 
people’s ability to work and their productivity. 

The  number  of  registered  work  accidents  has 
increased,  reaching  a  20-year  peak  in  2016.  The 
rate  of  both  work  accidents  and  fatal  work 
accidents  per  100  000  employees  grew  in  1  year 
from  2015(37).  A 
large  proportion  of  work 
accidents involve people who have been employed 
for  less  than  1  year.  The  government  proposes  to 
amend  the  Occupational  Health  and  Work  Safety 
Act  from  2019.  The  revised  Act  is  expected  to 
make  workers'  health  checks  work  oriented, 
improve protection against direct health hazards in 
the  workplace  and  ensure  safety  instructions  and 
the provision of first aid training are adapted to the 
specificities  of  the  company.  These  changes  are 
intended  to  improve  occupational  health  -  make 
the  existing 
the 
rules  clearer  and 
lower 
administrative  burden  on 
employers  while 
increasing safety in the workplaces. The impact of 
these  changes  on  lowering  health-related  exits 
from work remains to be seen. 

Access  to  health  care  is  a  challenge.  In  2015, 
12.7 % of all Estonians reported an unmet need for 
medical care, the highest rate in the EU (discussed 
in  OECD/European  Observatory  on  Health 
Systems and Policies 2017). Access to specialised 
medical  care  is  problematic  not  because  of  high 
costs  but  rather  due  to  waiting  times.  Analysis  of 
patient pathways ― the route patients follow from 
their  first  contact  with  a  healthcare  professional 

(37)  The  number  of  fatal  work  accidents  for  the  15–74  age 

group was 788. 

24 

 
                                                           
                                                           
3.3. Labour market, education and social policies 

through  to  the  completion  of  their  treatment  ― 
points  to  problems  with  care  coordination  and 
misaligned  incentives  in  primary  care.  Some  6  % 
of the population have no insurance coverage. The 
government  is  taking  steps  to  ease  the  burden  of 
out-of-pocket  payments,  such  as  re-establishing 
benefits for dental care for adults. The government 
is  also  conducting  an  analysis  on  the  burden  of 
out-of-pocket payments. 

The  number  of  people  affected  by  non-
communicable  diseases  is  increasing  and  poses 
challenges to health services. Attention is paid to 
improving  the  quality  and  integration  of  health 
services  through  the  introduction  of  a  quality 
bonus  system  in  primary  care,  an  e-consultation 
system and various quality assurance mechanisms. 
However,  a  large  proportion  of  acute  in-patient 
care can be avoided and the share of hospital stays 
and  ambulatory  specialist  visits  can  be  reduced, 
according to the World Bank (2015). Primary care 
capacity  and  its  coordination  role  are  being 
strengthened  by  the  creation  of  multi-disciplinary 
health centres. This reform is being financed with 
help  from  the  European  Regional  Development 
Fund.  Estonia  also  faces  a  shortage  of  nurses, 
which  risks  jeopardising  the  success  of  plans  for 
integrating  care  and  for  better  management  of 
chronic diseases. 

The  provision  of  long-term  care  for  the  older 
people with deteriorating health conditions does 
not  match  the  needs  of  the  population.  Rising 
long-term  care  needs  and  costs  are  fuelled  by  the 
rapid  ageing of  the  population.  By 2030  a quarter 
of the population will be over 65 and more than 7 
%  over  80.  Most  older  people  finance  social 
services from their state-provided pension which is 
often  not  sufficient  to  cover  the  costs  of  even  the 
least-expensive general care home(38). The cost of 
round-the-clock care in homes was mostly between 
EUR 400 and 600 a month in 2016 but could also 
be  as  high  as  EUR  800-1  200  a  month.  In 
comparison the  average old-age pension  was  only 
EUR  386.  The  increase  of  previously  very  low 
minimum hourly wages of nurses and carers by 5.4 
%  to  13.6  %  is  expected  to  further  increase  the 
financial burden on people in care homes in 2018. 

(38)  Wold Bank. Reducing the Burden of Care in Estonia, June 
2017, 
https://riigikantselei.ee/sites/default/files/content-
editors/Failid/hoolduskoormus/estonia_ltc_report_final.pdf 

of 

healthcare 

sustainability 

Assuring  the  long-term  stability  of  health  care 
financing  is  a  considerable  challenge;  even 
though 
improvements  are  planned.  Estonia 
spends less on health than the EU average, making 
the 
financing 
vulnerable  to  economic  shocks  and  the  ageing  of 
the  population.  The  long-term  forecast  model(39) 
shows  that  the  long-term  costs  are  higher  than 
revenues  and  that  the  reserves  of  the  Estonian 
Health  Insurance  Fund  (EHIF)  will  run  out  in 
2021. In September 2017, the government decided 
to  increase  the  funding  for  the  health  care  system 
by  EUR  300  million  over  the  next  5  years  by 
making  contributions  to  EHIF  for  non-working 
pensioners.  This  will  broaden  the  health  system's 
revenue  base  beyond  social  tax  alone  and  relieve 
pressure on EHIF's reserves.  

3.3.4.  EDUCATION AND SKILLS  

top  performing 

Future workers (today’s 15-year-olds) achieve a 
high  level  of  basic  skills  but  some  challenges 
remain.  The  2015  PISA  tests  show  that  the 
students  who 
number  of 
demonstrate the ability to solve complex problems 
outnumber  those  who  fail  to  reach  a  minimum 
level of skills in science, reading and mathematics. 
However,  the  performance  gap  between  students 
of  Estonian  and  Russian  mother  tongue  remains 
important. In 2016, only 61 % of Russian-medium 
basic  schools  graduates  achieved  the  required 
intermediate  level  in  Estonian  language  (B1), 
(target  90  %).  There  was  an  improvement  in  the 
proportion  of  students  who  reached  the  B2  level 
required  at  the  end  of  upper  secondary  (83  %  in 
2016).  Student  demographics  raise  efficiency 
challenges  and  the  need  to  further  strengthen  the 
coordination  of  resources  and  responsibilities  at 
different levels of education(40). 

Early  school  leaving  remains  high.  Although 
early  school  leaving  is  around  the  EU  average  it 
has  not  decreased  consistently  over  recent  years. 

(39)  Kruus,  P.,  Soe  R.-M.,  Võrk,  A.,  Jüri.  L.  (2014). 
prognoos 
(Health 
jätkusuutlikkuse 
forecast).  Tallinn:  Praxis. 

Ravikindlustuse 
insurance 
sustainability 
http://www.praxis.ee/wp-
content/uploads/2014/02/Ravikindlustuse-
j%C3%A4tkusuutlikkuse-prognoos-09.04.pdf 

(40)  (European  Commission  2017,  Education  and  Training 
Estonia 

Monitor: 
https://ec.europa.eu/education/sites/education/files/monitor
2017-ee_en.pdf).  

25 

 
                                                           
                                                           
3.3. Labour market, education and social policies 

Increasing  the  attractiveness  of  the  teaching 
profession  remains  critical.  Almost  half  of  the 
Estonian  teachers  are  aged  over  50.  To  make  the 
profession  more  attractive,  measures  to  raise 
teachers' salaries have continued, with increases in 
the  minimum  salary,  especially  for  pre-school 
teachers.  In  2017,  universities  revised  admission 
requirements for teacher education programmes in 
order 
students. 
However,  measures  to  make  university  teaching 
more attractive have been rather slow. 

to  engage  more  motivated 

Tertiary  attainment  is  high,  but  high  dropout 
and  the  gender  imbalance  remain  problematic. 
In  2016,  tertiary  attainment  was  above  the  EU 
average  of  39.1  %.  52  %  of  women  aged  30-34 
have a tertiary degree, compared to 38.8 % of men 
of  the  same  age.  The  government  targets  the 
completion  of  studies  in  nominal  time  and  the 
revised  funding  model  seeks  to  address  the  high 
dropout rate. The recommendations of OSKA (the 
labour market and skills survey system (European 
Commission,  2017))  have  been  embedded  in  the 
performance  agreements  and  are  expected  to  be 
monitored  when  assessing  the  fulfilment  of  the 
agreements.  

in  some  economic  sectors  due 

The  transition  from  higher  education  to  work 
raises some challenges. There is evidence of skill 
mismatch 
to 
inadequate  supply.  Although  graduates  in  natural 
sciences appear to have a good level of skills, there 
is  no  clear  demand  for  them  in  the  labour  market 
(42).  Apprenticeship  training  has  been  piloted  in 
higher  education  since  autumn  2017.  The  level  of 
doctoral  allowance  has  been  increased  by  50  % 
from 2018 in order to reduce the dropout rate. But 
the  motivation  and  attractiveness  of 
overall 
obtaining  a  PhD  are  rather  limited.  Completing 
doctoral studies is challenging for students who do 
paid  work  at  the  same  time.  An  additional 
challenge  is  that  the  overall  number  of  students 
continues to fall due to demographic trends. 

(42)      Annual  analysis  by  the  Ministry  of  Education  and 
Summary 

Research 
2017, 
https://www.hm.ee/sites/default/files/uuringud/htmannuala
nalyses2017summary_en.pdf 

The gender gap remains significant. Dropout rates 
in  the  first  year  of  upper  secondary  vocational 
education  and  training  (VET)  have  fallen  but 
remain  high  (22.4 %  in  2017).  Authorities  are 
exploring  options  to  raise  the  age  of  compulsory 
schooling  to  reduce  the  proportion  of  low-skilled 
people.  

While participation in adult learning in Estonia 
has improved, reaching groups that are difficult 
to engage in learning and up-skilling remains a 
challenge.  Following  the  Council  of  the  EU’s 
December  2016  Recommendation  on  Upskilling 
Pathways  recommendation(41),  attention  is  being 
given  to  bringing  low-skilled  adults  back  into 
formal  education.  The  aim  is  to  improve  their 
in  key 
qualifications  or  give 
competences.  The  2017-2020  adult  education 
programme 
key 
competences:  digital  skills,  learning  skills,  social 
skills  and  entrepreneurship,  and  national  and 
foreign  language  skills.  For  2017-2020  more  than 
EUR  30  million  of  European  Social  Fund  (ESF) 
financing  has  been  allocated  providing  training 
free of  charge.  The  aim  is to  train  at  least  50 000 
adults.  

prioritises 

following 

training 

them 

the 

the 

low 

training 

level  of  participation 

The  employment  rate  for  recent  vocational 
(VET)  graduates 
education  and 
remains  high  and  challenges  in  the  area  are 
being  addressed.  The  employment  rate  of  recent 
graduates  (82.1  %  in  2016)  was  well  above  the 
EU-average of 75 %. The main challenges in VET 
include: 
in 
apprenticeship  training,  the  high  level  of  dropout 
from 
skills 
initial  VET  programmes,  and 
mismatches.  The  ESF  funded  projects  are  used  to 
increase  the  low  level  of  participation  in  work-
based 
learning,  etc.  They  are  doing  so  by 
supporting the first groups of apprentices in upper 
secondary  VET  (study  length  3.5  years)  and 
piloting apprenticeship training in higher education 
(study 
to  4  years).  From  2018, 
professional  standards  will  be  renewed  which 
would lead to a better match between skills taught 
in  VET  and  labour  market  needs.  Performance-
linked funding will be introduced which will focus 
on  students'  completion  of  studies  in  the  nominal 
time,  success  in  professional  examinations  and 
participation in apprenticeship training. 

length  3 

(41)  OJ C 484/01, 24.12.2016 

26 

 
                                                           
                                                           
 
3.4.    INVESTMENT 

3.4.1.  GDP CONVERGENCE AND INVESTMENT 

Graph 3.4.2:  Breakdown of absolute growth in Estonia, 

2005-2016 

Per  capita  income  in  Estonia  is  about  30 % 
below  the  euro  area  average  (See  Graphs  3.4.1 
and  3.4.2).  While  labour  participation  is  much 
higher than the EU average, labour productivity is 
much lower. 

Graph 3.4.1:  Breakdown of the gap with the Euro Area 

Source: European Commission 

Investment  was  the  key  driver  of  economic 
convergence with the EU average and helped to 
close  the  gap  in  capital  intensity.  However,  the 
strong  overall  performance  over  the  last  decade 
(44)  masks  differences  in  investment  before  and 
after  the  financial  crisis.  For  example,  the  inflow 
of  net  foreign  direct  investment,  which  facilitates 
technology  transfers,  peaked  at  22 %  of  GDP  in 
2005  and  has  moderated  significantly  since  2011 
to above 5 % on average (see Graph 3.4.3).  

Today,  the  Estonian  economy  remains  20 % 
under-capitalised compared to the EU average, 
partly  due  to  the  differences  in  relative  prices  of 
labour and capital inputs, partly due to the sectoral 
composition  (see  Section  3.4.2).  The  gap  in  total 
factor productivity is about 30 %. Hence, Estonia’s 
convergence  challenge  is  to  use  its  scarce  human 
capital  more  productively  while  finding  ways  to 
increasing  both  the  active  population  and  the 
capital/labour ratio in the medium term. 

(44)  Capital intensity increased on average 2 percentage points 
faster in Estonia than in the Euro Area in 2005-2016. 

This figure shows the gap in GDP per capita with the EA19 in 
2016 and its breakdown. The horizontal axis shows the 
percentage gap to the EA19 level. The breakdown is done 
in two steps. First, the GDP per capita gap is broken down 
into contributions from demographic components, labour 
market components and labour productivity. In the second 
step, each of these is further broken down into a number of 
more refined components. The other two panels follow the 
same approach. The next panel depicts the contributions of 
these groups of components to the absolute annual GDP 
growth between 2005 and 2016. Hence, the horizontal axis 
shows percentage point contributions to the absolute 
growth. The third panel also provides the breakdown of 
growth in GDP but in relation to the EA19. The horizontal axis 
shows by how many percentage points each component 
contributed more/less to growth than in the EA19. 
Source: European Commission 

The  main  driver  of  Estonia’s  GDP  growth  in 
2005-2016 has been capital deepening(43), which 
averaged  almost  3 %  a  year.  The  high  rates  of 
people  participating  in  the  labour  market  also 
contributed.  However,  in  contrast  to  most  other 
European  countries,  the  falling  proportion  of  the 
working-age population and net outward migration 
restricted growth in 2005-2016. 

(43)  Capital deepening is the increase in capital per worker. 

27 

-40-2002040GDPTFPCapital intensityInitial education of labourNative populationNet migrationShare of working agepopulationYouth participation25-64 male participation25-64 female participation55-64 Older workerparticipationAverage hours workedLabourproductivityDemographicsLabour market specificcomponent-10123GDPTFPCapital intensityInitial education of labourNative populationNet migrationShare of working agepopulationYouth participation25-64 male participation25-64 female participation55-64 Older workerparticipationAverage hours workedLabour productivityDemographicsLabour market specificcomponent 
 
 
 
                                                           
 
 
                                                           
3.4. Investment 

Graph 3.4.3:  Foreign direct investment, sum of net inflows 

(% of GDP) 

sustained taking into account the allocations under 
the next EU multiannual financial framework.  

Graph 3.4.4:  Investment rates (total) 

Source: IMF, European Commission 

3.4.2.  OVERVIEW OF INVESTMENT 

DEVELOPMENTS 

As in the other Baltic states, the investment rate 
in  Estonia  remained  above  20 %,  a  few 
percentage  points  above  the  EU  average,  in 
2011-2016.  However,  the  investment  rate  has 
declined  significantly  from  the  pre-crisis  years 
when  it  was  above  30 %  (see  Graph  3.4.4).  This 
partly reflects the adjustment that has followed the 
period  of  overheating,  and  can  signal  the  gradual 
maturing of the economy, but it may also indicate 
the existence of investment bottlenecks that hinder 
competitiveness  in  the  long  run  (see  box  3.4.1). 
The  following  analysis  focuses  on  the  assessment 
of relevance of such potential bottlenecks. 

Estonia’s  private  investment  rate  has  been 
about  four  times  above  the  rate  of  public 
investment,  suggesting  that  there  is  no  crowding 
out effect. Indeed, both investment rates have been 
higher  on  average 
the  corresponding 
than 
indicators  for  the  euro  area  (see  Graph  3.4.5).  In 
Estonia,  public  investment  has  one  of  the  highest 
shares  in  GDP  in  the  EU  (see  graph  3.4.5)  where 
EU funds have played an important role amounting 
to  a  significant  share  of  public  investment.  This 
dependency  on  EU  funds was  identified  as a  risk, 
and the Estonian government launched a taskforce 
to  consider  how  its  investment  policy  can  be 

Source: Eurostat 

Graph 3.4.5:  Investment rates (public and private) 

Source: European Commission 

Estonian  manufacturing 
industry  has  been 
specialised in four areas: wood and paper; ICT 
and  electrical  equipment;  food  and  beverages; 
and manufacture of fabricated metal. Together, 
these  four  sectors  have  accounted  for  around  two 
thirds of manufacturing output and exports and for 
about  the  same  share  of  the  total  employment  in 
manufacturing  industries.  According  to  Statistics 
labour  productivity  per  person 
Estonia  data, 
employed 
in  ICT  companies. 
the  highest 
is 
However,  as  a  share  of  value  added,  wood 

28 

7%13%4%Pre-accession (1995-2003)Prior financial crisis (2004-2010)Post financial crisis (2011-2016)1520253035400001020304050607080910111213141516% of GDPEAEstoniaLatviaLithuania05101520253035939597990103050709111315% GDPEE publicEE privateEA privateEA public 
 
 
 
 
 
3.4. Investment 

manufacturing  is  more  significant  as  it  accounts 
for  a  quarter  of  the  value  added,  while  ICT  only 
accounts for 11 %.   

a  recent  Eurobarometer  survey,  a  majority  of 
Estonian  firms  do  not  consider  labour  legislation 
an  obstacle  to  their  business  activity  European 
Commission, 2017c). 

in 

investment 

This  relative  specialisation  in  the  Estonian 
manufacturing  industries  has  changed  very 
little  since  2005  and  consequently,  the  share  of 
investment  in  technology-intensive  assets  in 
GDP  remains  below  the  EU  average.  The  share 
has  increased  recently,  mostly  on  the  account  of 
the  share  of 
information  and 
communications  technology  equipment,  which  in 
the  last  decade  has  been  twice  as  high  in  Estonia 
(1.5 %  of  GDP)  as  in  the  EU.  At  the  same  time, 
investment  in  intellectual  property  products  as  a 
share  of  GDP  increased  broadly  in  line  with  the 
EU  average  but from  a  lower  level (Graph  3.4.6). 
It  reached  2.5 %  of  GDP  in  2016  in  Estonia, 
against 4 % in the EU. As convergence progresses 
and  earlier  investments  start  bearing  fruit,  it  is 
reasonable  to  expect  the  share  of  investments  in 
intellectual property products to become bigger as 
economy structure shifts towards more knowledge- 
and technology intensive activities.  

scores  highly 

Estonia  has  a  business-friendly  regulatory 
landscape  and 
in  many 
international  competitiveness  rankings  (World 
Bank,  2016)  (45).  This  is  particularly  important 
considering  Estonia’s  business  demographics(46) 
and the need to maintain cost competitiveness. The 
areas  where  there  are  no  particular  problems  for 
include  creating  a  business, 
doing  business 
compliance  costs  and  dealing  with  public 
administration. This performance reflects Estonia’s 
investments  in  e-government  and  in  public  sector 
efficiency.  Consequently,  net  business  population 
growth 
the  EU 
average(47).  The  survival  rate  of  Estonian  firms 
after  the  fifth  year  (49 %)  is  also  relatively  high, 
in  central  and 
outperforming  most  countries 
Eastern Europe. 

is  well  above 

in  Estonia 

Graph 3.4.6:  Investment in intellectual property products 

3.4.3.  INVESTMENT CONDITIONS 

Estonia’s  financing  conditions  remain  rather 
favourable  (see  Section  3.2).  Several  institutions 
support access to finance for companies, including 
for  SMEs  and 
for 
innovation and exports. Alternative ways of raising 
capital,  such  as  crowd  financing,  are  also  used  in 
Estonia.  A  lot  of  investment  is  supported  by 
various EU initiatives, such as the European Fund 
for Strategic Investments.  

those  needing 

funding 

seems 
but 

to  be 
Labour  market  regulation 
negative 
conducive 
investment 
to 
demographic  developments  are  a 
strain. 
Estonia’s  labour  market  policy  performs  well  in 
terms  of  activity  and  employment  rates  compared 
to  the  EU  average  (see  Section  3.3).  Employment 
protection  legislation  in  Estonia  does  not  seem  to 
unduly hinder business competitiveness, and there 
is  no 
labour  market  segmentation  between 
temporary  and  permanent  employment  contracts. 
The  recent  Work  Ability  reform  has  removed 
major  disincentives  to  work,  and  though  it  is  still 
being implemented its impact is already visible in 
data showing an increase in activity. According to 

Source: European Commission 

(45)  Estonia ranks 12th out of 190 economies. 
(46)  More than 90 % of  firms  in Estonia are micro enterprises. 
SMEs account for almost 76 % of value added and roughly 
78 % of employment in the country. 

(47)  In 2015 the net business population growth in Estonia was 

2.85 %, against 1 % for the EU. 

29 

012345672007200820092010201120122013201420152016% of GDPEU28EstoniaLatviaLithuaniaFinlandSweden 
 
 
 
 
                                                           
3.4. Investment 

Box 3.4.1: Investment challenges and reforms in Estonia 

Macroeconomic perspective 
Estonia's ratio of investment to GDP is above the EU average, but it has trended down over recent 
years  compared  to  pre-crisis  levels.  While  investments  picked  up  strongly  in  2017,  capital 
intensity's contribution to GDP per capita in Estonia was about 20 % below the level in the euro 
area average in 2016 (see Section 3.4.1). The rise in investments in 2017 was due to a peak in the 
EU funds absorption cycle. Estonia invests more than the EU average in ‘other construction’ and 
‘machinery and equipment’. Estonia invests 40 % less than the EU average in the ‘other’ category, 
which includes investment in intangible assets. 

Structural barriers to investment 

Some barriers to investment were identified in Estonia, as outlined in the table below: 

1) Labour and skill shortages are considered a barrier to higher investment in fast growing sectors. 
Shortages of certain skill types (IT skills) are more acute in a few sectors, for example in ICT (see 
Section 3.3.4). Estonia is taking holistic approach to close the skills gaps and address the structural 
shortages  in  labour  supply.  These  are  all  steps  in  the  right  direction  but  their  impact  has  been 
limited. 

2) Investment in activities with higher value added remains an issue. The Commission analysis on 
investment  barriers  highlighted  limited  cooperation  between  businesses  and  academia  and  low 
RDI  private  investment.  Estonia  introduced  measures  to  address  these  issues,  but  their 
effectiveness cannot yet be assessed (see Section 3.5.1). 

3)  The  Commission  analysis  highlighted  the  lengthy  insolvency  procedures  as  an  institutional 
barrier  that  might  hamper  investment.  The  review  of  the  insolvency  framework  is  under  way, 
including a complementary project related to early warning and pre-insolvency (see Section 3.4.3).  

insolvency  procedures  hinder  the 
Lengthy 
efficient  reallocation  of  resources.  Estonia's 
insolvency  framework  is  relatively  strong,  but 
insolvency 
and 
cumbersome,  and  this  has  been  identified  as  a 
weakness.  Lack  of  early  intervention,  notably  by 
creditors, results in a low recovery rate and slows 
down  the  reallocation  of  resources  and  business 

procedures 

lengthy 

are 

lack  of  national  rules  and 
dynamism.  The 
procedures for companies to directly transfer their 
registered offices into and out of Estonia weakens 
the business environment. 

30 

Regulatory/ administrative burdenTaxationPublic administrationAccess to financePublic procurement /PPPsCooperation btw academia, research and businessCSRJudicial systemFinancing of R&D&IInsolvency 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 addressedNot assessed yetPublic administration/ Business environmentFinancial Sector / TaxationR&D&ISector specific regulationLabour market/ Education 
                                                                                                                                                               
 
3.4. Investment 

combined with the tightening of the labour market 
and the minimum wage hikes of the last years have 
put  constant  pressure  on  nominal  wages.  Since 
2012,  this  has  accelerated  the  growth  rate  of  the 
compensation  of  employee  beyond 
that  of 
productivity  leading  to  increasing  nominal  unit 
labour  cost.  Moreover,  since  2012,  nominal  wage 
growth  has  been  above  the  rates  that  would  be 
consistent  both  with 
labour  market 
conditions  and  with  a  stable  evolution  of  cost 
competitiveness (Graph 3.4.8).   

internal 

Real wage growth in Estonia is partly driven by 
a  catching-up  process.  Starting  from  a  relatively 
low  wage  level,  Estonia  is  one  of  the  countries 
(together with the other Baltic States, Bulgaria and 
Romania),  which  have  witnessed  rapid  real  wage 
growth since 2000 that can be attributed in part to 
convergence  with  the  other  EU  economies.  In  the 
first  half  of  2017  the  growth  in  productivity 
exceeded  that  in  real  wages  for  the  first  time  in 
several years.  

Overall, the rise in unit labour costs has  so far 
not  significantly  hit  exports.  Exports  have 
expanded  in  line  with  global  demand  over  recent 
years. In industries where Estonia is a price-taker, 
labour  cost  hikes  have  been  absorbed  to  some 
extent  by  reducing  profits  and  by  the  favourable 
price  developments  in  the  export  markets.  In 
industries  where  Estonia  has  gained  market  share 
in  technology-intensive  niche  markets(48),  it  has 
gained  an  advantage.  Sustaining  that  advantage 
will not be possible without further investments in 
R&D  and  in  human  capital  to  ensure  that  labour 
productivity and competitiveness are increasing.  
The  full  effect  of  ageing  will  kick  in  more 
strongly  over  the  coming  year.  Most  likely,  it 
will  exert  an  upward  pressure  on  wages.  A 
continuous  rise  in  unit  labour  costs  over  the 
coming  years  can  have  more  visible  negative 
effects on the economy. 

(48)  A  study  recently  conducted  by  the  Ministry  of  Economic 
Affairs  and  Communications 
the  GDP 
contributions  generated  by  exports  can  vary  significantly 
depending  on  the  amounts  of  imported  intermediates  and 
the added value created in the country. Statistics many not 
fully accurately account for the technology used. 

found 

that 

Graph 3.4.7:  Resolving insolvency indicators 

Source: World Bank 

Estonia  is  a  leader  in  applying  e-procurement 
solutions  but  the  strategic  use  of  tendering 
procedures  is  still  limited.  Estonia  is  actively 
using  e-procurement  and  plans  to  integrate  the 
European  Single  Procurement  Document  into  the 
national  system.  However,  the  use  of  quality 
criteria for evaluating public tenders is still scarce. 
The main award criterion in about 76 % of public 
procurement  procedures  remains  the  lowest  price 
rather 
innovation  (European 
Commission, 2018a). 

than  quality  or 

Measures  have  been  taken  to  strengthen  the 
Estonian  start-up  ecosystem.  The  government 
introduced  a  new  visa  programme  for  non-EU 
entrepreneurs  who  wish  to  establish  their  start-up 
company in the country. The visa can be issued for 
up  to  one  year  and  extended  for  up  to  6  months. 
Those  who  want  to  stay  longer  can  apply  for  a 
temporary  residence  permit  for  entrepreneurship. 
The visa can also be used by Estonian start-ups to 
attract and employ foreign talent thus limiting the 
impact of labour shortages in some sectors. 

3.4.4.  PRODUCTIVITY AND LABOUR COST 

DEVELOPMENTS   

Structural and cyclical factors continue to push 
wages  up.  The  favourable  economic  outlook 

31 

01020304050607080901000510152025IESIBEFIDKUKATNLDECYLVESITFRHULUSECZLTEEMTPLPTHRBGROELSKTime, yearsCost, % of estateRecovery rate, % (rhs) 
 
 
                                                           
3.4. Investment 

Graph 3.4.8:  Nominal wage growth in Estonia in comparison 

with wage benchmarks 

Nominal wage growth is increasing faster than predicted by 
two different benchmark models taking into account 
fundamental developments (e.g. inflation, productivity, unit 
labour costs, real economic exchange rate etc.). 
Source: Update of Arpaia and Kiss (2015) 

32 

-10-5051015202530990001020304050607080910111213141516%Prediction based on inflation, productivity andunemploymentWage growth consistent with constant ULC-basedREERActual nominal wage growth 
 
 
3.5.    SECTORAL POLICIES 

3.5.1.  R&D AND INNOVATION  

The  full  potential  of  Estonia’s  research  and 
innovation  (R&I)  system  remains  underused. 
The country has implemented several measures to 
boost  the  growth  of  the  knowledge  economy,  but 
the challenge is to maximise their impact. There is 
a  good  variety  of  higher  education,  research  and 
technology-enabling institutions  and  infrastructure 
in  place(49).  However,  weak 
links  between 
business  and  science,  low  private  investment  in 
R&D,  the  quality  of  scientific  output  and  the 
supply  of  human  capital  and  skills  are  key 
bottlenecks  to  expanding  Estonia’s  innovation 
capacity. 

Supported by EU funds, Estonia’s public R&D 
intensity,  at  0.6 %  of  GDP,  has  been  generally 
above  the  EU  average.  The  government  has 
increased  the  national  budget  for  R&D  in  recent 
years, a trend that will continue in 2018. However, 
50 %  of  government  R&D  expenditure  comes 
from  the  EU’s  Structural  Funds(50)  and  this 
dependence  may  become  vulnerability  in  the 
future. 

Estonia  is  a  ‘moderate  innovator’  with  an 
innovation  performance 
that  has  recently 
worsened  compared  to  its  EU  peers(51).  This 
decline is due to the low share of innovative SMEs 
and decreasing academia-business and business-to-
business  links.  Estonia’s  relative  strengths  are  in 
tertiary  education 
in  R&I, 
public 
attainment and an innovation-friendly environment 
(see Section 3.4.3.). 

investment 

Estonia  benefits  from  an  open  public  R&I 
system,  but  the  system’s  efficiency  seems  to  be 
an  issue,  at  least  in  the  short  term.  Estonia 
performs strongly on international cooperation (52), 
and  the  number  of  foreign  doctoral  students  more 
than  tripled  between  2008  and  2017  to  17.1 %. 

(49)  Estonia  has  7  universities,  4  private  R&D  institutions  and 
11  public  research  organisations.  In  addition,  there  are  3 
Science and Technology Parks, 6 competence centres, and 
22 technology clusters at different level of maturity. 

(50)  Estonia’s R&I strategy for 2014-2020 states that Structural 
Funds  will  be  used  particularly  to  implement  structural 
change.  By  contrast,  the  activities  that  require  continuous 
financing (such as the operating cost of R&D institutions) 
are being financed from state revenue. 
(51)  See the European Innovation Scoreboard. 
(52)  e.g Estonia ranks sixth in the EU on international scientific 

co-publications. 

However,  the  quality  of  its  scientific  outputs  as 
measured by the most-cited publications is low(53) 
(see  Graph  3.5.1).  Since  2016, 
the  ASTRA 
programme(54)  is  supporting  the  evaluation  and 
rationalisation  of  financing  for  the  public  R&I 
system  through,  for  example,  several  mergers  of 
higher  education  and  research  institutions(55).In 
terms  of  funding,  in  2017  over  EUR  22  million 
were earmarked to strengthen higher education and 
research  institutions.  Over  the  following  years, 
research 
received  an 
additional  EUR  16.9  million  for  non-competitive 
funding to reduce their current overdependence on 
competitive  grants  versus  basic  funding  for 
research  and  higher  education  institutions,  and  to 
improve the longer-term sustainability of the R&D 
system. 

institutions  will  have 

in 

science 

and  graduates 

The  shortage  of  people  involved  in  R&I  is  a 
cause  of  major  concern.  The  number  of  new 
and 
doctorates 
engineering has decreased since 2013 to below the 
EU  average(56),  which 
is  worrisome.  The 
government  has  put  in  place  several  measures  to 
improve  the  working  conditions  of  researchers, 
promote research careers and attract foreign talent 
(57).In  addition,  Estonia  is  increasingly  using 
funding  from  the  European  Strategic  Investment 
Fund to strengthen its human capital (See box 2.1). 

(53)  Estonia is 19th in the EU in terms of number of scientific 
publications  ranked  among 
top  10%  most-cited 
worldwide  publications,  but  it  is  12th  in  terms  of  public 
R&D spending as a percentage of GDP. 

the 

(54)  ASTRA  is  the  institutional  development  programme  for 

R&D institutions and higher education institutions. 

(55)  Some  examples  of  mergers  in  2017:  i)  The  Estonian 
Biocentre  (EBC)  became  part  of  Tartu  University;  ii) 
Tallinn University of Technology and IT College merged. 
(56)  The number of new doctoral graduates per thousand people 
aged  25-34  decreased  from  1.13  in  2014  to  1.09  in  2015. 
The corresponding figure for new graduates in science and 
engineering declined from 15.7 in 2013 to 14.5 in 2015. 
(57)  Thirteen  high-level  researchers  have  been  attracted  to 
Estonia through the Mobilitas Pluss Top Researcher grants. 

33 

 
 
                                                           
                                                           
3.5. Sectoral policies 

is  well  below 

performance  on  academia-business  cooperation 
remains  weak  and 
the  EU 
average(59).  The  NUTIKAS  programme  was 
launched in 2015 to raise the capabilities of firms 
to  carry  out  applied  research.  It  aims  to  involve 
200 companies by 2023. Although interest appears 
to  be  growing  among  businesses,  only  21 
companies  received  a  grant  in  2017.  Use  of  other 
measures, such as support for public procurement, 
is also picking up slowly. 

Graph 3.5.2:  R&D expenditure and sector of performance 

and source of funds (2015) 

Graph 3.5.1:  Highly-cited publications(*) 

* Scientific publications within the 10 % most-cited scientific 
publications worldwide as % of total scientific publications of 
the country, versus public R&D intensity (government 
expenditure on R&D plus higher education sector 
expenditure on R&D as % of GDP). 
Source: European Commission 

in 

increased 

investment 

With  less  than  0.5 %  of  Estonian  companies 
reporting  research  activities  in  2016,  private 
R&D intensity is only 0.7 % of GDP — half the 
EU  average  of  1.3 %.  The  low  level  of  R&D 
conducted by businesses may reflect the low share 
technology  and  knowledge-intensive 
of  high 
companies 
economy.  The  highest 
the 
the  ICT, 
expenditure  on  R&D  comes  from 
manufacturing  and  energy  sectors.  Some  of  these 
sectors  have 
in  R&D: 
manufacturing  by  39 %,  electronic  products  and 
equipment  by  80 %  and  services  by  13 %  from 
2014  to  2015(58).  To  leverage  business  R&D 
investments  and  upgrade 
technological 
capacity of the Estonian economy, the government 
provides  support  for  businesses  to  participate  in 
technology  development  centres  and  clusters.  It 
also provides support for promoting investment in 
technology  (with  a  budget  of  EUR  3  million).  In 
‘ADAPTER’  platform  supports 
addition, 
Estonian  firms  engaging  in  research  projects  with 
universities.  Fourteen  projects  have  been  signed 
since its launch in 2016. 

the 

the 

The mismatch between the needs of the business 
sector  and  the  limited  provision  of  knowledge 
from  the  public  research  system  continues  to 
hamper Estonia’s innovation capacity. Estonia’s 

(58)  2015 OECD ANBERD indicator: business enterprise R&D 

broken down by industry. 

Source: European Commission (Eurostat) 
Bars indicate the sector of performance and the colours – 
the source of funding.  

Insufficient  prioritisation  of  public  R&D  and 
innovation  investment  remains  a  challenge. 
Estonia  has  made  some  progress  in  re-launching 
the process of identifying and refining its specific 
competitive  advantages  and  facilitating  market 
opportunities  in  international  value  chains.  The 
eventual aim of the process is to match the public 
R&D  and  innovation  investment  better  with  these 
advantages  and  opportunities.  The  country  would 
benefit  from  a  sustained  effort  to  implement  and 
refine  its  ‘smart  specialisation’  approach,  which 
aims  at  the  continuous  transformation  of  its 

(59)  Public  expenditure  on  R&D  financed  by  domestic 
businesses  represents  0.036 %  of  GDP 
in  Estonia, 
compared with an EU average of 0.052 %. In addition, with 
0.1 % of public-private scientific co-publications as a % of 
the  total  number  of  publications  in  2015,  Estonia  is  well 
below the EU average of 2.8 %. 

34 

EUBEBGCZDKDEEEIEELESFRHRITCYLVLTLUHUMTNLATPLPTROSISKFISEUK36912150.20.40.60.81.01.2Highly-cited publications(%), 2014Public R&D intensity, 20140.00.10.20.30.40.50.60.70.8% of GDPBusiness, enterprisesGovernment sectorAbroad 
 
 
                                                           
 
 
                                                           
3.5. Sectoral policies 

productive 
innovation. 

structures 

through 

research  and 

areas  by  2018.  Once  completed,  98 %  of  all 
households,  businesses  and  institutions  in  Estonia 
should be located no further than 1.5 km from the 
nearest network access point. 

3.5.2.  DIGITAL ECONOMY AND SOCIETY 

technologies  by 

The  rapid  uptake  of  digital  technology  by  the 
public  sector  continues.  Estonia  is  one  of  the 
most advanced countries in Europe in the adoption 
of  digital 
the  government. 
According  to  the  Digital  Scoreboard  (European 
Commission,  2018a),  it  is  the  best  performer  in 
digital public services and e-government. It scores 
above the EU average on the public’s digital skills 
and  use  of  the  internet.  Estonia  has  been  at  the 
forefront  of  online  public  services  for  several 
e-
years.  Remarkably, 
government users, at 78 %, is more than double the 
EU average (see box 3.5.1). 

the  proportion  of 

On  the  other  hand,  the  private  sector  is 
performing  less  well  and  the  digitalisation  of 
companies  is  one  of  the  key  challenges.  Despite 
there  being  some  very  dynamic  start-ups,  the 
traditional  economic  sectors  are  not  making  the 
most  of  the  opportunities  of  a  digital  business 
model.  One  of  the  reasons  is  the  difficulty  they 
face  in  recruiting  people  with  appropriate  digital 
skills.  Estonian  companies  are  lagging  behind  in 
the use of ICT. This is reflected in the proportion 
of 
are 
automatically  linked  to  those  of  their  suppliers 
and/or  customers,  the  proportion  of  company 
turnover  from  e-commerce  and  the  percentage  of 
firms  with  broadband  access.  However,  SMEs 
have  made  some  significant  progress.  The 
proportion  of  SMEs  selling  online  is  increasing 
and e-commerce turnover is above the EU average 
(10.7 %  against  9.4 %),  although  there  are  still 
only a few selling online across Estonia’s borders. 

firms  whose 

processes 

business 

Some  progress  has  been  achieved  on  digital 
infrastructure.  The  proportion  of  households 
covered  by  fixed  broadband  (at  91 %)  has 
improved  but  is  still  well  below  the  EU  average 
(98 %).  At  present  only  one  third  of  the  internet 
subscriptions  is  to  fast  broadband,  compared  with 
37 %  at  EU  level.  This  mainly  illustrates  the 
urban-rural  digital  divide.  The  lack  of  fixed 
broadband coverage in rural areas is being tackled 
through  the  EstWin  project.  This  aims  to  build  a 
total  of  6 600  km  of  backhaul  networks  in  rural 

the 

income 

facilitate  and  simplify 

Estonia  has  put  in  place  measures  to  facilitate 
use  of  the  collaborative  economy,  starting  with 
the  transport  sector.  A  draft  new  law  intends  to 
lower  the  administrative  burden  for  mediating 
platforms.  Furthermore,  the  Estonian  authorities 
have struck cooperation agreements with platforms 
to 
tax 
declaration  for  drivers  and  collection  of  the  tax 
from  them.  With  the  drivers’  consent,  platforms 
send  electronically 
tax 
authorities  to  minimise  administrative  burden  for 
the  drivers(60).  It  will  also  be  possible  for  service 
providers  to  open  a  special  business  account  in  a 
bank from which the relevant contributions would 
be  automatically  transferred  to  the  tax  authorities. 
According to 2017 Eurostat survey results, 20 % of 
Estonians  booked  transport  services  from  another 
private  individual  online,  which  is  one  of  the 
highest shares in the EU. 

related  data 

the 

to 

3.5.3.  ENERGY, CLIMATE AND ENVIRONMENT 

Estonia has a relatively high share of solid fuels 
in  its  energy  mix  due  to  domestically  mind  oil 
shale  (61)  which  is  used  for  producing  shale  oil 
and electricity. Consequently, it has a very low 
the  second  most 
import  dependency  and 
energy-intensive  economy  in  the  EU.  The  share 
of  renewable  energy  in  gross  inland  consumption 
is  28.8 %,  putting  Estonia  already  above  its  25 % 
target  for  2020,  mainly  due  to  its  use  of  biomass 
for electricity and heating. 

Estonia  is  well  on  track  to  meet  its  2020 
greenhouse gas emission reduction target. It has 
decided  to  reduce  greenhouse  gas  emissions  by 
70 %  by  2030,  to  increase  renewable  energy 
production  to  50 %  of  final  energy  consumption 
and  to  maintain  final  energy  consumption  at  the 
2010 level. 

(60)  Study  on  passenger  transport  by  taxi,  hire  car  with  driver 
and  ridesharing  in  the  EU,  2016,  Annex  III,  available  at 
https://ec.europa.eu/transport/modes/road/studies/road_en, 
see page 230. 

(61)  See  e.g.  OECD  Environmental  Performance  Reviews: 

Estonia 2017. 

35 

 
                                                           
3.5. Sectoral policies 

Box 3.5.1: Policy highlights:  e-governance 

Estonia has been at the forefront of online public services for a few years and it has probably the most joined 
up digital government in the world. Its use of ICT in public sector allows 99% of the public services to be 
available online 24/7. (1) 

The  success  in  converting  public  services  online  is  mainly  based  on  the  widespread  use  of  electronic 
identification cards and the creation of a digital information infrastructure: the X-Road a secure internet data 
exchange  layer  that  allows  decentralised  databases  and  information  systems  to  communicate  with  each 
other. X-Road parties share information to produce services that people can access with their e-ID. 

The flexibility provided by this open set-up has allowed new components to be added over the years. The 
system is fed with information from both public (i.e. population register, health insurance register, vehicle 
register,  etc.)  and  private  sector  (mainly  energy,  telecom  and  banks)  and  allows  the  Estonians  to  exploit 
services  including  i-voting,  tax  filling,  online  medical  prescriptions  but  also  signing  a  binding  contract  or 
opening a bank account via mobile phone from anywhere in the world.  

After a slow start, as for many technological innovations, the diffusion of the use of ID-card has increased 
over  time  to  get to  more than  80  million  usages  in  2014  (an average  annual increase  of  about  7.4  million 
authentications, and about 3.5 million signatures). The system total number of services offered through the 
X-Road has also widespread to 1600 from 40 in 2003. 

On top of the easy availability of the services, the process implies efficiency improvements that allows for 
large gains in terms of money and time saved by the users as well as public officials. For example, filling a 
tax  declaration  takes  5  minutes  and  a  refund  is  issued  within  a  maximum  of  5  working  days  for  non-
problematic tax returns (compared to 3 to 6 months for paper declaration). Not surprising 95% of income 
taxes are provided online.  

More in general, the World Bank has quantified the time savings coming from the adoption of the X-Road 
into an impressive 2.8 million total hours for 2014, or 3225 years. Other ways stated the productivity gain 
from the eGovernment is equivalent to 3225 people working 24/7 for a whole year. (2) 

(1)  See https://e-estonia.com/solutions/e-governance/state-e-services-portal/  
(2)  See  WB  (2016)  Estonian  e-Government  Ecosystem:  Foundation,  Applications,  Outcomes  background  paper  to  the 
world development repost 2016: Digital dividends. The estimate reflects a resident- government interaction that would 
have taken 15 minutes (conservative assumption) if made in person. By varying the pre-query threshold (from 5 minute 
to an hour), the time savings ranges from about 1000 to 12000 years. 

Estonia’s  energy  efficiency  is  improving  but 
there  remains  major  energy-saving  potential, 
particularly 
in  the  residential  and  energy 
distribution  sectors.  According  to  the  Energy 
Union  factsheet,  Estonia  has  achieved  its  national 
energy  efficiency  targets.  It  has  made  some 
progress  on  a  number  of  legislative  initiatives  to 
improve energy efficiency. Public subsidy schemes 
are  currently  being  developed,  including  a  new 
scheme  to  subsidise  the  renovation  of  district 
heating  systems.  Support  projects  include  the 
renovation of district heating distribution networks 
and facilities all over Estonia. Energy communities 
in Estonia can play a major role in helping achieve 
its national energy efficiency targets.  

integrating 

The completion of key electricity infrastructure 
projects  in  the  Baltic  states  has  brought  the 
region  lower  prices  and  better  security  of 
supply. As part of the implementation of the Baltic 
Energy  Market  Interconnection  Plan  a  number  of 
cross-border  and  domestic  infrastructure  projects 
have  been  completed  across  the  Baltic  states, 
essentially 
the  Nordic 
electricity  market  (European  Commission,  2017).. 
The  increased  capacity  of  the  Estonia-Latvia 
interconnection will benefit the electricity markets 
of  Estonia  and  the  other  Baltic  states  alike. 
Synchronising  their  grids  with  continental  Europe 
is  a  common  strategic  goal  of  all  three  Baltic 
states.  The  main  aim  of  the  synchronisation  is  to 
increase  the  security  of  supply  and  contribute  to 
achieving a fully integrated internal energy market. 

them  with 

36 

 
 
3.5. Sectoral policies 

Implementing  the  project  will  be  the  region’s 
biggest  challenge  in  the  area  of  energy  in  the 
coming years. 

Graph 3.5.4:  Market concentration index for power 

generation 

Graph 3.5.3:  Wholesale electricity prices 

Source: EC Commission, based on Platts and European 
power exchanges 

Progress  in  developing  a  regional  natural  gas 
market  has  been  slower  than  for  electricity. 
Wholesale  gas  prices  in  Estonia  have  declined  in 
the  last  few  years  but  remain  higher  than  EU 
average prices partly due to a lack of competition 
in the region. It is expected that competition in the 
gas market will improve once the broader regional 
gas  market  is  established.  The  Klaipeda  LNG 
terminal  provides  Estonia  with  access  to  an 
alternative  source  of  gas  supply and  so  has  ended 
its  previous  isolation  in  the  gas  sector.  There  are 
plans to develop more projects in the coming years 
in order to further increase security of supply and 
integration of the region’s markets. 

Source: EC Commission, based on ENTSOE Winter Outlook 
2016/2017 

Estonia is not on track to meet the current EU 
waste  targets  or  create  a  ‘recycling  economy’ 
where  only  residual  waste  is  incinerated.  There 
is  clear  scope  to  further  improve  the  separate 
collection of waste, in particular by extending it to 
organic  waste  and  waste  for  recycling.  Economic 
instruments,  such  as  an  incineration  tax,  could 
make  recycling  a  more  economically  feasible 
option.  

led 

infrastructure  upgrades  have 

In transport the challenge is to introduce more 
sustainable  and  intelligent  solutions.  In  rail 
passenger transport, the introduction of new trains 
and 
to  a 
remarkable increase in rail passenger travel (more 
than  50 %  since  2013).  In  the  medium  term,  the 
Rail  Baltica  project  will  remain  an  important 
investment for the whole region. The updated cost-
benefit  analysis  of  the  project,  delivered  in  April 
2017,  confirmed  the  positive  expected  impact  on 
economic  growth  in  the  region,  as  well  as  on  the 
environment  due  to  the  modal  shift  from  road  to 
rail. 

37 

45.543.238.733.105101520253035404550EU28EEEUR/MWh20132016relative change 2013-2016 (%)-15%                                -23%49109054372671340200040006000800010000EU28EE20052015relative change2005-2015 (%)-24%-21%           
 
 
ANNEX A: OVERVIEW TABLE 

Commitments  

Summary assessment ( [1] )  

2017 Country-specific recommendations (CSRs)  

CSR  1:  Pursue  its  fiscal  policy  in  line 
with  the  requirements  of  the  preventive 
arm  of  the  Stability  and  Growth  Pact, 
which  entails  remaining  at  its  medium-
term  budgetary  objective 
in  2018. 
Improve the 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.  

Pursue  its  fiscal  policy  in  line  with  the 
requirements of the preventive arm of the 
Stability  and  Growth  Pact,  which  entails 
remaining  at  its  medium-term  budgetary 
objective in 2018. 

Improve the adequacy of the social safety 
net. 

Take  measures  to  reduce  the  gender  pay 
gap,  

Estonia has made Some Progress in addressing CSR 1 

This  overall  assessment  of  CSR  1  does  not  include  an 
assessment of compliance with the Stability and Growth Pact. 

The  compliance  assessment  with  the  Stability  and  Growth 
Pact  will  be  included  in  Spring  when  final  data  for  2017  is 
available.  

Some Progress Some steps are being taken to provide more 
adequate  pension  for  pensioners  living  alone,  higher  and 
more  flexible  subsistence  allowance  and  higher  family 
allowances.  Despite  recent  measures,  social  safety  nets  still 
do  not  provide  adequate  income  support  and  the  increasing 
share  of  the  population  at  risk-of-poverty  is  a  concern.  The 
actual impact of the recent reforms therefore requires proper 
monitoring  and  assessment.  The  inadequacy  of  financing  is 
the  highest  for  pensions,  disability  benefits  and  long-term 
care services.  

Some Progress Some progress was made regarding reducing 
the  gender  pay  gap.  Modifications  to  the  parental  leave 
system and parental benefits were adopted by the Parliament, 
implementation from 2018 onwards in steps. Amendments to 
improving 
the  Gender  Equality  Act  with  a  view 
transparency  of  wages  are  planned  to  be  adopted  by  the 
government in Spring 2018.  

to 

particular 
in 
transparency and  

by 

improving  wage 

Limited  Progress  Amendments  to  the  Gender  Equality  Act 
with a view to improving transparency of wages are planned 
to be adopted by the government in Spring 2018.  

reviewing the parental leave system.  

Some  Progress  Modifications  to  the  parental  leave  system 
and  parental  benefits  were  adopted  by  the  Parliament, 
implementation from 2018 onwards in steps.  

38 

 
 
 
 
 
A. Overview Table 

Commitments  

Summary assessment ( [1] )  

technology 

investment, 
CSR  2:  Promote  private 
innovation, 
and 
research, 
including  by  implementing  measures  for 
strengthening 
cooperation  between 
academia and businesses.  

the 

Estonia has made Some Progress in addressing CSR 2  

Promote 
private 
technology and innovation,  

investment, 

research, 

Some  Progress  Estonia  put  in  place  various  measures  to 
increase the potential for private investment but the impact 
of these measures to date has been limited.  

including  by  implementing  measures  for 
strengthening 
cooperation  between 
academia and businesses.  

the 

Some  Progress  Measures  were  put  in  place  and  their 
implementation is on the way, but it is not yet possible to 
assess the effectiveness of the new measures compared to 
the earlier measures.  

Europe  2020 
progress)  

(national 

targets  and 

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.  

The  target  was  already  reached  in  2015  (76.5 %)  and 
maintained in 2016 (76.6 %). 

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

In 2016, R&D investment in Estonia decreased to 1.28 % 
of  GDP,  down  from  1.49  %  in  2015,  and  remains  below 
the EU average of 2 % of GDP.  

Non-ETS  greenhouse  gas  emissions  target: 
11% (compared with 2005 emissions)  

Business  enterprise  expenditure  in  R&D  also  decreased 
slightly from 0.69 in 2015 to 0.66% in 2016. Private R&D 
intensity continues to be far from the National target (2% 
of GDP) and the EU average (1.31% of GDP in 2016). 

7.6%.  Based  on  currently  available  data  non-ETS 
emissions  were  increased  by  7.6%  between  2005  and 
2016, which is above the interim target. According to the 
latest  national  projections  submitted  to  the  Commission 
and taking into account existing measures, the 2020 target 
is  expected  to  be  met  by  a  small  margin  of  0.3%  points. 
Source:  EC  and  EEA;  2016  data  based  on  approximated 
inventory  data,  2020  data  based  on  projections  with 
existing measures 2017 submission. 

Renewable energy target: 25% 

28.8% (2016; Eurostat). Efforts might be needed to avoid 
the decline of indicator. 

Energy  efficiency:  absolute  level  of  primary 
energy consumption of 6.5 Mtoe 

6.13 (2016; Eurostat). 

39 

 
A. Overview Table 

Commitments 

Summary assessment ( [1] )  

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. 

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

In 2016 the rate (10.9) improved  the from 2015 (12.2 %) 
and further efforts could help achieve the target.  

In 2016, the rate was 45.4 %.  

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). 

The number of people at risk of poverty in 2016 remained 
unaltered.  The  national  poverty  reduction  target  of  15 % 
continues to be very challenging. 

At-risk-of-poverty rate (survey year): 2016: 21.7 % 

2014:21.8 %, 2015: 21.6 % 

([1])  The  following  categories  are  used  to  assess  progress  in  implementing  the  2017  country-specific 
recommendations (CSRs): 

No  progress:  The  Member  State  has  not  credibly  announced  nor  adopted  any  measures  to  address  the  CSR.  This 
category covers a number of typical situations, to be interpreted on a case-by-case basis taking into account country-
specific conditions. They include the following: 
 no legal, administrative, or budgetary measures have been announced in the national reform   programme, 

 in any other official communication to the national Parliament/relevant parliamentary committees or the European 
Commission,  

publicly (e.g. in a press statement or on the government's website);  

no non-legislative acts have been presented by the governing or legislative 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  to  be  taken  (unless  the  CSR  explicitly  asks  for  orientations  or  exploratory 
actions). However, it has not proposed any clearly-specified measure(s) to address the CSR. 

Limited progress: The Member State has: 

announced certain measures but these address the CSR only to a limited extent; and/or 

presented  legislative  acts  in  the  governing  or  legislative  body  but  these  have  not  been  adopted  yet  and  substantial 
further, non-legislative work is needed before the CSR is implemented;  

presented non-legislative acts, but has not followed these up with the implementation needed to address the CSR. 

Some progress: The Member State has adopted measures  

that partly address the CSR; and/or  

that address the CSR, but a fair amount of work is still needed to address the CSR fully as only a few of the measures 
have  been  implemented.  For  instance,  a  measure  or  measures  have  been  adopted  by  the  national  Parliament  or  by 
ministerial decision, but no implementing decisions are in place. 

Substantial progress: The Member State has adopted measures that go a long way towards addressing the CSR and 
most of them have been implemented. 

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

40 

 
 
ANNEX B: MACROECONOMIC IMBALANCE PROCEDURE 

SCOREBOARD 

Table B.1: 

The MIP scoreboard for Estonia (AMR 2018) 

1) This table provides data as published under the Alert Mechanism Report 2018, which reports data as of 24 Oct 2017. Please 
note that figures reported in this table may therefore differ from more recent data elsewhere in this document. 2) 
Unemployment rate:  i = Eurostat back-calculation to include 2011 Population Census results. 3) Youth unemployment rate: i = 
Eurostat back-calculation to include 2011 Population Census results. 
Source: European Commission 2017, Statistical Annex to the Alert Mechanism Report 2018, SWD(2017) 661. 

41 

Thresholds201120122013201420152016Current account balance, % of GDP 3 year average-4%/6%1.9 0.4 0.0 -0.4 0.9 1.4 Net international investment position% of GDP-35%-54.8 -51.1 -50.1 -46.9 -39.8 -37.1 Real effective exchange rate - 42 trading partners,                  HICP deflator3 year % change±5% (EA) ±11% (Non-EA)-0.8 -3.6 3.1 4.8 5.9 4.5 Export market share -                 % of world exports5 year % change-6%24.5 7.3 10.2 20.4 7.9 -0.7 Nominal unit labour cost index (2010=100)3 year % change9% (EA) 12% (Non-EA)-2.6 0.0 9.1 14.0 13.5 13.4 House price index (2015=100), deflated 1 year % change6%2.7 3.2 7.5 13.0 7.1 3.8 Private sector credit flow, consolidated% of GDP14%-1.1 6.8 3.5 5.7 3.0 5.9 Private sector debt, consolidated% of GDP133%120.4 117.8 115.9 118.0 115.2 115.4 General government gross debt% of GDP60%6.1 9.7 10.2 10.7 10.0 9.4 Unemployment rate3 year average10%14.2 13.0 10.3 8.7 7.4 6.8 Total financial sector liabilities, non-consolidated1 year % change16.5%-0.6 10.4 10.4 13.1 8.7 7.2 Activity rate - % of total population aged 15-643 year change in pp-0.2 pp0.5 0.8 1.2 0.5 1.9 2.4 Long-term unemployment rate - % of active population aged 15-743 year change in pp0.5 pp5.4 1.8 -3.8 -3.8 -3.1 -1.7 Youth unemployment rate - % of active population                aged 15-243 year change in pp2 pp10.4 -6.5 -14.2 -7.4 -7.8 -5.3 External imbalances and competitivenessInternal imbalancesEmployment indicators 
 
 
 
 
 
 
 
 
ANNEX C: STANDARD TABLES 

Table C.1: 

Financial market indicators 

1) Latest data Q3 2017. Includes not only banks but all monetary financial institutions excluding central banks 
2) Latest data Q2 2017. 
3) As per ECB definition of gross non-performing debt instruments 
4) 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). 

42 

201220132014201520162017Total assets of the banking sector (% of GDP)1)109.7105.4108.5114.2117.1107.7Share of assets of the five largest banks (% of total assets)89.689.789.988.688.0-Foreign ownership of banking system (% of total assets)2)96.495.795.194.293.492.2Financial soundness indicators:2)              - non-performing loans (% of total loans)3)3.01.92.61.91.51.9              - capital adequacy ratio (%)23.223.141.835.434.435.9              - return on equity (%)4)11.710.79.76.811.15.6Bank loans to the private sector (year-on-year % change)1)-0.42.74.59.39.51.6Lending for house purchase (year-on-year % change)1)0.21.22.94.55.56.8Loan to deposit ratio1)134.4128.9124.0122.1122.5120.3Central Bank liquidity as % of liabilities1)--0.30.40.40.4Private debt (% of GDP)117.8115.9118.0115.2115.4-Gross external debt (% of GDP)2) - public7.07.68.07.27.16.5    - private49.447.449.346.043.741.6Long-term interest rate spread versus Bund (basis points)*------Credit default swap spreads for sovereign securities (5-year)*101.358.657.158.358.555.6 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
C. Standard Tables 

Table C.2: 

Headline Social Scoreboard indicators 

The Social Scoreboard includes 14 headline indicators, of which 12 are currently used to compare Member States 
performance. The indicators "participants in active labour market policies per 100 persons wanting to work" and 
"compensation of employees per hour worked (in EUR)" are not used due to technical concerns by Member States. Possible 
alternatives will be discussed in the relevant Committees. 
(1) People at risk of poverty or social exclusion (AROPE): individuals who are at risk of poverty (AROP) and/or suffering from 
severe material deprivation (SMD) and/or living in households with zero or very low work intensity (LWI).       
(2) Unemployed persons are all those who were not employed but had actively sought work and were ready to begin 
working immediately or within two weeks.       
(3) Gross disposable household income is defined in unadjusted terms, according to the draft Joint Employment Report 2018.       
(4) Reduction in percentage of the risk of poverty rate, due to social transfers (calculated comparing at-risk-of poverty rates 
before social transfers with those after transfers; pensions are not considered as social transfers in the calculation).       
(5)  Average of first three quarters of 2017, except for the indicator "individual who have basic or above basic digital skills" 
(annual data). Data for unemployment rate is seasonally adjusted. 
Source: Eurostat 

43 

201220132014201520162017 5Equal opportunities and access to the labour marketEarly leavers from education and training (% of population aged 18-24)10.39.712.012.210.9:Gender employment gap (pps)5.76.67.77.98.27.6Income inequality, measured as quintile share ratio (S80/S20)5.45.56.56.25.6:At-risk-of-poverty or social exclusion rate1 (AROPE)23.423.526.024.224.4:Young people neither in employment nor in education and training (% of population aged 15-24)12.211.311.710.89.1:Dynamic labour markets and fair working conditions†Employment rate (20-64 years)72.273.374.376.576.678.3Unemployment rate2 (15-74 years)10.08.67.46.26.86.0Gross disposable income of households in real terms per capita3 (Index 2008=100) ::99.9104.6::Public support / Social protection and inclusionImpact of social transfers (excluding pensions) on poverty reduction429.426.823.222.324.9:Children aged less than 3 years in formal childcare18.021.019.421.430.2:Self-reported unmet need for medical care8.38.411.312.715.3:Individuals who have basic or above basic overall digital skills (% of population aged 16-74):::65.060.060.0 
 
 
 
 
 
 
 
 
 
 
C. Standard Tables 

Table C.3: 

Labour market and education indicators 

* Non-scoreboard indicator       
(1) Long-term unemployed are people who have been unemployed for at least 12 months.       
(2) Difference between the average gross hourly earnings of male paid employees and of female paid employees as a 
percentage of average gross hourly earnings of male paid employees. It is defined as "unadjusted", as it does not correct for 
the distribution of individual characteristics (and thus gives an overall picture of gender inequalities in terms of pay). All 
employees working in firms with ten or more employees, without restrictions for age and hours worked, are included.       
(3) PISA (OECD) results for low achievement in mathematics for 15 year-olds.       
(4) Impact of socio-economic and cultural status on PISA (OECD) scores. Values for 2012 and 2015 refer respectively to 
mathematics and science.        
(5) Average of first three quarters of 2017. Data for youth unemployment rate is seasonally adjusted. 
Source: Eurostat, OECD 

44 

Labour market indicators201220132014201520162017 5Activity rate (15-64)74.875.175.276.777.5:Employment in current job by durationFrom 0 to 11 months16.115.315.214.815.6:From 12 to 23 months12.311.911.211.911.4:From 24 to 59 months17.119.020.320.921.2:60 months or over54.653.853.152.251.6:Employment growth* (% change from previous year)1.61.20.82.90.31.6Employment rate of women(% of female population aged 20-64)69.470.170.672.672.674.5Employment rate of men (% of male population aged 20-64)75.176.778.380.580.882.1Employment rate of older workers* (% of population aged 55-64)60.562.664.064.565.267.6Part-time employment* (% of total employment, aged 15-64)9.28.98.39.59.99.5Fixed-term employment* (% of employees with a fixed term contract, aged 15-64)3.53.53.13.43.73.1Transition rate from temporary to permanent employment(3-year average)47.063.062.555.7::Long-term unemployment rate1 (% of labour force)5.53.83.32.42.12.0Youth unemployment rate (% active population aged 15-24)20.918.715.013.113.413.7Gender gap in part-time employment8.26.95.57.46.57.5Gender pay gap2 (in undadjusted form)29.929.828.126.9::Education and training indicators201220132014201520162017Adult participation in learning(% of people aged 25-64 participating in education and  training)12.812.611.612.415.7:Underachievement in education310.5::11.2::Tertiary educational attainment (% of population aged 30-34 having successfully completed tertiary education)39.542.543.245.345.4:Variation in performance explained by students' socio-economic status48.6::7.8:: 
 
 
 
 
 
 
 
 
 
 
C. Standard Tables 

Table C.4: 

Social inclusion and health indicators 

*  Non-scoreboard indicator 
(1) At-risk-of-poverty rate (AROP): proportion of people with an equivalised disposable income below 60 % of the national 
equivalised median income.  
(2) 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. 
(3) Percentage of total population living in overcrowded dwellings and exhibiting housing deprivation. 
(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) Ratio of the median individual gross pensions of people aged 65-74 relative to the median individual gross earnings of 
people aged 50-59. 
(6) Fixed broadband take up (33%), mobile broadband take up (22%), speed (33%) and affordability (11%), from the Digital 
Scoreboard.Source: Eurostat, OECD 

45 

201220132014201520162017Expenditure on social protection benefits* (% of GDP)Sickness/healthcare4.24.14.44.6::Disability1.71.81.81.8::Old age and survivors6.66.66.67.1::Family/children1.71.61.62.1::Unemployment0.50.50.40.4::Housing0.00.00.00.0::Social exclusion n.e.c.0.10.10.10.1::Total14.814.714.916.2::of which: means-tested benefits0.10.10.10.1::General government expenditure by function (% of GDP, COFOG)Social protection12.311.911.912.913.5:Health5.05.05.25.55.3:Education6.36.05.76.15.9:Out-of-pocket expenditure on healthcare (% of total health expenditure)21.522.622.622.8::Children at risk of poverty or social exclusion (% of people aged 0-17)*22.422.323.822.521.2:At-risk-of-poverty  rate1 (% of total population)17.518.621.821.621.7:In-work at-risk-of-poverty rate (% of persons employed)8.37.611.810.09.6:Severe material deprivation rate2  (% of total population)9.47.66.24.54.7:Severe housing deprivation rate3, by tenure statusOwner, with mortgage or loan2.34.42.21.90.9:Tenant, rent at market price3.75.18.14.36.1:Proportion of people living in low work intensity households4 (% of people aged 0-59)9.18.47.66.65.8:Poverty thresholds, expressed in national currency at constant prices*28122965315134283754:Healthy life years (at the age of 65)Females5.55.76.05.3::Males5.45.14.95.3::Aggregate replacement ratio for pensions5 (at the age of 65)0.50.50.50.40.5:Connectivity dimension of the Digital Economy and Society Inedex (DESI)6::44.851.856.762.2GINI coefficient before taxes and transfers*48.648.951.649.947.5:GINI coefficient after taxes and transfers*32.532.935.634.832.7: 
 
 
 
 
 
 
 
 
C. Standard Tables 

Table C.5: 

Product market performance and policy indicators 

(1) The methodologies, including the assumptions, for this indicator are shown in detail here: 
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 codified 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 don't know.       
(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 here: http://www.oecd.org/competition/reform/indicatorsofproductmarketregulationhomepage.htm       
(6) Aggregate OECD indicators of regulation in energy, transport and communications (ETCR).       
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)."  

46 

Performance Indicators2010201120122013201420152016Labour productivity (real, per person employed, year-on-year % change)Labour productivity in Industry12.60-1.815.996.329.28-1.46-2.01Labour productivity in Construction23.68-5.687.83-1.92-8.28-13.4616.61Labour productivity in Market Services4.68-0.995.660.01-0.47-1.101.23Unit labour costs (ULC) (whole economy, year-on-year % change)ULC in Industry-12.63-0.669.181.51-0.503.142.93ULC in Construction-6.98-11.144.985.882.161.545.94ULC in Market Services-5.040.094.813.197.696.102.40Business Environment2010201120122013201420152016Time needed to enforce contracts(1) (days)425.0425.0425.0425.0425.0425.0425.0Time needed to start a business(1) (days)6.56.56.56.54.53.53.5Outcome of applications by SMEs for bank loans(2)na0.89na0.910.660.190.82Research and innovation2010201120122013201420152016R&D intensity1.582.312.121.721.451.491.28General government expenditure on education as % of GDP6.606.206.306.005.706.10naPersons with tertiary education and/or employed in science and technology as % of total employment50505151515151Population having completed tertiary education(3)30313232333334Young people with upper secondary level education(4)84838184838284Trade balance of high technology products as % of GDP-1.58-0.67-0.88-0.32-0.33-0.34naProduct and service markets and competition200320082013OECD product market regulation (PMR)(5), overallna1.371.29OECD PMR5, retailna1.401.50OECD PMR5, professional servicesna1.811.79OECD PMR5, network industries(6)3.342.602.40 
 
 
 
 
 
 
 
 
 
 
 
 
 
C. Standard Tables 

Table C.6:  Green growth 

All macro intensity indicators are expressed as a ratio of a physical quantity to GDP (in 2010 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 % of total value added for the economy 
Industry energy intensity: final energy consumption of industry (in kgoe) divided by gross value added of industry (in 2010 EUR)  
Real unit energy costs for manufacturing industry excluding refining : real costs as % 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 GHG emissions covered by EU emissions trading system (ETS) (excluding aviation): based on GHG 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 2010 EUR) 
Transport carbon intensity: GHG 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 covering natural gas, total petrol products, nuclear heat, renewable energies 
and solid fuels 
* European Commission and European Environment Agency 
Source: European Commission and European Environment Agency (Share of GHG emissions covered by ETS); European 
Commission (Environmental taxes over labour taxes and GDP); Eurostat (all other indicators) 

47 

Green growth performance201120122013201420152016MacroeconomicEnergy intensity kgoe / €0.390.370.400.370.360.35Carbon intensity kg / €1.341.221.301.221.02-Resource intensity (reciprocal of resource productivity)kg / €2.242.162.252.142.061.85Waste intensity kg / €-1.33-1.26--Energy balance of trade % GDP-0.4-1.3-2.2-2.1-1.5-1.0Weighting of energy in HICP%13.9314.6914.4214.4313.6510.58Difference between energy price change and inflation %1.37.27.4-4.6-4.1-5.1Real unit of energy cost% of value added14.915.615.714.6--Ratio of environmental taxes to labour taxesratio0.170.170.160.160.16-Environmental taxes% GDP2.72.72.62.72.83.1Sectoral Industry energy intensity kgoe / € 0.190.180.190.160.140.13Real unit energy cost for manufacturing industry excl. refining% of value added13.513.514.213.3--Share of energy-intensive industries in the economy% GDP12.8512.3312.7613.9014.0213.23Electricity prices for medium-sized industrial users€ / kWh0.070.080.100.090.090.09Gas prices for medium-sized industrial users€ / kWh0.030.040.040.040.030.02Public R&D for energy % GDP0.020.020.010.010.020.00Public R&D for environmental protection% GDP0.050.030.040.040.050.02Municipal waste recycling rate%23.319.117.931.328.328.1Share of GHG emissions covered by ETS*%72.369.773.571.167.769.7Transport energy intensitykgoe / €0.640.630.610.640.680.68Transport carbon intensitykg / €1.871.841.781.862.00-Security of energy supplyEnergy import dependency%12.017.011.99.27.36.8Aggregated supplier concentration indexHHI74.779.673.076.611.5-Diversification of energy mixHHI0.490.450.480.480.440.43 
 
 
 
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49