COMMISSION STAFF WORKING DOCUMENT Country Report Estonia 2019 Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE EUROPEAN COUNCIL, THE COUNCIL, THE EUROPEAN CENTRAL BANK AND THE EUROGROUP 2019 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: 2019-02-27
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, 27.2.2019  SWD(2019) 1005 final  COMMISSION STAFF WORKING DOCUMENT Country Report Estonia 2019 Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE EUROPEAN COUNCIL, THE COUNCIL, THE EUROPEAN CENTRAL BANK AND THE EUROGROUP 2019 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(2019) 150 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.   Competitiveness reforms and investment 

Annex A: Overview Table 

Annex B: Commission Debt Sustainability Analysis and fiscal risks 

Annex C: Standard Tables 

Annex D: Guidance on investment needs for cohesion policy 

References 

LIST OF TABLES 

Table 1.1: 

Key economic and financial indicators - Estonia 

Table 2.1: 

Assessment of implementation of 2018 country-specific recommendations 

Table 3.2.1: 

Financial soundness of banks 

Table 3.4.1:  Completion of TEN-T core network 2016 

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 

Table D.1: 

Policy Objectives 

LIST OF GRAPHS 

Graph 1.1: 

Real GDP growth and contributions 

1 

3 

6 

13 

16 

16 

19 

23 

32 

44 

48 

49 

55 

60 

12 

14 

19 

38 

49 

50 

51 

52 

53 

54 

55 

6 

 
 
 
 
Graph 1.2: 

Inflation quarterly growth 

Graph 1.3: 

Investment growth and  contributions, % 

Graph 1.4: 

Real effective exchange rate based on unit labour cost 

Graph 1.5: 

Contribution to change in total employment between 2007 and 2017 

Graph 1.6: 

Breakdown of external position (current and capital accounts) 

Graph 1.7: 

Export market share, goods and services, nominal 

Graph 1.8: 

Components of the Net International Investment Position (NIIP) 

Graph 1.9: 

Activity, employment and unemployment rates 

Graph 1.10:  Annual growth of nominal compensation per employee and benchmarks based on 

domestic and external economic developments 

Graph 1.11:  Gross Domestic Product per inhabitant in purchasing power standard (PPS) 

Graph 1.12:  Regional productivity 

Graph 1.13:  Demographic changes 

Graph 2.1:  Overall multiannual implementation of 2011-2018 country-specific recommendations 

(CSRs) to date 

Graph 3.1.1:  Share of affected households (winners and losers) by income deciles 

Graph 3.2.1:  Credit growth 

Graph 3.2.2:  Cost of borrowing in the  Euro area  and Estonia 

Graph 3.2.3:  Construction volumes 

Graph 3.3.1:  Key labour market indicators 

Graph 3.3.2:  Labour shortage per industry 

Graph 3.3.3:  Poverty indicators 

Graph 3.4.1:  Labour productivity in PPS relative to the EU 

Graph 3.4.2: 

Total factor productivity 

Graph 3.4.3:  GDP per capita growth breakdown in absolute terms, 2005-2017 

Graph 3.4.4: 

Investment by asset type and year 

Graph 3.4.5:  Private and public investment rates 

Graph 3.4.6: 

Investment in intellectual property products (gross) 

Graph 3.4.7:  Share of renewable energy in transport 

Graph 3.4.8:  Regional net migration 

LIST OF BOXES 

Box 2.1: EU funds and programmes contribute to addressing structural challenges and to fostering 

growth and competitiveness in Estonia 

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

Box 3.4.1: Investment challenges and reforms in Estonia 

6 

7 

7 

8 

8 

8 

9 

9 

10 

10 

11 

11 

13 

18 

19 

20 

21 

23 

23 

27 

32 

32 

33 

33 

33 

34 

39 

41 

15 

25 

36 

2 

 
 
 
EXECUTIVE SUMMARY 

Estonia’s  economic  performance  puts 
the 
country in a good position to address challenges 
to ensure long-term growth. Productivity growth 
has  been  impacted  by  demographic  trends  and  by 
the  country’s  moderate  innovation  performance. 
Skill  shortages  and  mismatches  are  on  the  rise, 
also due to the education system’s limited capacity 
to  respond  to  the  demands  of  the  labour  market. 
The ageing of the population puts pressure both on 
the provision of good quality and affordable social 
services  and  on  public  resources.  Insufficient 
investment  in  research  and  innovation  prevents 
companies  from  becoming  more  competitive  and 
productive.  Well targeted policies and investments 
could help unlock Estonia’s full potential. (1)  

Estonia’s  economic  growth  was  strong  in  2018 
at  3.5 %,  but  is  expected  to  gradually  slow 
down. Domestic demand has been the main driver 
of  growth,  with consumer  spending  playing a  key 
role  due  to  high  employment  and  fast-growing 
wages.  In  addition,  strong  external  demand  and 
favourable world commodity prices helped sustain 
an  increase  in  exports  and  industrial  production 
across  all  sectors.  In  the  coming  years,  consumer 
spending 
in 
tempered  by  a 
employment  and  wage  growth,  and  external 
demand is set to weaken. Government finances are 
expected to be in a small headline surplus and debt 
remains around 8% of GDP in 2019. 

slowdown 

is 

Due  to  good  economic  times  and  demographic 
pressures,  Estonia’s  economy  is  close  to  full 
employment.  This  situation  continues  to  drive 
rapid  wage  growth.  The  employment  rate  has 
increased to 78 % while unemployment fell below 
6 %  in  2017.  However,  Estonia’s  working-age 
population  decreased  by  7 %  in  the  last  10  years. 
This  demographic  trend  is  expected  to  continue 
until  2030  and  puts  pressure  on  the  public 
resources. 

(1)  This  report  assesses  Estonia's  economy  in  light  of  the 
European Commission’s Annual Growth Survey published 
on 21 November 2018. In the survey, the Commission calls 
on  EU  Member  States  to  implement  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  —  delivering  high-quality  investment, 
efforts  on  productivity  growth, 
reforms 
focusing 
inclusiveness  and 
institutional  quality  and  ensuring 
macroeconomic stability and sound public finance. 

3 

to  grow 

Despite  the  recent  pick-up  in  growth,  labour 
productivity  needs 
for 
competitiveness to be sustained. It may become a 
challenge  for Estonia’s economic growth and cost 
competitiveness  if  productivity  does  not  catch  up 
with the strong wage growth. 

further 

Regional  disparities  are  high,  leading  to  stark 
differences  in  overall  prosperity,  quality  of 
social  infrastructure  and  public  services.  The 
Tallinn area enjoys income levels close to the EU 
average. The economic performance of the capital 
region  is  characterised  by  higher  wages,  better 
employment opportunities and higher productivity 
than other Estonian regions,  which are  marked by 
a  dwindling  population,  higher  poverty  rates  and 
like 
increased  pressure  on  public 
healthcare and education. 

services 

and 

the  same 

on  promoting 

time,  ensuring  good 

Focusing  public  and  private  investment  on 
human  capital,  infrastructure,  research  and 
innovation 
resource 
efficiency would strengthen Estonia’s long-term 
growth  potential.    Current  skills  shortages  and 
underinvestment in research and development limit 
productivity  gains  for 
the  economy.  Further 
investment  in  innovation,  including  in  digitisation 
and  automation  can  make  firms  more  productive. 
transport 
At 
connections 
competitiveness. 
Fostering resource efficiency further contributes to 
a  more  competitive  and  sustainable  economy. 
Investments  in  education  and  skills,  as  well  as  in 
social  inclusion,  health  and  social  services  could 
foster  sustainable  and  inclusive  growth.  Annex  D 
the 
identifies  key  priorities  for  support  by 
European  Regional  Development  Fund, 
the 
European Social Fund Plus and the Cohesion Fund 
for  the  2021-2027  period  in  Estonia,  building  on 
the  analysis  of  investment  needs  and  challenges 
outlined in this report. 

support 

can 

in 
Estonia  has  made  some 
addressing 
country-specific 
2018 
recommendations. There has been some progress 
in the following areas:   

(2)  progress 

the 

(2)  Information  on  the  level  of  progress  and  actions  taken  to 
address  the  policy  advice  in  each  respective  subpart  of  a 
the 
country-specific  recommendation 
overview table in Annex A. 

is  presented 

in 

 
 
                                                           
                                                           
Executive summary 

service  needs  and  providing  health  and  social 
services  in  an  integrated  way.  Individuals  also 
have  to  cover  a  large  part  of  the  costs  of  the 
services provided by municipalities.  

  Labour  and  skills  shortages  are  apparent. 
Skills shortages and mismatches are among the 
main obstacles to business investment and limit 
greater  productivity  gains.  The  education  and 
training system’s capacity to respond to labour 
market needs is hampered by the persistence of 
early school leaving, insufficient labour market 
relevance  of  higher  education  and  vocational 
education  and  training,  and  the  challenges 
posed  by  the  high  number  of  ageing  teachers. 
Although  participation  in  adult  learning  is 
improving,  upskilling  and  reskilling  of  the 
workforce is not occurring fast enough to keep 
up with labour market trends. 

  The  gender  pay  gap  is  decreasing  but 
remains among the highest in the EU. Recent 
measures  add  flexibility  to  the  parental  leave 
and benefit system with a view to facilitate the 
return  to  the  labour  market.  The  use  of 
childcare  is  improving.  Nevertheless,  without 
flexible  services,  care  responsibilities  remain 
high  for  parents,  especially  for  women.  This 
generates  considerable  economic  and  social 
costs.  Some  steps  have  been  taken  but  wage 
transparency has not yet improved. 

  Research, 

technological 
innovation  and 
transformation 
to  boosting 
are  key 
productivity growth. A significant proportion 
of  the  Estonian  companies  operate  in  medium 
and low-technology sectors. Low investment in 
research  and  development  partly  explains  why 
productivity  has  been  lagging  behind.  More 
targeted  investment  in  research  and  economy-
wide  innovation  would  increase  productivity 
and  competitiveness.  A  stronger  connection 
between  the  public  research  system  and  the 
private sector will also help the economy grow. 
Digitisation  and  automation  could  support  the 
competitiveness  of  small  and  medium-sized 
firms  in  the  medium  term  but  require  specific 
skills.  Modernising  the  insolvency  framework 
can  also  help  unlock  Estonia’s  business 
potential. 

 

 

improving  the  adequacy  of  the  social  safety 
net,  in  particular  for  older  people  and  people 
with disabilities; 

taking  measures to reduce the gender pay gap, 
including  by  improving  wage  transparency  in 
the private sector; 

  promoting 

research 

in 
particular by providing effective incentives for 
broadening the innovation base. 

innovation, 

and 

Estonia  performs  relatively  well  on  most 
indicators  of  the  Social  Scoreboard  supporting 
the  European  Pillar  of  Social  Rights,  but  some 
concerns  remain.  Estonia’s  labour  market  is  one 
of  the  best  performers  in  the  EU.  However,  the 
proportion  of  people  with  unmet  medical  needs 
remains  one  of  the  highest  in  the  EU  due  to  long 
waiting  times  and  weak  coordination  between  the 
health  and  social  care  services.  The  proportion  of 
youth not in education, employment or training has 
slightly  increased.  Social  transfers  are  still  not 
effective  in  reducing  poverty  and  the  weak  social 
safety  net  has  had  limited  impact  on  poverty  and 
inequality, although both indicators show signs of 
improvement. 

Regarding  progress  towards  its  national  targets 
under  the  Europe  2020  strategy,  Estonia  met  its 
employment  rate  target  and  its  tertiary  education 
target  already  in  2015.  It  also  performs  well  on 
renewable  energy,  and  has  made  some  progress 
towards 
reducing 
efficiency 
greenhouse  gas  emissions.  However,  Estonia  is 
underperforming on reducing early  school leaving 
and  on  reaching  its  national  targets  for  reducing 
poverty and increasing investment in research and 
development.  

energy 

and 

Key structural issues analysed in this report, which 
for  Estonia’s 
point 
economy, are the following: 

to  particular  challenges 

  Lack  of  access  to  affordable  and  good 
quality  social  services  remains  the  key 
challenge.  The  adequacy  of  the  social  safety 
net  is  slowly  improving, 
  but  access  to 
affordable and good quality services, including 
in 
services, 
long-term  care 
particular 
for  older  people.  There  are 
shortcomings  in  identifying  individual  social 

is  difficult, 

4 

 
 
  Estonia  has  strengthened  its  anti-money-
laundering 
challenges 
framework  but 
remain.  In  2018,  against  the  background  of  a 
large  money-laundering  scandal  involving  a 
foreign  financial  institution  and  its  Estonian 
branch, and the largest amount allegedly being 
laundered  to  date  in  the  EU,  the  government 
introduced  additional  measures  and  guidelines 
to  strengthen  money  laundering  prevention. 
However, 
establishing 
draft 
significantly  higher  fines,  introducing  reverse-
burden-of-proof  on  suspicious  assets,  and 
hardening  regulations  concerning  providers  of 
virtual currencies has not been adopted. 

law 

the 

and 

  A  high-quality  transport  infrastructure  is 
important for Estonia to take full advantage 
of  the  single  market.  As  a  peripheral  country 
low  population  density,  a  well-
with  a 
functioning 
transport 
interconnected 
system is key for Estonia’s economic activities 
and  exports.  Estonia  does  not  yet  have 
sustainable  and  green  transport  infrastructure 
that can reduce energy intensity and pollution, 
especially  for  rail  and  intermodal  transport. 
Further  innovative  and  sustainable  solutions 
could  help  address  congestion  and  public 
transport-related problems. 

is 

  Energy  and  climate  challenges  remain. 
Although Estonia has already met its renewable 
energy 
low, 
target,  energy  efficiency 
especially in buildings. The synchronisation of 
the 
Estonia’s 
electricity 
continental  European  network 
to 
ensuring  security  of  electricity  supply  in  the 
entire Baltic region. Furthermore, the reduction 
of greenhouse gas emissions is still insufficient, 
especially in transport and agriculture.  

system  with 

is  key 

Executive summary 

5 

 
 
1.  ECONOMIC SITUATION AND OUTLOOK 

GDP growth pattern and outlook 

Estonia’s  real  economic  growth  in  2018  has 
remained robust, slowing down to an estimated 
3.5 %  after  peaking  in  the  previous  year  (see 
Graph  1.1).  Domestic  demand  has  been  the  main 
growth  driver,  with  the  key  contribution  coming 
from  private  consumption,  which  was  supported 
by  high  employment  and  fast-growing  wages.  In 
addition,  strong  external  demand  and  favourable 
world commodity prices helped sustain an increase 
in  exports  and  industrial  production  across  all 
sectors.  Exports  make  up  over  75 %  of  GDP,  so 
the Estonian economy is highly open and sensitive 
to global economic conditions. 

GDP  growth  is  forecast  as  moderate  at  below 
3 % in 2019 and 2020. With the global economy 
entering  a  lower  growth  period  and  investment  in 
buildings and construction levelling off, economic 
activity  is  set  to  shift  into  lower  gear.  Domestic 
demand  is  projected  to  remain  the  main  growth 
driver,  although  the  contribution  of  EU  funded 
investments will even out.  

Graph 1.1: 

Real GDP growth and contributions 

in excise taxes will be much lower than in previous 
years, and assuming a moderation in global energy 
prices  (see  Graph  1.2).  Reflecting  the  ongoing 
strong wage pressures, services prices are forecast 
to increasingly drive inflation up in 2019-2020. 

Graph 1.2: 

Inflation quarterly growth 

Inflation as defined by Harmonized Index of Consumer Prices 
(HICP) 
Source: European Commission 

Investment 

In  2018-2020, 

The  contribution  of  investment  to  growth  is 
forecast 
to  be  moderately  positive  going 
forward.    In  2017,  there  was  a  temporary  rise  in 
investment, linked to the expansionary phase in the 
EU  funds  cycle  and  a  number  of  large  one-off 
projects. 
the  contribution  of 
investment  to  growth  is  forecast  to  be  moderate. 
Non-residential  construction  and  dwellings  drove 
investment  growth  in  2018,  but  are  forecast  to 
subside thereafter. In the coming years, investment 
activity  is  projected  to  be  subdued,  driven  by 
(see  Graph  1.3). 
machinery  and  equipment 
Overall,  investment  intensity  is  projected  to  level 
off  over  2019-2020,  amounting  to  about  24 %  of 
GDP. While this is slightly above the EU average, 
it is lower than in the past decades. Overall, capital 
per  employee  in  Estonia  still  remains  below  the 
EU 
keep 
productivity  low  and  thus  poses  a  risk  for  future 
competitiveness (see Section 3.4). 

average,  which 

contributes 

to 

Source: European Commission 

Inflation 

Inflation  was  well  above  3 %  per  year  over 
2017-2018 reflecting growing global commodity 
prices and a substantial increase in excise duties 
on fuels, alcohol and tobacco. Inflation is forecast 
to slow down to below 3 % in 2019-2020, as rises 

6 

-6-4-2024681012101112131415161718'19'20'%, ppsInventories investmentInvestment (GFCF)ConsumptionNet exportsReal GDP growth-2-101234514Q415Q215Q416Q216Q417Q217Q418Q2*18Q4*19Q2*19Q4*20Q2*20Q4*% change yoyEnergyUnprocessed foodProcessed foodServicesNon-energy ind. goodsInflation 
 
 
 
1. Economic situation and outlook 

Graph 1.3: 

Investment growth and  contributions, % 

Graph 1.4: 

Real effective exchange rate based on unit 
labour cost 

Source: European Commission 

Source: European Commission 

The  relative  stagnation  of 
investment  has 
turned Estonia's private sector into a net lender 
in  recent  years.  Non-financial  corporations 
contributed  to  net  lending  of  the  economy  with 
around 1.5 % of GDP in 2017, while net lending of 
private  households  amounted  to  2.6 %  of  GDP  in 
same  year.  The  general  government 
the 
traditionally  a  net 
in  Estonia,  was 
lender 
exceptionally  a  net  borrower  in  2017.  Savings 
relative to GDP tend to be higher in Estonia than in 
the  other  Baltic  states,  and  increasingly  so  in 
recent years. 

Cost competitiveness 

the 

Estonia’s  cost  competitiveness  has  declined 
since  2008  compared  to  that  of  the  EU.  A 
favourable  economic  outlook  combined  with  the 
tightening  of 
labour  market  put  upward 
pressure  on  wages,  which  have  on  average 
outpaced productivity growth over the past decade. 
As a  result, the real effective exchange rate  based 
on  unit 
risen  significantly 
compared to the EU and the euro area (see Graph 
1.4).  

labour  cost  has 

Despite  strong  unit  labour  cost  growth,  since 
2008  Estonia  gained  market  share  in  its  main 
export markets. However, recent gains have been 
much smaller than before the 2009 financial crisis, 
suggesting that the strong wage growth might have 
had  a  tangible  impact  on  competitiveness  (see 
Graph 1.7).  

The  current  account  balance  has  been  in 
surplus  for  six  consecutive  years,  primarily 
thanks  to  the  surplus  in  trade  of  services.  A 
surplus is also expected over 2019-2020, while the 
balance of trade in goods is set to be in deficit. In 
recent  years,  the  main  contribution  to  the  surplus 
in  services  has  come  from  tourism  and  transport, 
and increasingly from information technology and 
business  services.  Notably,  Estonia  has  gained  a 
comparative  advantage  in  information  technology 
services (see Graph 1.5).  

Financial sector 

Estonia's  banking  sector  is  profitable  and  well 
capitalised.  However,  in  May  2018,  the  Estonian 
authorities uncovered potential large-scale money-
laundering  that  took  place  prior  to  2016  through 
the  Estonian  branch  of  Danske  bank.  Since  2016, 
the  proportion  of  non-resident  deposits  has 
decreased  considerably.  The  direct  impact  of 
money  laundering  on  the  functioning  of  the 
Estonian financial sector has remained limited, but 

7 

-40-30-20-100102030400002040608101214161820% y-o-yOther constr.DwellingsEquipmentOtherTotalForecast70809010011012013014015016017018019000020406081012141618*1999=100EstoniaEAEU 
 
 
1. Economic situation and outlook 

implies  a  significant  reputational  risk  for 

it 
Estonia's banks (see Section 3.2).  

because  privatisations  and  acquisitions  are  largely 
over.  

Graph 1.5:  Contribution to change in total employment 

Graph 1.6: 

between 2007 and 2017 

Breakdown of external position (current and 
capital accounts) 

Source: European Commission 

Source: European Commission 

Graph 1.7: 

Export market share, goods and services, 
nominal 

Source: European Commission  

Estonia  offers  a  business-friendly  environment, 
which explains part of its export success. Estonia 
is  characterised  by  a  low  administrative  burden, 
and  doing  business 
facilitated  by 
comprehensive  e-Government  services.  On  the 
down  side,  Estonia  has  long-standing  issues  with 
insolvency  rules,  an  area  that  has  proved  difficult 
to reform. (see Section 3.4). 

is  also 

Estonia’s  net  international  investment  position 
improved,  although  it  remains  negative.  In 
2017, 
it  was  -30 %  of  GDP,  a  significant 
improvement  compared  to  -80 %  of  GDP  at  its 
peak  in  2009.  The  net  inflow  of  foreign  direct 
investment  has  been  moderate  after  the  crisis, 
reaching 5.9 % of GDP in 2017, which is still high 
compared  to  the  euro  area.  Over  the  years,  the 
highest  foreign  direct  investment  stock,  as  a 
percentage  of  (sectoral)  gross  value  added,  has 
been in the financial and insurance sector, which is 
mostly  owned  by  Nordic  companies.  There  are 
indications (e.g. Durán and Navarrete-Plana, 2018) 
that the slower inflow of foreign direct investment 
after  the  crisis  is  due  to  poor  international  market 
conditions, holding back investment in general and 
foreign  direct  investment  in  particular.  The  large 
foreign  direct  investment  inflows  observed  in  the 
early  2000s  will  probably  not  be  seen  again 

8 

-4-3-2-101234EAEstoniaLatviaLithuaniaFinlandSweden%IT and communicationOther business servicesManufacturing-30-20-100102000010203040506070809101112131415161718*% of GDPCapital accountSecondary income balancePrimary income balance  Trade balance - services  Trade balance - goodsTrade balanceCurrent account balanceNet lending/borrowing-30-20-1001020300102030405060708091011121314151617Rate of change y-o-y (%)Contribution: World export growth (euros, neg. Sign)Contribution: Export growth (euros)Export market share growth rate 
 
 
 
 
 
1. Economic situation and outlook 

Graph 1.8:  Components of the Net International 

Graph 1.9:  Activity, employment and unemployment 

Investment Position (NIIP) 

rates 

Source: European Commission 

Public finance 

The  general  government  budget  is  expected  to 
show  a  small  nominal  surplus  over  2018-2020. 
Rising  revenues  as  a  result  of  the  favourable 
economic  cycle  and  broadening  of  the  tax  base 
have offset rapid growth in expenditure (especially 
public  wages and social spending). Given that the 
economy  is  operating  above  its  potential,  the 
structural fiscal position is expected to be in deficit 
of about ¾ % of GDP over 2018-2020. Public debt 
is  expected  to  decline  further  below  8 %  of  GDP 
by 2020, by far the lowest level in the EU. 

Labour market 

The  labour  market  continues  to  perform  well. 
Employment grew by 2.1 pp in 2017, partly due to 
the  Work  Ability  reform  that  encourages  people 
with  limited  work  ability  to  enter  the  labour 
market.  In  light  of  the  high  labour  demand, 
employment  is  expected  to  have  grown  by  over 
1 %  in  2018  and  to  slow  thereafter  in  response  to 
the 
outlook. 
Unemployment decreased further to 5.8 % in 2017 
(7.6 % in the EU). It stayed broadly stable in 2018, 
but is forecast to increase somewhat in 2019 due to 
the  impact  of  further  activation  of  people  with 
limited  ability  to  work  (see  Section  3.3).  The 
activity rate reached a record high level of 83.5 % 
in 2017. 

demographic 

economic 

and 

Activity and employment rates (% of population), total, ages 
20-64, seasonally adjusted. Unemployment rate (% of labour 
force), total, ages 15-74, seasonally adjusted. 
Source: European Commission 

Wages have grown fast on the back of buoyant 
economic  growth  and  high  demand  for  labour. 
According  to  Statistics  Estonia,  in  2017,  the 
average monthly gross  wages and salaries rose by 
6.5 %  to  EUR  1  221,  the  highest  annual  growth 
rate since 2008. Wages increased in all sectors on 
average,  and  faster  than  the  combination  of 
domestic  developments  in  labour  productivity, 
prices  and  unemployment  would  predict  (3.4 %). 
They also increased faster than the rate that would 
keep  the  real  effective  exchange  rate  unchanged 
(2.2 %).  Real  wages  increased  by  3 %  in  the 
second  quarter  of  2018  compared  to  the  second 
quarter of 2017, and the minimum  wage  has been 
increased regularly.  

Social developments and inequality  

Indicators of poverty and social exclusion show 
a  mixed  picture.  The  proportion  of  people  living 
in  low  work  intensity  households  has  decreased 
since  2012  and  severe  material  deprivation  has 
also  declined.  Conversely,  the  at-risk-of-poverty 
rate, measuring relative poverty, shows an upward 
trend since 2011 and is above the levels witnessed 
before and during the crisis.  

9 

-150-100-50050100000102030405060708091011121314151617% of GDPReserve assetsNet portfolio investment, equity and investment fund shares/unitsNet portfolio investment, debt securitiesOther investment (net)Net direct investmentNet financial derivatives and employee stock optionsNet International investment position (NIIP)Marketable debt (NIIP minus FDI and shares)02468101214161845505560657075808590010305070911131517% of labour force% of populationUnemployment rate 15-74 (rhs)Activity rate 20-64Employment rate 20-64 
 
 
1. Economic situation and outlook 

Graph 1.10:  Annual growth of nominal compensation per 

employee and benchmarks based on 
domestic and external economic 
developments 

disparities  in  relation  to  labour  productivity  and 
other  socio-economic  indicators.  The  regional 
income gap can be explained in terms of an urban-
rural  divide  (see  Section  3.4).  The  population 
living in rural regions decreased,  to a  large  extent 
because  younger,  more  skilled  workers  moved  to 
cities,  leaving  behind  lower-income  and  older 
residents.  Accordingly,  the  population  of  the 
capital  city  region  increased,  as  it  attracted  talent 
from other regions and from abroad. 

Graph 1.11:  Gross Domestic Product per inhabitant in 

purchasing power standard (PPS) 

Source: European Commission 

Income  inequality  has  decreased,  but  remains 
above  the  EU  average.  In  2017,  the  share  of 
household  income  of  the  richest  20 %  was  5.4 
times higher than that of the poorest 20 %, a ratio 
that  remains  above  the  EU  average  (5.1  in  2017). 
While the  middle income households  have caught 
up  with  the  rich,  the  poorest  households'  income 
share  remains  low.  In  2016,  taxes  and  transfers 
together  reduced  income  inequality  by  33.9 %. 
Taxes reduced inequality by  10.3 % (compared to 
12.4 % in the EU as a whole), while benefits did so 
by another 23.6 % (compared to an EU average of 
31.9 %).  In  2017,  the  tax  and  benefits  system  has 
been  reformed  in  a  way  that  was  intended  to 
reduce  income  inequality  (for  analysis  of  the 
impact  of  the  personal  income  tax  reform  on 
poverty reduction, see Section 3.1.2). 

Regional dimension 

Since  2008,  income  per  capita  in  Estonia  has 
converged fast towards the EU average but not 
uniformly  across  NUTS 
(nomenclature  of 
territorial  units  for  statistics)  3  regions  (see 
section 3.4 and Graph  1.11). Income per capita in 
the  capital  region  has  caught  up  with  the  EU 
average,  while  all  other  regions  are  lagging 
significantly  behind.  The  capital  region  (Harju 
County), which is home to 44.7 % of the Estonian 
population,  produced  64 %  of  national  GDP  and 
52.7 % of total exports in 2016. There are regional 

Source: European Commission 

 Estonia's  local  governments  face  the  challenge 
of  ensuring  accessibility,  efficiency  and  quality 
of  public  services.  Difficulties  are  particularly 
high for remote municipalities. The strong regional 
divide in Estonia means that the country's capacity 
to  switch  to  a  model  where  the  benefits  of 
convergence  are  more  equally 
shared  and 
territorially balanced depends crucially on targeted 
investments (see Section 3.4), as well as on ad hoc 
policies that support those regions that are lagging 
behind. 

10 

-10-505101520253099010305070911131517%Actual nominal compensation growthNominal compensation growthPrediction based on inflation, productivity andunemployment20304050607080901001101200001020304050607080910111213141516% EU average in PPSPõhjaLääneKeskKirdeLõuna 
 
 
1. Economic situation and outlook 

Graph 1.12:  Regional productivity 

Graph 1.13:  Demographic changes 

Source: European Commission 

Source: European Commission 

Demographic developments 

Demographic  pressures  have  been  the  main 
source of economic challenges in Estonia. In the 
last 10 years, Estonia has lost 7 % of its working-
age  population,  amounting  to  63 000  people  (see 
Graph  1.13).  Population  ageing  and  emigration 
were  the  main  contributing  factors.  While  the 
natural change of the population remains negative, 
immigration (3) has outpaced emigration in the last 
three  years,  though  not  sufficiently  to  reverse  the 
trend  of  the  shrinking  working-age  population. 
According to projections, if Estonia’s activity rate 
remains at its current levels, employment is going 
to  start  to  fall  due  to  ageing.  As  a  result,  the  old-
age  dependency  ratio  (number  of  people  aged  65 
and  over  relative  to  the  working-age  population 
aged 15-64) is projected to increase from 30 % in 
2016  to  38 %  by  2030,  putting  pressure  on  the 
social  security  system.  Taking  the  demographic 
trends 
been 
estimated (European  Commission,  2017a)  that,  to 
keep  its  GDP  growth  at  2 %,  Estonia  would  need 
to  see  its  productivity  grow  at  2.5 %  for  the  next 
30 years; its current productivity growth stands  at 
2 %. 

account, 

into 

has 

it 

(3)  The  composition  of  immigrants  to  Estonia  has  changed 
from  60%  return  migration  (Estonian  citizens  returning  to 
Estonia)  in  2013  to  48%  in  2016.  The  remaining  half  is 
split  equally  between  EU  citizens  and  third-country 
nationals. 

11 

20406080100120140GDP per headGDP per headchangePopulation growthProductivityRoadaccessibilityIndex, EU 28=100EUNon-capital regionsCapital regionMS average800820840860880900920940960-6-4-2024602030405060708091011121314151617ThousandsChange in ThousandsNatural change of population (lhs)Net migration (lhs)Working age (15-64) population (rhs) 
 
 
                                                           
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1. Economic situation and outlook 

12 

2004-072008-122013-1520162017201820192020Real GDP (y-o-y)8,4-1,52,23,54,93,52,72,4Potential growth (y-o-y)5,70,82,62,73,33,23,32,9Private consumption (y-o-y)9,6-3,03,74,42,6...Public consumption (y-o-y)4,51,12,52,20,6...Gross fixed capital formation (y-o-y)13,3-4,1-3,02,912,5...Exports of goods and services (y-o-y)14,85,41,45,23,5...Imports of goods and services (y-o-y) 16,62,01,25,53,6...Contribution to GDP growth:Domestic demand (y-o-y)10,5-3,21,63,44,3...Inventories (y-o-y)0,2-0,40,21,1-0,3...Net exports (y-o-y)-2,62,20,20,00,1...Contribution to potential GDP growth:Total Labour (hours) (y-o-y)0,1-1,00,60,81,00,80,70,2Capital accumulation (y-o-y)3,41,41,30,91,21,21,21,2Total factor productivity (y-o-y)2,10,40,70,91,11,21,41,4Output gap8,4-2,20,91,22,73,02,62,3Unemployment rate7,211,67,46,85,85,76,06,0GDP deflator (y-o-y)7,83,62,51,53,94,23,62,9Harmonised index of consumer prices (HICP, y-o-y)4,64,51,30,83,73,42,82,3Nominal compensation per employee (y-o-y)15,63,74,96,36,97,06,05,6Labour productivity (real, person employed, y-o-y)6,50,10,63,22,1...Unit labour costs (ULC, whole economy, y-o-y)8,53,64,23,04,74,23,42,8Real unit labour costs (y-o-y)0,70,01,71,50,80,0-0,2-0,1Real effective exchange rate (ULC, y-o-y)6,70,93,42,44,64,01,10,7Real effective exchange rate (HICP, y-o-y)2,00,91,91,61,44,60,80,2Net savings rate of households (net saving as percentage of net disposable income)-9,04,65,96,57,9...Private credit flow, consolidated (% of GDP)21,50,54,06,03,6...Private sector debt, consolidated (% of GDP)104,8133,7115,1112,2106,4...of which household debt, consolidated (% of GDP)36,149,739,540,139,4...of which non-financial corporate debt, consolidated (% of GDP)68,784,175,672,167,0...Gross non-performing debt (% of total debt instruments and total loans and advances) (2).5,62,11,51,9...Corporations, net lending (+) or net borrowing (-) (% of GDP)-6,91,01,10,71,41,71,71,5Corporations, gross operating surplus (% of GDP)32,729,730,928,729,629,729,729,9Households, net lending (+) or net borrowing (-) (% of GDP)-6,41,91,61,72,62,02,02,4Deflated house price index (y-o-y).-10,79,03,81,8...Residential investment (% of GDP)5,43,13,84,54,3...Current account balance (% of GDP), balance of payments-12,7-1,01,12,03,23,53,23,2Trade balance (% of GDP), balance of payments-8,02,93,54,14,6...Terms of trade of goods and services (y-o-y)1,8-0,31,00,40,80,20,00,0Capital account balance (% of GDP)1,23,11,91,01,0...Net international investment position (% of GDP)-78,9-66,5-45,7-38,9-31,4...NIIP excluding non-defaultable instruments (% of GDP) (1)-16,9-16,912,318,721,5...IIP liabilities excluding non-defaultable instruments (% of GDP) (1)79,993,377,773,567,9...Export performance vs. advanced countries (% change over 5 years)57,530,418,3-3,5-2,0...Export market share, goods and services (y-o-y)..-1,47,2-0,1...Net FDI flows (% of GDP)-6,4-5,0-0,9-2,3-3,6...General government balance (% of GDP)2,3-0,80,2-0,3-0,40,50,50,2Structural budget balance (% of GDP)..-0,1-0,8-1,7-0,9-0,8-1,0General government gross debt (% of GDP)4,46,810,29,28,78,07,67,5Tax-to-GDP ratio (%) (3)30,832,832,533,833,033,633,533,4Tax rate for a single person earning the average wage (%)19,819,119,218,3....Tax rate for a single person earning 50% of the average wage (%)15,215,416,210,2....(1) NIIP excluding direct investment and portfolio equity sharesKey economic and financial indicators - Estoniaforecast(2) domestic banking groups and stand-alone banks, EU and non-EU foreign-controlled subsidiaries and EU and non-EU foreign-controlled branches.(3) The tax-to-GDP indicator includes imputed social contributions and hence differs from the tax-to-GDP indicator used in the section on taxationSource: Eurostat and ECB as of 31-1-2019, where available; European Commission for forecast figures (Winter forecast 2019 for real GDP and HICP, Autumn forecast 2018 otherwise) 
 
 
 
 
 
 
 
2.  PROGRESS WITH COUNTRY-SPECIFIC RECOMMENDATIONS 

allowance  decreases  gradually  up  to  zero  for 
individuals earning more than the average income. 
Though  the  gender  pay  gap  remains  amongst  the 
highest in the EU, the government has taken some 
steps  to  reduce  it.  Implementation  of  the  2016-
2023  Welfare  Plan  helps 
tackle  gender 
segregation  in  the  labour  market  and  to  fight 
stereotypes. 

to 

reforms 

Comprehensive reforms have been taken in the 
field  of  education  and  training  but  challenges 
remain.  Over  the  past  years,  Estonia  has  been 
implementing 
in 
comprehensive 
vocational education and training, higher education 
and  adult  learning.  The  percentage  of  students  in 
science,  technology,  engineering  and  mathematics 
is increasing. Skills governance was improved due 
to  the  introduction  of  a  system  to  anticipate  the 
labour  market.  The 
skills  needed 
increased 
participation 
although  it  is  still  low  for  the  low  skilled. 
Notwithstanding  these  efforts,  changing  labour 
market trends and the decrease in the working-age 
population  present  a  long  term  challenge  to  the 
education and training system.  

in 
in  adult 

learning  has 

the 

towards 

improving 

For 
between 

The  local  government  reform  is  an  important 
Estonia's 
step 
capacity. 
years, 
administrative 
fragmentation 
the 
and  mismatch 
budgetary  capacity  and  devolved  responsibilities 
of  municipalities  hindered 
the  provision  of 
accessible  and  quality  services.  Estonia  adopted 
and  is  implementing  the  local  government  reform 
create  viable 
that 
local 
is 
municipalities 
the  end  could  plan 
development  and  growth,  and  offer  quality 
services.  However,  providing  good  quality  and 
affordable social services remains a challenge. 

expected 
that 

to 
in 

Estonia  has  taken  measures  to  strengthen  the 
research  and  innovation  system  over  the  past 
years, but the level of R&D intensity, especially 
in  the  business  sector,  remains  low.  National 
authorities adopted the third Estonian R&I strategy 
in 2014 – “Knowledge-based Estonia 2014-2020”,  

Since  the  start  of  the  European  Semester  in 
2011,  all  the  country-specific  recommendations 
addressed  to  Estonia  have  recorded  at  least 
‘some  progress'.  18 %  of  these  country-specific 
recommendations  recorded  ‘substantial  progress’ 
(see Graph 2.1), notably in the area of incentives to 
work related to the Work Ability reform. 

Graph 2.1:  Overall multiannual implementation of 2011-

2018 country-specific recommendations 
(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 country-specific recommendation 
assessment categories.  
*** The multiannual country-specific recommendation 
assessment looks at the implementation since the country-
specific recommendations were first adopted until the 2019 
Country Report. 
Source: European Commission 

Over  the  years,  Estonia  has  taken  substantial 
measures  to  address  challenges  in  the  labour 
market.  Estonian  authorities  adopted  and  are 
implementing  the  Work  Ability  reform  and  they 
developed  specific  measures  to  bring  the  young 
and  long-term  unemployed  to  the  labour  market. 
These  were  important  steps  to  address  the  overall 
challenge  of  the  shrinking  labour  force.  Estonia 
also  took  action  to  improve  work  incentives  by 
reducing the tax burden on labour, in particular on 
low-income  earners.  It  lowered  the  income  taxes 
and the unemployment insurance contribution rate, 
abolished  the  fringe-benefit  tax  on  work–related 
studies  and  introduced  a  refund  for  low-income 
earners.    In  2018,  the  latter  was  replaced  with 
personal  income  tax-free  allowance of  EUR  500 
tax-free 
for 

low-income  earners,  while 

the 

13 

No progress0%Limited progress0%Some progress78%Substantial progress18%Full implementation4% 
 
 
 
2. Progress with country-specific recommendations 

Table 2.1: 

Assessment of implementation of 2018 country-specific recommendations 

Source: European Commission 

to 

the  weak 

which  aims  at  addressing  some  country-specific 
recommendations  in  the  field  of  R&D  –  mainly 
internationalisation and specialisation of the R&D 
system.  The  Estonian  authorities  put  in  place 
improve  science-business 
several  measures 
level  of 
cooperation.  Nevertheless, 
knowledge transfer from the public science base to 
the  private  sector,  the  lack  of  specialisation  of 
research  topics  in  sectors  that  are  relevant  for  the 
economy  and  the  low  technological  capacity  of 
firms  continue  to  drag  down  Estonia's  innovation 
performance.  The  measures  introduced  in  the 
previous  years  to  promote  R&D  (innovation  and 
development vouchers, ADAPTER, NUTIKAS) so 
far had only limited impact. 

Estonia  has  achieved  some  progress  (4)  in 
addressing 
country-specific 
2018 
the 
recommendations.  

 (4)  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 Annex A. This 
overall  assessment  does  not  include  an  assessment  of 
compliance with the Stability and Growth Pact. 

Some steps were taken to provide a more adequate 
social safety net as the subsistence level, pensions 
and  basic  income  tax  allowance  were  increased, 
and a parental pension supplement was introduced. 
Providing  good  quality  and  affordable  social 
services  however  remains  a  challenge.  In  order  to 
reduce  the  gender  pay  gap,  modifications  to  the 
parental leave and benefits system were adopted in 
autumn  2018.  The  new  legislation  to  improve 
wage  transparency,  although  only  in  the  public 
sector, has not yet been adopted by the Parliament. 
Estonia  has  made  some  progress  to  broaden  the 
innovation  base  by 
introducing  several  new 
funding  schemes  in  2018.  These  include  support 
product 
the 
commercialisation  of  breaking  scientific  results, 
and digitalisation in the industry. Nevertheless, the 
innovation  performance  of  small  and  medium-
sized  enterprises,  business  R&D  investment  and 
the  proportion  of  companies  reporting  research 
activities continue to be low.  

development 

companies, 

in 

14 

Estonia (CSR1 is euro area relevant) Overall assessment of progress with 2018 CSRs: Some CSR 1: Ensure that the nominal growth rate of net primary government expenditure does not exceed 4.1 % in 2019, corresponding to an annual structural adjustment of 0.6 % of GDP.  Improve the adequacy of the social safety net, in particular for older people and people with disabilities.   Take measures to reduce the gender pay gap, including by improving wage transparency in the private sector.  Some progress  Some progress in improving the adequacy of the social safety net  Some progress in reducing the gender pay gap  CSR 2: Promote research and innovation, in particular by providing effective incentives for broadening the innovation base. Some progress  Some progress in promoting in research and innovation   
                                                           
 
 
 
 
 
 
2. Progress with country-specific recommendations 

Box 2.1: EU funds and programmes contribute to addressing structural challenges and to 
fostering growth and competitiveness in Estonia 

Estonia is a beneficiary of European Structural and Investment Funds support and can receive during 
the 2014-2020 period up to EUR 4.42 billion of EU funding. This represents 2.7 % of GDP annually over 
the period 2014-2018 and 51.5 % of public investment. As of the end of 2018, some EUR 3 billion (70 % of 
the total) has been allocated to grant agreements. By the end of 2017, Estonia signed 12 agreements for EUR 
208  million  for  strategic  transport  projects  under  the  Connecting  Europe  Facility.  426  participants  have 
received funding of EUR 126 million under Horizon 2020 (including EUR 36 million received by 127 small 
and medium-sized enterprises).   

EU funding also has helped addressing policy challenges and the implementation of the 2018 country 
specific  recommendations.  Actions  financed,  among  others,  facilitating  private  sector  R&D  investments; 
enhancing  cooperation  between  business  and  academia;  improving  public  services’  quality,  including  by 
providing  support  to  the  local  government  reform.  Over  370  enterprises  are  co-operating  in  clusters,  64 
introduced new services and 74 new products. The Work Ability reform, supported by the European Social 
Fund, brought around 4 500 people with reduced ability for work to employment in 2017 (who were either 
unemployed  or  inactive  a  year  ago)  and  2  300  previously  inactive  became  unemployed.  In  2018,  20  770 
persons with reduced work ability were expected to receive labour market services. 

EU  funding  has  contributed  to  several  reforms  and  socio-economic  development  of  Estonia  by 
promoting  growth  and  employment  via  investments.  By  2018,  investments  driven  by  the  European 
Structural and Investment Funds have already led to completion of five new secondary schools and ten local 
health  centres;  the  capacity  of  childcare  infrastructure  has  been  raised  to  accommodate    more  than  700 
children. This has paved the way for over 6 700 enterprises being supported.  

In  addition,  the  European  Commission  can  provide  tailor-made  technical  support  upon  a  Member 
State’s  request  via  the  Structural  Reform  Support  Programme  to  help  Member  States  implement 
growth-sustaining reforms to address challenges identified in the European Semester process or other 
national  reforms.  Estonia,  for  example,  is  receiving  support  to  diagnose  the  status  of  capital  markets, 
identify development barriers and recommend improvements. The Commission is also assisting Estonia in its 
efforts  to  improve  small  and  medium-sized  enterprises’  access  to  its  financial  markets  by  setting  up  a 
regulatory  ‘sandbox’  (safe  space)  for  financial  technology  companies  and  adapting  its  legal  framework.  In 
addition,  in  2018,  work  has  started  on:  developing  a  model  for  more  integrated  provision  of  care  and 
rehabilitation  services;  identifying  future  trends  in  cyber  criminality;  and  the  development  of  tools  and 
processes for implementing the e-construction strategy, in particular for the processing of building permits.  

EU funding contributes to mobilisation of private investment. In Estonia, the overall volume of approved 
operations  by  the  European  Investment  Bank  with  European  Fund  for  Strategic  Investments  backing 
amounts  to  EUR  158  million,  which  is  set  to  trigger  a  total  of  EUR  1.3  billion  in  additional  private  and 
public investments (February 2019). Estonia has one of the highest overall volumes of approved projects by 
share  of  GDP.  Eight  projects  involving  Estonia  have  so  far  been  approved  under  the  infrastructure  and 
innovation  window  of  the  European  Fund  for  Strategic  Investments.  They  amount  to  EUR  129 million  in 
total  financing,  which  are  expected  to  generate  EUR  527  million  in  investments.  On  small  and  medium-
sized  enterprises,  eight  agreements  with  intermediary  banks  have  been  approved  for  a  total  of  EUR  29 
million, which are expected to mobilise around EUR 811 million of total investment. 8 443 companies are 
expected to benefit from this support. "Skeleton technologies OÜ" is a notable example of such project in 
Estonia. The European Investment Bank is providing financing of R&D and innovation to Europe's leading 
producer of ultracapacitors, a cutting edge emerging technology designed to store energy efficiently.   

EU funding strengthens national, regional and local authorities, social partners and the civil society.  
EUR  111  million  has  been  allocated  for  strengthening  the  capacity  of  public  administrations  at  different 
levels and to enhance cooperation with stakeholders, including social partners.   

More information at: https://cohesiondata.ec.europa.eu/countries/EE  

15 

 
    
3.  REFORM PRIORITIES 

3.1.  PUBLIC FINANCES AND TAXATION 

3.1.1.  BUDGETARY DEVELOPMENTS AND FISCAL 

FRAMEWORK  

Estonia’s fiscal position is expected to turn to a 
surplus from 2018 onwards, but the underlying 
structural fiscal position is estimated to remain 
in  deficit  (5).  According  to  the  Commission 
Autumn  2018  Economic  Forecast,  the  headline 
deficit of 0.4 % of GDP in 2017 is forecast to turn 
into a surplus of 0.5 % of GDP in 2018 and 2019. 
However, since the economy is operating above its 
potential,  the  structural  fiscal  position  is  expected 
to remain at a deficit of about ¾% of GDP in 2018 
and to stay at that level over 2019-2020.  

to 

fund 

some 

2018-2020 

The peak in economic activity has helped cover 
fast-growing  public  expenditure.  In  2018  and 
2019,  several  expenditure  programmes  have  been 
in  healthcare,  education,  social 
put  in  place 
funding,  and 
local  government 
in  financing 
mergers.  The  government  has  also  announced  an 
investment programme of 0.4 % of  GDP annually 
over 
specific 
infrastructure  in  transport  and  in  information  and 
communication  technologies,  as  well  as  housing 
and  tourism  projects.  Also,  social  expenditure  is 
set  to  grow  relatively  rapidly  due  to  an  indirect 
link to overall wage growth. So far, these expenses 
have  been  covered  by  an  increasing  tax  base, 
notably because of employment and  wage growth, 
as  well  as  cyclically  buoyant  consumption  and 
construction activity. The main threat to the budget 
balance 
is  macroeconomic  risk,  which  could 
quickly  erode  the  revenue  base  while  expenditure 
is set to grow at a relatively rapid pace. 

(medium-term 

the  structural  balance 

Estonia’s fiscal framework is based only on the 
fiscal 
budget  balance  rule 
targets) in structural terms. The exclusive focus 
on 
for  general 
government limits the importance and visibility of 
other 
notably, 
expenditure  rules  or  binding  expenditure  targets 
are  not  used,  which  reduces  the  framework’s 

indicators.  Most 

relevant 

rule 

(5)  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. 

relatively 

properties.  Accordingly, 
rapid  growth 

countercyclical 
the 
in  public 
currently 
expenditure  in  2018  and  2019  is  not  assessed 
against  any  domestic  expenditure  constraint,  such 
as  an  expenditure  rule,  ceiling  or  target.  To 
mitigate  possible  risks,  a  regular  assessment  of 
developments  on  the  expenditure  side  of  the 
budget  would  usefully 
the  national 
budgetary process (6). 

inform 

Debt sustainability analysis and fiscal risks 

to 

and 

risks 

related 

Medium- 
the 
long-term 
sustainability  of  public  finances  are  limited, 
given the current very low level of public debt. 
Estonia’s public debt was 8 % of GDP in 2018, by 
far  the  lowest  level  in  the  EU.  Long-term  fiscal 
sustainability  risks  are  low  because  spending 
to  population  ageing  are 
pressures 
contained  (see  Annex  B).  In  particular,  public 
pension  expenditure  (including  the  new  work 
ability  benefits 
replacing  disability 
pensions)  as  a  share  of  GDP  are  projected  to  fall 
steadily  through  2070  according  to  the  2018 
Ageing Report. This is  mainly due to a decline in 
the  public  benefit  ratio, 
i.e.  average  public 
pensions  (first  pillar)  vis-à-vis  average  wages  (7). 
The total (public plus private) pension benefit ratio 
is  projected  to  also  decline  slightly.  Moreover, 
pension  benefits  are  relatively  small  and  pension 
adequacy  is  a  concern  because  the  proportion  of 
the elderly population at risk of poverty in Estonia 
is above the EU average (see also Section 3.3.2.).  

that  are 

(6)  Such  an  assessment  could  for  example  be  done  by  the 
Fiscal  Council  (www.eelarvenoukogu.ee),  which  is  an 
independent body assessing the macroeconomic and public 
finance  forecasts  used  for  budgetary  planning  and 
monitoring compliance with the domestic budgetary rules, 
as well as budgetary rules in the EU law. 

(7)  This  decline  occurs  because  of  two  reasons.  First,  public 
pensions  grow  at  a  slower  pace  than  wages  because  they 
are  indexed  80 %  to  social  taxes  and  20 %  to  consumer 
prices.    Secondly,  it  reflects  the  transition  to  a  two-pillar 
pension  system  following  the  creation  of  a  mandatory 
private  individual  pension  scheme  in  2002.  This  second 
pillar  is  funded  through  a  portion  of  social  contributions. 
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. 

16 

 
 
                                                           
                                                           
3.1. Public finances and taxation 

Property  and  transport  taxes  could  be  used  to 
finance  a  further  shift  away  from  labour 
taxation.  The  total  revenue  from  property  taxes, 
mostly  recurrent  property  taxes,  amounted  to 
0.3 %  of  GDP  in  2017,  the  lowest  in  the  EU  and 
considerably  lower  than  the  EU  average  of  2.6 % 
(European  Commission,  2019b).  Estonia  collects 
more revenue from environmental taxation (8.8 % 
of total tax revenue in 2017) than the EU average 
6.1%  (European  Commission,  2019b).  However, 
most  of  it  comes  from  taxes  on  energy;  Estonia 
does  not  have  any  vehicle  taxation  apart  from  a 
circulation  tax  for  heavy  goods  vehicles  and  a 
vehicle  registration  fee.  Consequently,  transport 
taxes  account  for  0.2 %  of  total  tax  revenue  -  the 
lowest  level  in  the  EU.  From  2018,  heavy  goods 
vehicles  with  a  maximum  weight  of  over  3  500 
kilograms  registered  in  Estonia  or  abroad  are 
subject to road usage fees. New vehicles purchased 
in Estonia are the most environmentally unfriendly 
in  the  EU  with  an  average  CO2  emission  of  132 
grams  per  kilometre  compared  to  the  EU  average 
of  118.5  grams  in  2017  (European  Environment 
Agency, 2018).  

Estonia  is  shifting  the  tax  burden  away  from 
labour  but  the  tax-benefit  system  does  little  to 
reduce income inequality. The 2018 reform of the 
personal  income  tax  system  has  reduced  the  tax 
wedge  for  low  income  earners  but  inequality 
remains  high.  In  2017,  the  tax  wedge  for  low-
income  earners  was  higher  than  the  EU  average, 
standing  at  36.8 %  for  an  employee  earning  50 % 
of  the  average  wage  (above  the  EU  average  of 
32.5 %) (8). Preliminary estimates suggest  that the 
reform  reduced  the  previously  relatively  high  tax 
wedge  for  low  and  middle-income  earners  to  a 
level below the EU average. However, the reform 
had  only  a  marginal  impact  on  the  income  of  the 
poorest  households,  as  many  of  them  depend  on 
pensions  or  subsistence  social  benefits.  Overall, 
the  tax  reform  seems  to  have  had  a  limited  effect 
on reducing income inequality as measured by the 
Gini  coefficient  (see  Graph  3.1.1  and  European 
Commission, 2018b). 

(8)  Organisation 
Development: 
(http://www.oecd.org/social/benefits-and-wages.htm)  

Co-operation 
data 

Economic 
and 

Benefit 

Tax 

for 

and 
base 

3.1.2.  TAXATION FRAMEWORK  

of 

39.0 % 

of  GDP 

Estonia's  tax  system  has  a  relatively  growth-
friendly revenue structure. In 2017, the total tax 
burden  was  at  32.8 %  considerably  below  the  EU 
average 
(European 
Commission, 2019b). Revenues from labour taxes 
are  low  compared  with  the  EU  average  (16.6% 
against  19.4%  in  2017)  (European  Commission, 
2019b).  Corporate  income  taxes  and  taxation  of 
household  capital  income  are  also  below  the  EU 
average. On the other hand, revenues from indirect 
taxes at  14.4 % are  well above the EU average  of 
13.5 % in 2017 (European Commission, 2019b). 

Estonia  performs  well  on  measures  related  to 
tax  administration  efficiency.    According  to 
PricewaterhouseCoopers  and 
the  World  Bank 
(PwC and the World Bank Group, 2018), in 2016 
it  took  50  hours  a  year  for  a  medium-sized 
company to comply with tax obligations, which is 
the  most efficient outcome in the EU. The time it 
takes to comply with and obtain a value-added tax  
refund  and  the  time  it  takes  to  comply  with 
corporate income tax audit are among the lowest in 
the EU. E-filing of tax returns is  wide-spread and 
pre-filing of personal income tax returns is widely 
used.  

is 

work, 

compliance 

in  Estonia  after 

relatively  good  but 
Tax 
undeclared 
partial 
particularly 
declaration  of  salaries  remains  an  issue.    The 
value-added  tax  gap  was  at  6.8 %  of  the  total 
value-added tax liability, being down by over half 
from  the  2013  indicator  and  considerably  below 
the  EU  average  of  12.3 %  in  2016.  According  to 
the Tax and Customs Board of Estonia, undeclared 
the 
work  has  decreased 
introduction of a compulsory register of workers in 
2014, but partial declaration of salaries (‘envelope 
salaries’)  remain  an  issue.  National  authorities 
estimate  that,  in  2017,  13 %  of  workers  received 
undeclared  payments  and  that  for  these  workers, 
undeclared  payments  amounted  to  31 %  of  their 
total  salary.  The  foregone  labour  tax  revenue  was 
estimated  to  be  EUR  149.2  million  (0.6 %  of 
GDP).  Undeclared  payments  concern  particularly 
sectors  such  as  commerce, 
food, 
agriculture  and  construction.  The  tax  authority  is 
planning  to  take  further  measures  to  fight  against 
tax  evasion,  such  as  introducing  online  cash 
registers,  cooperating  with  banks, 
increasing 
transparency and facilitated access to tax data, etc.  

transport, 

17 

 
                                                           
3.1. Public finances and taxation 

Graph 3.1.1:  Share of affected households (winners and 

losers) by income deciles 

operation  expenses  and  other  revenue  accounted 
for the remaining 39.2 % of total revenues.  

the 

limit 

tax  base  might 

Local  governments'  ability  to  influence  their 
income  has  been  highly  limited.  Low  autonomy 
in  defining 
local 
governments'  ability 
to  provide  services  and 
incentives  to  attract  businesses.  The  personal 
income  tax  rate  and  the  proportion  of  income  tax 
that  is  transferred  to  local  governments  are  set  by 
the central government. Local governments can set 
the  land  tax  rate  applied  on  their  territory  with  a 
ceiling of 2.5 % of taxable land value. The taxable 
land value has not been re-evaluated since 2001.  

Calculations based on the EUROMOD model 
Source: European Commission 

The corporate income tax system has no special 
provisions  to  favour      investment  in  research 
and  development.  However,    companies  can 
the 
deduct  all  business-related  expenses  and 
corporate  income  tax  only  applies  to  the  income 
distributed to shareholders. Companies do not have 
to  pay  income  tax  on  the  income  they  reinvest  or 
retain  in  the  company.  The  statutory  corporate 
income  tax  rate  is  20 %.  In  2018,  a  reduced  tax 
rate  of  14 %  was  introduced  for  regular  profit 
distribution;  profit  distribution  is  deemed  to  be 
regular  if  the  amount  of  the  distribution  does  not 
exceed  the  average  distributed  profits  of  the  last 
three years subject to taxation in Estonia. As from 
2018,  the  Estonian  resident  credit  institutions  are 
subject  to  an  advance  corporate  income  tax 
obligation.  The  tax  rate  is  14 %  and  the  amount 
will  be  calculated  and  paid  quarterly  on  accrued 
profits.  

Fiscal sustainability of municipalities 

improved 

A  reform  of  the  local  government  reduced  the 
number  of  municipalities  from  213  to  79  but 
fiscal  autonomy  yet. 
has  not 
According to Statistics Estonia, in 2016, 60.8 % of 
local  governments'  revenues  consisted  of  tax 
revenue, of which over 92.6 % came from personal 
income  tax,  5.9 %  from  land  tax  and  1.5 %  from 
other  taxes.  Revenue  from  the  sale  of  goods  and 
services,  grants  from  central  government  for 

18 

010203040506070809010012345678910WinnersLosers 
 
 
3.2.  FINANCIAL SECTOR 

3.2.1.  BANKING SECTOR 

The  financial  position  of  the  Estonian  banking 
sector  is  strong.  Estonian  banks  continue  to  be 
well  capitalised  and  are  quite  profitable  (Table 
3.2.1). The total capital ratio reached an average of 
31.8 %  as  of  March  2018,  well  above 
the 
minimum  capital  adequacy  requirements  and  the 
capital  buffers  currently  in  force.  This  capital 
consists almost entirely of common equity "Tier 1 
Capital"  (adequacy  ratio  of  31.3 %  as  of  March 
2018), the highest quality capital. Banks' credit and 
loan  portfolios  of  banks  remain  of  good  quality. 
This  translates  into  a  low  non-performing  loan 
ratio (2.1% on average in the first quarter of 2018) 
and high levels of return both on assets (1.5 %) as 
well as on equity (10.1 %). The Estonian banking 
system  is  increasingly  funded  by  resident  client 
deposits, an evolution concomitant with a decrease 
in  the  share  of  parent  bank  funding.  However, 
there is still a small funding gap. 

Table 3.2.1: 

Financial soundness of banks 

in  incomes  and  rising  savings.  Credit  growth  to 
households  amounted  to  about  7 %  year-on-year 
over 2018. This was matched by wages growing at 
a  similar  rate  and  deposits  even  faster  by  10 % 
over  the  year.  The  increase  was  similar  for 
mortgage loans and other household loans.  

the  amount  borrowed 

Although  companies  and  households  rely 
mainly  on  bank  lending,  non-bank  players  are 
gaining  importance,  mainly  in  vehicle  leasing. 
Still, 
from  non-bank 
intermediaries is a much smaller part of corporate 
and  household  debt  than  loans  from  banks(9). 
Moreover, since the adoption of the Creditors and 
Credit  Intermediaries  Act 
in  2015,  non-bank 
players are subject to regulatory requirements and 
supervision by the Estonian Financial Supervision 
Agency. 

Graph 3.2.1:  Credit growth 

* European Central Bank aggregated balance sheet: loans 
excluding to government and International Money Fund / 
deposits excluding from government and MFI  
** For comparability only annual values are presented 
Source: European Central Bank, Consolidated Banking Data 

Source: European Central Bank 

Bank  lending  to  the  corporate  sector  has 
continued  to  expand,  growing  by  over  5%  in 
2018.  The  rate  of  growth  has  been  broadly  stable 
throughout 2018, if abstraction is  made of a  large 
one-off  reduction  in  the  loan  stock  in  autumn 
2017, due to one bank moving a substantial part of 
its loans to the portfolio of its foreign parent bank 
(see  Graph  3.2.1).  To  dampen  the  risk  associated 
with the  increasing  volume of lending, the central 
introduced  a  systemic  risk  buffer 
bank  has 
requirement 
a 
additionally 
countercyclical capital buffer for banks.  

could 

and 

set 

The concentrated banking sector, dominated by 
cross-border  groups,  remains  a  source  of 
vulnerability  due  to  spill-over  effects  in  this 
highly inter-linked region. Channels of contagion 
for  the  Estonian  banking  sector  go  through  both 
the  financial  and  the  real  estate  markets  via 
potential  second-round  effects.  Despite  the  rapid 
growth  in  deposits,  the  Swedish  banking  groups 
operating 
and 
Skandinaviska Enskilda Banken AB, with a market 
share of 40 % and 23 %, respectively) continue to 

(Swedbank 

Estonia 

in 

from  buoyant  credit  expansion 

Risks 
to 
households are eased by commensurate  growth 

(9)  Non-bank  financial  intermediaries  accounted  for  less  than 
4 %  of  all  loans  to  households,  by  the  end  of  the  second 
quarter 2018 (Eesti Pank). 

19 

2014q42015q42016q42017q42018q12018q2Non-performing loans3.22.21.71.92.11.8o/w foreign entities2.41.71.31.92.11.7o/w NFC & HH sectors3.52.92.32.42.72.3o/w NFC sector2.82.92.43.23.83.2o/w HH sector4.03.02.21.61.71.5Coverage ratio37.742.446.725.425.326.4Return on equity(1)9.76.811.19.211.311.4Return on assets(1)1.61.11.51.41.71.6Total capital ratio41.835.434.430.631.831.1CET 1 ratio41.334.833.830.031.330.7Tier 1 ratio41.334.933.830.131.330.7Loan to deposit ratio87.897.699.089.892.691.0-6-4-20246810121416Jan 12Jun 12Nov 12Apr 13Sep 13Feb 14Jul 14Dec 14May 15Oct 15Mar 16Aug 16Jan 17Jun 17Nov 17Apr 18Sep 18y-o-y %Total private Non-financial corporationsHouseholds 
 
 
 
 
 
                                                           
tap  funding  from  international  financial  markets, 
which  is  a  more  volatile  source,  thus  potentially 
exposing the Estonian branches to higher interbank 
funding liquidity risk. The financial position of the 
large  Nordic  banking  groups  active  in  Estonia  is 
still good though. Since 2017, financial stability in 
Estonia  is  also  linked  to  economic  and  financial 
developments  in  Latvia  and  Lithuania  through 
Luminor,  a  new  stand-alone  pan-Baltic  bank 
(market  share  of  15 %)  with  a  head  office  in 
Estonia and branches in the other Baltic states. The 
high  market  concentration  also  reverberates  into 
relatively  high  cost  of  borrowing  for  households 
and non-financial corporations (Graph 3.2.2). 

Graph 3.2.2:  Cost of borrowing in the  Euro area  and 

Estonia 

3.2. Financial sector 

to 

deposits  held  by  offshore  clients—where  the  risk 
of money laundering is highest – was also reduced, 
from  10 %  to  below  1 %.  Nevertheless,  in  the 
aftermath  of  the  scandal,  on  21  September  2018 
the European Commission called on the European 
Banking  Authority  to  investigate  any  possible 
breach  or  non-application  of  EU  law  by  the 
Estonian  and  Danish  supervisors.  On  its  side,  the 
additional 
Estonian 
introduced 
government 
measures  and  guidelines  on  how 
to  further 
strengthen  money  laundering  prevention.  On  29 
November 2018, a draft law was submitted by the 
the  Parliament,  establishing 
government 
significantly  higher  fines,  introducing  reverse-
burden-of-proof  on  suspicious  assets  (10),  and 
hardening  regulations  concerning  providers  of 
virtual currencies. However, discussions about this 
draft  law  in  the  Estonian  Parliament  have  been 
aborted  and  the  draft  law  has  not  been  approved. 
Looking  forward, 
to  diligently 
implement  the  tighter  EU  rules  under  the  Fourth 
Anti-Money  Laundering  Directive  Businesses  and 
individuals  subject 
the  new  Anti-Money 
Laundering  Directive  will  have  to  proceed  to  a 
global  assessment  of  the  money  laundering  and 
terrorism  financing  risks  they  face  and  must 
formulate  efficient  and  adequate  measures  to 
contain  them.  In  this  context,  increasing  the 
Estonian  Financial  Supervision  Authority’s 
responsibility 
anti-money 
laundering measures and increasing the number of 
staff working in this area is paramount. 

implementing 

is  crucial 

for 

to 

it 

Source: European Central Bank 

Housing market  

Combating  money 
laundering  and  fighting 
terrorism  financing  have  become  top  priorities 
for  the  Estonian  authorities  in  maintaining  the 
trustworthiness  of  the  financial  system.  Estonia 
has  been  under  the  regulatory  spotlight  after  the 
Estonian  branch  of  Danske  Bank  was  accused  of 
money laundering. This branch stood out due to its 
large  number  of  non-resident  clients  and  cross-
border  transactions,  many  of  which  have  been 
labelled as 'suspicious'. Apart from the reputational 
damage, the impact of the scandal on the Estonian 
banking  sector  remains  limited,  as  Danske  Bank 
ended  its  non-resident  portfolio  already  in  2016. 
Since  then,  according  to  the  Estonian  Central 
Bank,  the  proportion  of  non-resident  deposits  in 
the Estonian banking sector has fallen from 19.4 % 
to  7 %  in  September  2018.  The  proportion  of 

House price inflation has remained high at 7% 
in the first half of 2018 but recent data point to 
some deceleration in prices and demand. In past 
decades,  demand  for  housing  has  been  driven  by 
population  growth  in  the  capital  region,  income 
growth of households, and people's desire to move 
to  newly-built  houses  (European  Commission, 
2016).    Compared  to  the  2005-2008  real-estate 
boom  period,  in  recent  years  demand  has  been 
driven  significantly  less  by  mortgage  growth, 
which  levelled  off  at  about  7 %  in  2017-2018. 
Reacting  to  housing  demand,  the  supply  of  new 
residential  real  estate  has  increased  markedly, 

(10)  If  the  state  can  demonstrate  a  valid  suspicion  of  money 
laundering,  it  would  fall  to  the  owner  to  prove  legitimate 
origin  of  assets,  and  if  they  cannot,  the  assets  would  be 
exacted into public revenues. 

20 

0.00.51.01.52.02.53.03.5Jul 17Aug 17Sep 17Oct 17Nov 17Dec 17Jan 18Feb 18Mar 18Apr 18May 18Jun 18Jul 18 Euro area EstoniaTrendline 
 
                                                           
3.2. Financial sector 

3.2.2.  ACCESS TO FINANCE 

to 

Conditions for access to finance  are favourable 
the 
for  Estonian  companies.  According 
European  Investment  Bank  survey (EIB,  2018), 
most  firms  are  satisfied  with  the  type,  amount, 
cost,  and  maturity  of  the  funding  received.  The 
highest  dissatisfaction  is  reported  for  collateral 
requirements.  These  requirements  affect  more 
small  companies  and  companies  in  rural  areas 
because  of  the  lower  value  of  property  in  these 
areas.  In  fact,  about  35 %  of  Estonian  small  and 
medium-sized  enterprises,  well  above  the  EU 
average  of  12 %,  consider  collateral  requirements 
as  the  most  significant  limiting  factor  in  getting 
external  financing (European  Commission  and 
ECB, 2018). All in all, however, access to finance 
is  only  the  most  important  concern  for  5 %  of 
Estonian  small  and  medium-sized  enterprises 
compared to 7 % at EU level. 

Equity  financing  is  becoming  more  prevalent 
within  Estonian 
small  and  medium-sized 
enterprises. In 2018, 13 % of companies reported 
that  they  have  used  or  are  planning  to  use  equity 
financing. This is above the EU 12 % average and 
a significant improvement compared to the 6 % in 
2017  (EIB,  2018).  In  Estonia's  venture  capital 
investment  per  capita  is  among  the  highest  in  the 
EU. However, the Estonian venture capital market 
is small and it has some difficulties attracting large 
investors. The significant EU and national support 
provided  through  Kredex,  the  Baltic  Innovation 
Fund (EUR 130 million) and the EstFund (EUR 60 
million),  served  as  a  stimulus  to  some  large 
institutional 
investors,  such  as  pension  and 
insurance  funds,  to  invest  in  young  and  growing 
companies  (12).  It  also  helped  to  increase  the 
number  of  start-ups  and  to  scale  up  the  most 
successful ones. In the  first quarter of 2018, there 
were  already  around  550  Estonian  start-ups, 
compared to about 430 in the same quarter the year 
before.  In  addition,  employment  in  their  Estonian 
offices increased by 27 % for this period (13). Four 
Estonian start-ups have already received the status 
of  unicorns  (14).  Among  the  sectors  with  the 

(12)  See http://www.estvca.ee/ Baltic Innovation Fund managed 
to raise EUR 335 million, 40 % of which coming from the 
pension funds. 

(13)  https://www.startupestonia.ee/  
(14)  Skype,  Playtech,  TransferWise  and  Taxify.  Unicorn  is  a 
privately  held  startup  company  valued  at  over  $1  billion. 

contributing to containing the upward pressure on 
house  prices.  Construction  investment  reached 
historical highs in other sectors of the economy as 
well,  such  as  infrastructure  and  non-residential 
buildings (see Graph 3.2.3), also exerting pressure 
on  the  labour  market  (see  Section  3.3).  Hence, 
there  are  some  overheating  risks  stemming  from 
the construction sector.  

Graph 3.2.3:  Construction volumes 

Source: Statistics Estonia 

in 

lending 

for  house  purchases 
Growth 
continues  to  grow  broadly  in  line  with  GDP. 
While  household  debt  levels  are  still  in  line  with 
fundamentals, lending  growth seems to have been 
slightly  in  excess  of  fundamentals  in  the  latest 
years.(11)  Nonetheless,  banks'  loan  terms  and 
conditions  for  housing  loans  have  not  eased  and 
the  Estonian 
loan 
in  place  since  2015,  can  be 
requirements, 
considered  as  adequate  (maximum  loan-to-value 
ratio  of  85 %,  debt  service-to-income  ratio  of 
50 %, maximum loan maturity of 30 years).  

central  banks'  housing 

(11)  Fundamentals-based  benchmarks 

are  derived 

from 
regressions  capturing  the  main  determinants  of  credit 
growth and taking into account a given initial stock of debt. 
Prudential  thresholds  represent  the  debt  threshold  beyond 
which the probability of a banking crisis is relatively high, 
minimising the probability of missed crisis and that of false 
alerts.  Methodologies 
in  European 
Commission (2017b) and updates to the methodology have 
been  subsequently  proposed  in  European  Commission 
(2018f). 

are  described 

21 

0204060801001201401601800203040506070809101112131415161718Index, 2015=100buildingsinfrastructure 
 
                                                           
                                                           
3.2. Financial sector 

communication 

in  Estonia  are 
highest  number  of  start-ups 
information 
technology, 
and 
fintech,  robotics,  transportation  and  collaboration. 
Crowdfunding  is  developing  quickly  but  most  of 
the  investments  are  oriented  towards  less  risky 
projects in the real estate area.  

Private indebtedness  

Private  indebtedness  has  gone  down  from  its 
2009  peak  of  over  153 %  of  GDP.  Since  then 
both  households  and  corporations  have  been 
deleveraging.  Debt  is  forecast  to  have  declined  to 
103 % of GDP in 2018. This  reflects a significant 
change in private sector credit flows, which peaked 
at  34.5 %  of  GDP  in  2006,  and  have  come  to  an 
estimated 4.5 % of GDP in 2018. Household debt, 
at 37.6 % of GDP, amounts to about a third of the 
total  private  debt.  Such  a 
level  of  private 
indebtedness  is  considered  sustainable  and  below 
the  point  of  view  of 
the  alert  levels  from 
macroeconomic imbalances. 

At the beginning of 2018 EU is home to only 26 "Unicorn 
start-ups” (European Commission, 2018c) 

22 

 
                                                                                   
3.3.  LABOUR MARKET, EDUCATION AND SOCIAL POLICIES 

3.3.1.  LABOUR MARKET 

Activity 
unemployment 

and 

employment 

rates, 

Graph 3.3.1:  Key labour market indicators 

Organisation  for  Economic  Co-operation  and 
Development  (OECD,  2018a),  East-Viru  belongs 
to the bottom 20 % of all 395 OECD regions. With 
the  exception  of  the  counties  of  Harju  and  Tartu, 
employment  opportunities  in  knowledge-intensive 
services and high-technology sectors remain scarce 
overall  in  Estonia.  The  strong  regional  divide  in 
the  country  suggests  that  the  sustainability  of 
regional  convergence  relies  also  on 
targeted 
investments and policy measures (see Section 4.4). 

Graph 3.3.2:  Labour shortage per industry 

Source: European Commission 

Labour  market  performance  as  measured  by 
key  indicators  has  continued  to  improve.  Both 
unemployment  and  youth  unemployment  have 
declined, benefitting from the favourable economic 
climate  (15).  The  long-term  unemployment  rate 
decreased  to  1.9 %  in  2017.  Conversely,  the 
proportion of people not in employment, education 
or  training  (15-24  years)  increased  slightly16  to 
9.4%  in  2017,  from  9.1 %  in  2016,  but  remained 
below  the  EU  average  (10.9 %).  Finally,  besides 
the high employment rate of 78.7 % (20-64 years), 
Estonia's  activity  rate  has  increased  since  2014, 
reaching 83.5 % in 2017. 

Persisting regional disparities in labour market 
have  fostered  labour  mobility.  Harju  County, 
which  includes  Tallinn,  offers  relatively  high 
salaries  that  drive  interregional  migration.  By 
comparison, 
is 
county 
characterised  by  high  structural  unemployment, 
low business activity, environmental problems and 
health  and  integration  issues.  According  to  the 

of  East-Viru 

the 

(15)  Unemployment  declined  from  6.8  %  in  2016  to  5.8  %  in 
2017 (7.6 % in the EU), the youth unemployment rate (15 – 
24 years) was at 12.1 % in 2017, lower than the 16.8 % EU 
average. 

16    Due  to  increase  in  the  number  of  inactive  people  not  in 

employment, education or training 

The indicator measures the share of companies who report 
that the shortage of labour is a major factor constraining 
their production. Data for industry and services refer to Q3-
2018, while data for construction refer to October 2018. 
Source: European Commission 

indicated 

in 
in  services 

Labour and skills shortages in some sectors and 
occupations  are  on  the  rise.  The  proportion  of 
employers  reporting  labour  shortages  in  all  three 
main  economic  sectors  (industry,  construction, 
services)  is  higher  in  Estonia  than  in  the  EU  on 
average. In the first quarter of 2019, nearly 25% of 
industry  and  almost  28%  of 
employers 
labour 
employers 
shortages  limited  their  production.  The  unmet 
demand  for  labour  is  particularly  high  in  the 
information technology and communication sector. 
Employment  in  information  and  communication 
technology  and  related  fields  is  expected  to  grow 
by  58 %  in  the  next  10  years.  The  lack  of  an 
adequately  skilled  workforce  is  increasingly  cited 
as  a  barrier  to  doing  business.  According  to  the 
Organisation  for  Economic  Co-operation  and 
Development (OECD, 2018b), the supply of skills 
in  the  areas  of  health,  mathematics,  science  and 

that 

23 

727476788082848605101520253035010305070911131517%%Activity rate 20-64 (rhs)Unemployment rate 15-74 (lhs)Long-term unemployment rate 15-74 (lhs)Youth unemployment rate 15-24 (lhs)Neither in employment nor in education and training rate15-24 (lhs)0102030405060ConstructionServicesIndustryEstoniaLithuaniaLatviaEU 
 
 
                                                           
 
3.3. Labour market, education and social policies 

communication,  as  well  as  in  the  business  and 
management  professions  is  low  in  Estonia.  As 
concerns  digital  skills,  the  percentage  of  people 
with at least basic digital skills is lower among the 
unemployed (53.5 % vs employed: 67.8 %) and in 
rural  areas  (56.4 %  vs  urban:  66 %).  Ensuring  an 
adequate  supply of skills is one of the  main areas 
where investments might be needed. 

2017 offers financing for formal education studies 
in  vocational  and  higher  education  for  both  the 
unemployed and the employed. However, financial 
support is low (17) and unlikely to motivate people 
to  improve  their  skills.  Lack  of  coordination 
between 
local  governments  (providing  social 
services)  and  the  education  system  appears  to 
hinder the appropriate use of resources.  

The  Work  Ability  reform  is  bringing  inactive 
people  to  the  labour  market.  The  employment 
rate  of  people  with  reduced  ability  to  work 
increased by 0.5 pp in 2017. Funding from the EU 
has  made  a  positive  impact  on  the  proportion  of 
people  with  disabilities  in  employment,  which 
increased  from  32 %  in  2010  to  50 %  in  2017. 
Nevertheless,  the  unemployment  of  people  with 
multiple  disabilities 
increase. 
Investments  in  support  services,  rehabilitation 
measures  and  further  development  of  social 
enterprises  will  be  key  in  helping  people  to 
integrate.  Participation  in  training  remains  lower 
for  employed  people  with  limited  or  no  work 
ability  than  for  the  rest  of  employed  people.  This 
suggests that investment may be needed in helping 
people  to  improve  their  skills  and  in  providing  a 
safe and healthy working environment for all. 

is  expected 

to 

to  renew 

low  and  offers  people 

Participation in active labour market policies is 
relatively 
limited 
opportunities 
their  skills.  Both 
participation  and  expenditure  is  low  compared  to 
the EU average according to the benchmarking of 
active  labour  market  policies  and  unemployment 
benefits  (European  Commission,  2018d).  The 
following  groups  would  benefit 
from  more 
preventive  and  upskilling  measures,  which  need 
groups  whose 
additional 
performance  in  the  labour  market  is  weak  (those 
not-proficient 
in  Estonian  and  older  workers 
constituted  over  half  of  registered  unemployed 
people  in  2018);  young  mothers  returning  to  the 
labour  market  after  parental  leave  and  workers 
with lower-level skills. A measure adopted in July 

investment: 

risk 

and 

(see 

Substantial  challenges  remain  in  the  area  of 
occupational  health  and  safety.  Over  the  past  5 
years the number of registered work accidents has 
increased  by  25 %.  Analyses  of  workplace 
accidents  confirmed  that  almost  all  of  them  could 
have  been  prevented.  The  amendments  to  the 
Occupational  Health  and  Work  Safety  Act  will 
enter  into  force  in  2019.  They  are  expected  to 
promote  a  culture  of  safety  among  workers  and 
employers  alike,  which  can  lead  to  a  change  in 
European 
attitudes 
behaviour 
is  no 
Commission,  2018e).  However, 
prevention  system  envisaged  to  provide  economic 
incentives 
that 
promotes  health  and  discourages  employers  who 
fail  to  ensure  workplace  safety  (  European  Social 
Policy  Network,  2018a).  The  evaluation  of  tasks 
and  functions  of  the  Labour  Inspectorate  has 
demonstrated that a lack of resources constrains its 
reach  small  and  medium-sized 
capacity 
enterprises in an efficient manner (ibid). Similarly, 
the  Inspectorate  has  limited  capacity  to  tackle 
(18).  
undeclared  work  and  envelope  wages 
sustainable 
Dedicated 
occupational health system could support safe and 
healthy  working  lives,  taking  into  account  best 
practices in other Member States   

for  creating  an  environment 

investments 

there 

into 

to 

a 

(17)  The  size  of  the  support  is  EUR  260  per  month  for 
unemployed people and EUR 130 per month if a person is 
employed or has other income. 

(18)  There  is  close  to  one  inspector  per  17  000  employed 
persons  in  Estonia,  almost  half  the  rate  suggested  by 
International Labour Organisation. 

24 

 
 
                                                           
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 is designed as a compass for a renewed process of upward convergence 
towards  better  working  and  living  conditions  in  the  European  Union.(19)  It  sets  out  twenty  essential 
principles  and  rights  in  the  areas  of  equal  opportunities  and  access  to  the  labour  market;  fair  working 
conditions; and social protection and inclusion.  

Estonia is delivering well on a number of indicators of the Social Scoreboard supporting the European 
Pillar of Social Rights, but some issues remain. Estonia’s labour market performance has been improving 
in  line  with  its  recent  strong  economic  growth.  It  performs  above  average  in  terms  of  employment. 
Nevertheless, several areas  merit further attention. The gender pay  gap remains high, though reducing. The 
self-reported unmet need for medical care remains one of the highest in the EU caused by long waiting times 
and  weak  care  coordination  between  the  health 
and  social  services.  The  rate  of  youth  not  in 
education,  employment  or  training  shows  a 
slightly increasing trend. Social transfers are still 
not  effective  in  reducing  poverty,  although  the 
social safety net has recently somewhat reduced 
both poverty and inequality in Estonia. 

framework 

The main challenge in Estonia is to develop a 
comprehensive  policy 
for  a 
sustainable long-term care system.  Affordable 
and  good  quality  long-term  care  is  one  of  the 
twenty  Pillar  principles.  Inactivity  due  to  care 
responsibilities  is  relatively  high,  20%,  against 
the  EU  average  of  16.5  %  (2017)  as  mainly 
family  members  bear 
the  burden  of  care. 
Currently,  provision  of  services  in  long-term 
care  and  related  support  services  are  split 
between  the  health  system  and  social  welfare 
services  and  there  is  no  integrated  service 
provision. 

Estonia  has  a  promising  policy  measure 
for  outreach  youth.  It  is  implementing  a 
tracking  system  to  identify  and  integrate 
outreach 
in  education, 
employment  or  training  under  the  Youth 
Guarantee  scheme.  This  system  analyses 
data from different registries and helps local 
municipalities  to  approach  young  people 
and offer them help in finding job. Since the 
launch of the system in mid-April 2018, around 7 000 young people have been identified and local 
authorities have reached out to them (including through a media campaign).  

to  youth  not 

(19) The European Pillar of Social Rights was proclaimed on 17 November 2017 by the European Parliament, the Council and the 
European  Commission.  https://ec.europa.eu/commission/priorities/deeper-and-fairer-economic-and-monetary-union/european-
pillar-social-rights/european-pillar-social-rights-20-principles_en 

25 

Early leavers from education and training (% of population aged 18-24)On averageGender employment gapBetter than averageIncome quintile ratio (S80/S20)On averageAt risk of poverty or social exclusion (in %)On averageYouth NEET (% of total population aged 15-24)To watchEmployment rate (% population aged 20-64)Best performersUnemployment rate (% population aged 15-74)On averageLong-term unemployment  (% population aged 15-74)Better than averageGDHI per capita growth Better than averageNet earnings of a full-time single worker earning AWWeak but improvingImpact of social transfers (other than pensions) on poverty reductionTo watchChildren aged less than 3 years in formal childcareTo watchSelf-reported unmet need for medical care Weak but improvingIndividuals' level of digital skillsOn averageSocial protection and inclusionEqual opportunities and access to the labour marketMembersStatesareclassifiedaccordingtoastatisticalmethodologyagreedwiththeEMCOandSPCCommittees.ThemethodologylooksjointlyatlevelsandchangesoftheindicatorsincomparisonwiththerespectiveEUaveragesandclassifiesMemberStatesinsevencategories(from"bestperformers"to"criticalsituation").Forinstance,acountrycanbeflaggedas"betterthanaverage"iftheleveloftheindicatorisclosetoEUaverage,butitisimprovingfast.Formethodologicaldetails,please consult the draft Joint Employment Report 2019, COM (2018)761 final.NEET:neitherinemploymentnorineducationandtraining;GDHI:grossdisposablehousehold income.                      Dynamic labour markets and fair working conditionsSOCIAL SCOREBOARD FOR ESTONIA 
                                                           
duration  of  the  right  to  claim  it  will  be  longer. 
Parents can also share the parental leave for up to 
two months.  

to 

remains 

introduce 

transparency 

limited.  The 
Pay 
government  plans 
transparency 
requirements  to  reduce  the  gender  pay  gap.  The 
necessary  changes  to  the  Gender  Equality  Act  are 
discussed  in  the  Parliament.  These  measures  will 
however  only  concern  the  public  sector,  hence 
considerably limiting their potential impact.  

Social dialogue 

Capacity of social partners to participate in the 
policy design and implementation remains weak 
in  light  of  very  low  membership  rates.  Regular 
tripartite high level meetings resumed in 2018 after 
interruption  in  2002.  Bipartite  social  dialogue  is 
developing  between  the  Estonian  Trade  Union 
the  Estonian  Employers 
Confederation  and 
Confederation. In 2017-2018, they have concluded 
agreements  on 
telework,  active  ageing  and 
minimum wages. Collective agreements at sectoral 
level  only  exist  in  road  transport  and  healthcare 
sectors.  Social  partners  are 
the 
European Semester discussions but show readiness 
for  more  involvement.  Still,  representativeness  of 
both  trade  unions  and  employer  organisations  is 
very  low  and  participation  in  the  legislative 
process  is  demanding.  Therefore,  there  is  a  need 
for  further  investment  in  the  capacity  of  social 
partners. 

involved 

in 

Gender pay gap 

The gender pay gap in Estonia is decreasing but 
remains  among  the  highest  in  the  EU  (25.3 % 
and  16.2 %  in  2016,  respectively).  The  impact  of 
parenthood  on  women’s  employment  was  very 
high  (25.3 %)  and  well  above  the  EU  average 
(9.0 %)  in  2017.  In  2017,  the  employment  rates 
among  women  and  men  with  a  child  aged  below 
the age of 1 were 16.2 % and 92.6 %, respectively. 
Long parental leaves often lead to women’s slower 
career  progression  and 
fewer  opportunities, 
reflected by the gender pay gap. This, in turn, leads 
to the need for investments that promote work-life 
in  better-paid 
balance.  Overall,  men  work 
economic  sectors  and  occupations  than  women 
despite  the  fact  that  women’s  education  level  is 
higher  than  that  of  men's  (see  Section  3.3.3  and 
European  Commission  2018e)  and  that  digital 
skills  among  women  are  higher  than  the  EU 
average (European Commission, 2018g). Only part 
of the gender pay gap in Estonia can be explained 
by  factors  such  as  economic  activity,  occupation, 
age,  job  experience  or  working  time,  leaving  an 
unexplained  gap  of  20 %  against  the  EU  average 
of 11.5 %. This means that there may be issues on 
which pay transparency could shed some light.  

Enrolment  in  childcare  is  improving  but  is  not 
flexible  enough  to  meet  the  needs  of  parents 
who  participate  in  the  labour  market.  For 
children aged up to 3 years, enrolment rate (27.0 % 
in  2017)  has  fallen    below  the  EU  average  and 
below  the  Barcelona  target  of  33  %.  For  children 
aged  3  to  7  enrolment  is  higher  than  in  the  EU 
(92.8  %  vs  86.3  %,  respectively,  in  2016).  To 
make  it easier  for parents to  work,  investments in 
flexible childcare possibilities are needed in order 
to ensure longer and more flexible hours as well as 
in  childcare  places  for  children  under  the  age  of 
1.5 years and early detection of special needs. 

Estonia is taking some measures to address the 
significant  gender  pay  gap.  The  Parliament 
approved  the  second  phase  of  the  parental  leave 
and  benefits  reform  in  October  2018.  These 
changes  will  enter  into  force  on  1  April  2022. 
Maternity leave will be shortened from 140 days to 
60-100  days  and  it  will  be  possible  to  receive  the 
parental benefit  until the child is 3  years old. The 
amount  of  the  benefit  will  not  change  but  the 

26 

 
 
 
3.3. Labour market, education and social policies 

3.3.2.    SOCIAL POLICY  

Graph 3.3.3:  Poverty indicators 

gap between people with and without disabilities is 
one  of  the  largest  in  the  EU  (14.8  pp  vs  the  EU 
average  of  1.4  pp  in  2016).  In  most  cases,  the 
increased  work  ability 
Work  Ability  reform 
allowances while providing incentives to work.  

of 

impact 

reduced 

The  poverty-reduction 
social 
transfers  remains  below  the  EU  average  but  is 
increasing.  The  number  of  people  at  risk  of 
poverty after social transfers has been significantly 
higher  than  in  the  EU  (21 %  vs  16.9 %  in  2017). 
This reflects the challenges for the social safety net 
and  the  social  protection.  In  2017,  taxes  and 
transfers  together  reduced  income  inequality  by 
35 %.  Taxes 
inequality  by  12 % 
(compared  to  13 %  in  the  EU),  while  benefits  by 
another  26 %  (compared  to  35 %  in  the  EU). 
Although  the  adequacy  of  minimum  income  is 
around  the  EU  average  (European  Commission, 
2018d)  (23),  the  subsistence  benefit  level  does  not 
protect  people  from  falling  below  the  absolute 
poverty 
despite 
line/subsistence  minimum 
increases  in  recent  years  (24).  The  recent  analysis 
of 
the 
subsistence  minimum  suggests  to  increase  the 
coefficients  of  non-food  expenses  and/or  imputed 
rent  (Koppel  et  al.,  2018).  Currently,  around  30 
000 people rely on food aid every year because of 
low  incomes  and  low  skills  to  manage  household 
duties.  Thus,  there  is  need  for  investment  in  this 
area.  

the  methodology  used 

to  calculate 

Pension adequacy 

Old-age  poverty  remains  high 
in  Estonia. 
Around 42 % of those  aged 65 and above were  at 
risk  of  poverty  and  social  exclusion  in  2017.  The 
rate  was  48.7 %  for  women,  which  is  almost 
double the rate among the total population, 23.4 %. 
Estonia's  population  is  rapidly  ageing,  which 
threatens  to  increase  its  pension  expenditure, 
limiting  government  capacity  to  raise  the  level  of 
state  pension  benefits.  The  Amendment  of  the 
State Pension Insurance Act, adopted in December 

(23)  The  adequacy  of  the  minimum  income  scheme  in  Estonia 
was  58  %  of  the  poverty  line  and  50.3  %  of  a  low-wage 
earner in 2016, close to the EU average of 57.7 % and 46.1 
%, respectively. According to the benchmarking exercise in 
the area of minimum income schemes conducted within the 
Social Protection Committee. 

(24)  In  2016,  the  subsistence  level  was  increased  significantly 
from  EUR  90  to  EUR  130,  while  in  2018  the  subsistence 
level was EUR 140, the minimum food basket EUR 98 and 
absolute poverty line EUR 215. 

Source: European Commission 

Poverty is being reduced, but for certain groups 
remains  high  and  above  the  EU  average, 
according  to  the  Social  Scoreboard  (European 
Commission  2018e).  The  percentage  of  people  at 
risk  of  poverty  or  social  exclusion  (20)  has  been 
decreasing,  due  to  a  particular  decline  in  the 
in  severe  material 
living 
number  of  people 
deprivation,  which  is  below  the  level  before  the 
crisis  (21).  The  number  of  people 
living  in 
households  with  very  low  work-intensity  is  also 
rate 
decreasing,  but 
remains  among  the  highest  in  the  EU  (22).  This 
points 
inadequate  unemployment  support, 
probably  caused  by  low  replacement  rates  and 
coverage issues. In-work poverty is slightly above 
the EU average but the poverty rate for temporary 
workers was among the highest in the EU in 2017 
(21.1 %  vs  16.3 %  in  EU).  The  at-risk-of-poverty 

their  at-risk-of-poverty 

to 

(20)  At  risk  of  poverty  and  social  exclusion  rate  is  defined  as 
the  sum  of  persons  who  are  at  risk  of  poverty  or  severely 
materially  deprived  or  living  in  households  with  very  low 
work intensity.  

(21)  According  to  Eurostat,  the  proportion  of  people  at  risk  of 
poverty or social exclusion was 23.4 % in 2017, above the 
EU's  22.5  %.  Material  deprivation  stood  at  4.1  %  against 
6.9 % in the EU in 2017.  

(22)  According to Eurostat, in 2013, the percentage of people at 
risk  of  poverty  in  households  where  working-age  adults 
work less than 20 % of their total work potential was 78.4 
%.  By  2017,  it  had  decreased  to  71.9  %  but  remained 
significantly higher than the EU average of 62.2 %. 

27 

0510152025302005200620072008200920102011201220132014201520162017% of populationAt-risk-of-poverty-or-social-exclusion rateAt-risk-of-poverty rateSevere material deprivationPeople living in low work intensity households 
 
 
                                                           
 
                                                           
3.3. Labour market, education and social policies 

2018,  is  expected  to  address  demographic  trends 
and  the  system's  sustainability.  Several  measures 
were  introduced  in  2018  to  alleviate  old-age 
poverty.  They  include  a  monthly  supplement 
equivalent  to  a  year  of  pensionable  work  (EUR  6  
161 in 2018) paid for every child raised; 229 000 
pensioners  receive  this  supplement.  Also,  79  370 
received  an  annual 
pensioners 
allowance of EUR 115 in 2018 that is expected to 
reduce relative poverty by 5.5 pp. However, these 
changes  will  only  have  a  limited  impact  on 
improving the lives of older people.  

living  alone 

Estonia  relies  on  the  second-pillar  funded 
system to shore up future benefits. Participation 
is mandatory for people born from 1983 onwards, 
and  the  scheme  now  covers  most  of  the  labour 
force and makes up one third of expected pension 
benefits. The Parliament adopted changes that aim 
to  reduce  second-pillar  management  fees,  which 
have been among the highest in the OECD, and to 
promote  higher  yields  (25).  Moreover,  more 
competition  among 
is 
expected to increase annuities. 

insurance  companies 

Social services 

The  provision  of  social  services  does  not  meet 
the  demand.  The  recent  government  reform 
reduced the number of municipalities from 213 to 
79.  This  has  resulted  in  a  wide  variation  in  the 
municipalities’ capability to deliver social services 
to  the  population.  Services  aimed  at  citizens  are 
commissioned  and  organised  differently  between 
municipalities  and  the  level  of  expertise  required 
to  identify  service  needs  varies.  Furthermore, 
individuals have  to cover a large part of the costs 
of  the  services  provided  by    municipalities.  This 
leads to higher administrative costs and gaps in the 
provision of support services. It also shows a need 
for  investment  in  access  to  affordable  and  good 
quality social services. 

Long-term care services 

is  to  develop  a 
Estonia’s  main  challenge 
comprehensive  policy  framework  for  the  long-
term  care  system. 
to  care 
responsibilities  is  relatively  high,  20 %,  while  the 
EU average is 16.5 % (2017). Since mainly family 

Inactivity  due 

members  bear  the  burden  of  care,  this  creates 
considerable  economic  and  social  costs  for  them 
(European  Social  Policy  Network,  2018b). 
Estonia’s  public  spending  on  long-term  care  was 
less  than  half  (0.6 %  of  GDP  to  1.6 %  of  GDP  in 
2016)  of  the  EU  average.  At  the  moment,  there 
does  not  seem  to  be  either  a  preventive  or  a 
support  system  that  would  alleviate  the  burden 
from informal carers. There is also a problem with 
accessibility  to  care:  in  2016,  39.6 %  of  people 
reported an unmet need for homecare services due 
to  financial  reasons.  This  is  among  the  highest 
rates  in  the  EU,  which  averages  at  32.2 %.  This 
situation  could  be  mitigated  by  putting  in  place 
effective  public  policies  on 
long-term  care. 
Currently, the provision of long-term care services 
is  split  between  the  health  and  social  welfare 
services,  and  the  exchange  of  data  are  not  fully 
inter-operational. A significant investment into the 
provision of long-term care services would ensure 
that people have access to affordable, high-quality 
integrated  social  and  health  services  both  at 
national and local level.  

Applying  a  deinstitutionalisation  (26)  approach 
to  long-term  care  services  is  challenging.  With 
the  support  of  EU  funding,    municipalities  and 
private service providers  were able to increase the 
number of places in care homes for elderly,  people 
with  disabilities  and  children.  In  2018,  over  500 
additional  service  places  were  created  and  over 
2000  services  offered.  According  to  an  expert 
report  (  European  Social  Policy  Network,  2018c), 
the  number  of  people  needing  mental  health 
services  is  growing  and  there  are  around  1  300 
people on the waiting list for such services. There 
are also difficulties to provide services at home or 
in  the  community.  There  is  therefore  need  for 
further investments in this area. 

Healthcare 

Self-reported  unmet  need  for  medical  care  is 
one  of  the  highest  in  the  EU.  Unmet  healthcare 
needs  in  Estonia  stood  at  11.8 %  in  2017,  and 
continue to flag a critical situation according to the 
Social  Scoreboard  that  supports  the  European 
Pillar of Social Rights and its healthcare principle. 
The situation is  mostly due to long  waiting times. 
These  have  been  previously  noted  mainly  for 

(25)  Changes to the Investment Funds Act entered into force on 

(26)  Deinstitutionalisation  is  a  transition  from  institutional  to 

13 January , 2019. 

community-based services.  

28 

 
                                                           
                                                           
3.3. Labour market, education and social policies 

on 

priorities  for  the  government,  and  is  expected  to 
the  coming  years. 
increase  somewhat  over 
Restrictions 
to 
investment 
employers' 
employees’  health  still  exist  in  the  form  of  fringe 
benefit  tax  on  special  care,  medication  or  dental 
care  costs.  Households’  out-of-pocket  payments 
were  above  the  EU  average  in  2016  (23 % 
compared to 18 % EU) but reimbursement of cost 
for  prescribed  drugs  increased  in  2018.  Public 
health  insurance  coverage  was  estimated  at  94 % 
of  the  population  in  2016,  but  recent  analysis 
suggest that it could even be lower, at only 86 % in 
2017 (European Social Policy Network, 2018d).  

in  some  specialisations 

Uneven  availability  and  distribution  of  the 
health  workforce  contribute  to  long  waiting 
times.  The  number  of  doctors  in  Estonia  is  very 
close to the EU average (3.5  per 1000 inhabitants 
compared  to  3.6  in  the  EU)  and  has  slightly 
increased  in  recent  years  (ibid.).  However,  there 
(e.g. 
are  shortages 
psychiatrists)  and  uneven  regional  distribution 
with  rural  areas  facing  shortages  of,  e.g.  family 
doctors and nurses. Even more acute is the limited 
(currently  6.1  per  1000 
number  of  nurses 
inhabitants  compared  to  the  8.4  EU  average), 
which could be linked to work-related emigration. 
Estonia  is  making  efforts  in  this  area  by  offering 
an increase in the salaries of nurses, increasing the 
number  of  training  places  and  organising  return 
programmes. However, its health workforce would 
benefit from investments in training, incentives for 
better  regional  distribution,  and  improvement  of 
working conditions. 

to 

are 

used 

funds 

Several reforms are being implemented in order 
to  improve  access  to  and  quality  of  healthcare. 
create 
being 
EU 
multidisciplinary  healthcare  centres.  Continued 
strengthening  of  the  primary  care  system  should 
improve  access  to  specialist  services.  Many  small 
hospitals  have  merged  or  turned  into  ambulatory 
(or  outpatient)  clinics,  nursing  and  rehabilitation 
facilities,  hospitals  and  social  services  providers, 
which 
and 
accessibility.  In  addition,  since  2014  regional 
hospitals  have  been  encouraged  to  network  with 
general  hospitals  to  share  skills  and  medical 
resources. Two such networks were operational by 
2018.  The  National  Health  Plan  2020-2030  is 
expected  to  improve  the  quality  of  the  health 
system,  e.g.  by 
in  prevention  and 
creating  an  environment  that  supports  healthy 

investing 

improve 

quality 

should 

care 

access  to  specialised  care,  but,  according  to  the 
State Audit Office (Riigikontroll, 2018a), access to 
primary  healthcare  is  also  an  issue.  Some  groups 
face  serious  difficulties  with  access  to  health 
services,  notably  the  unemployed,  young  people, 
women,  and  those  in  poorer  health  and/or  who 
have  a  lower  income  (European  Social  Policy 
regional 
Network,  2018d).  There  are  also 
disparities  in  access  to  specialist  services,  with 
North-Estonia  accounting  for  21.4 %  of  unmet 
needs  for  specialist  care  in  2018,  against  only 
6.8 % in West- Estonia.  

there  are 

improvements, 

Despite 
serious 
challenges  with  Estonians'  health  status.  Life 
expectancy  continues  to  increase  but  remains  3 
years below the EU average (OECD, 2018a). This 
can be linked to unhealthy lifestyles (e.g. smoking, 
harmful  alcohol  drinking,  physical  inactivity  and 
obesity),  and  to  long  waiting  times  for  medical 
care. The difference between male and female life 
expectancy  has  decreased  in  recent  years  from  12 
years  in  1994  to  8.6  years  in  2017  but  remains 
higher than the 5.4 year EU average (ibid.). There 
are  also  noticeable  regional  differences  in  life 
years  lost  and  in  premature  deaths,  with  the  East-
Viru,  Valga  and  Jõgeva  counties  showing  the 
worst results.  

Estonia  is  among  the  EU  countries  with  the 
lowest  average  number  of  healthy  life  years  in 
the EU. In 2016, healthy life years were calculated 
as  54.4  for  men  and  59  for  women  (compared  to 
63.5  and  64.2  in  the  EU,  respectively).  There  are 
big  disparities  in  healthy  life  years  between  low 
and  high  income  groups.  Circulatory  diseases 
remain the  main cause of deaths. Estonia also has 
the  highest  percentage  of  HIV-positive  adults  in 
the  EU.  An  increase  in  mental  health  problems 
among  children  has  been  reported  (Eurochild, 
2018),  along  with  one  of  the  highest  rates  of 
cyberbullying  in  the  EU  (reported  at  38 %  of 
children  aged  11,  13  and  15  in  2013-2014) 
(OECD, 
The  worse-than-average 
performance  in  terms  of  health  outcomes  and  the 
for 
related 
investments in better disease prevention and health 
promotion.   

inequalities  highlight 

the  need 

2018c). 

Public  spending  on  healthcare  in  Estonia  is 
below the EU average. In 2017, Estonia spent on 
healthcare 6.7 % of GDP compared to 9.6 % in the 
EU  (ibid.).  Healthcare  spending  is  one  of  the 

29 

 
3.3. Labour market, education and social policies 

choices.  Investment  needs  can  be  envisaged  for 
primary  care  services  and  the  development  and 
improvement of outpatient care.  

efficient  use  of  school  resources  and  improve  the 
working conditions of teachers.  

3.3.3.  EDUCATION AND SKILLS  

for 

The  education  and  training  system  is  under 
pressure  to  adapt  to  demographic  and  labour 
market  trends.  Demographic  trends  (27)  and 
emerging  automation  mean  that  Estonia  needs  to 
better  capitalise  on  its  human  resources  and  its 
education  system    to  deploy  higher  skills  and 
enable the uptake of  innovation. According to the 
OECD’s  Program 
International  Student 
Assessment, known as the "PISA survey", (OECD, 
2016), young Estonians have a good level of basic 
skills.  However,  the  rate  of  early  leavers  from 
education and training (28) remains too high in the 
context of a shrinking working-age population and 
the  need  for  high-skilled  workers  Measures  to 
prevent  early  school  leaving,  including  career 
guidance  and 
individualised  approaches,  are 
insufficient.  Almost  50 %  of  upper-secondary 
general  education  students  are  unhappy  with  the 
content and quality of the digital skills acquired at 
their  school.  Provision  of  digital  skills  is  unequal 
among  schools  and  the  need  to  upgrade  teachers’ 
digital competences is high (Ministry of Education 
and  Research,  2018).  Russian-speaking  medium- 
school  graduates  do  not  have  sufficient  levels  of 
proficiency  in  Estonian  (29)  and  English,  which 
The 
impacts 
reorganisation  of  the  school  network  —  partly 
financed  by  EU  funds  —  is  still  ongoing  and 
requires further investments in the coming years. A 
planned  ‘consortium’  may  help  ensure  a  more 

labour  market 

outcomes. 

(27)  The  distribution  between  the  different  stages  of  education 
has  changed  considerably,  reflecting  changes  in  the 
population’s  age  structure.  In  2017,  the  number  of  higher 
education students decreased by one third compared to the 
peak  year  of  2010.  Declining  trends  since  2005  in 
secondary  education  have  reversed,  while  the  number  of 
students  in  basic  education  continues  to  increase.  In  pre-
school,  numbers  have  been  decreasing  since  2015 
(Statistics Estonia, 2018).  

(28)  10.8  %  in  Estonia  against  the  EU  average  of  10.6  %  in 
2017  and  above  Estonia’s  national  Europe  2020  target  of 
9.5%. 

29)  10.8  %  in  Estonia  against  the  EU  average  of  10.6  %  in 
2017  and  above  Estonia’s  national  Europe  2020  target  of 
9.5%. 

lower  than  the  target  of  90  %.  83  %  of  upper  secondary 
Russian-medium school graduates had a B2 level in 2016.  

Tackling anticipated teacher shortages is a  key 
challenge. Almost 50 % of teachers in Estonia are 
aged 50 or more. The number of subject teachers is 
already  behind  demand,  while  the  number  of 
in  university  programmes  preparing 
students 
subject  teachers 
is  low  (OSKA,  2018).  The  
salaries of teachers  have increased significantly in 
recent  years(30)  but  are  still  below  the  average 
wage  of  higher  education  graduates.  Working 
conditions of teachers are  considered unattractive, 
including  due  to  challenges  linked  to  career 
pathways  and  to  teacher's  education  programmes. 
Furthermore,  students  do  not  receive  necessary 
support  services  despite  an  expansion  of  services. 
Less  than  half  of  Estonian  schools  had  a  speech 
therapist  in  2017  and  less  than  a  third  had  a 
psychologist or special education teacher. Teachers 
often  lack  the  necessary  skills  to  work  with 
students  with  special  educational  needs  or  to 
develop individualised approaches to learning. The 
number of graduates in inclusive education is low 
(Ministry  of  Education  and  Research,  2018). 
Increasing  the  number  of  teachers  in  Russian-
medium  schools  who  have  sufficient  Estonian-
language knowledge remains a challenge (31).  

Despite its potentially important role in tackling 
skills  mismatches,  vocational  education  and 
training remains unattractive. The employability 
of  recent  graduates  is  above  the  EU  average 
(86.2 % in Estonia compared to 76.6 % the EU in 
2017) indicating a high demand for specialists. The 
potential  of  vocational  education  and  training  to 
provide  industry-specific  technological  skills  and 
support  productivity  growth  is  not  sufficiently 
utilised.  Young  people  still  consider  vocational 
education  and  training  an  unattractive  educational 
path,  but  the  proportion  of  adult  students  in 
vocational education is growing.   

The 
labour  market  relevance  of  higher 
education  is  not  sufficient.  Tertiary  educational 
attainment  continues  to  increase  (48.4 %  in  2017) 
and  is  above  the  EU  average  (39.9 %).  However, 

(30)  By about 60% between 2012 and 2018 
(31)  In  2017,  7.8  %  of  all  teachers  did  not  have  sufficient  
Estonian  language  knowledge  (Ministry  of  Education  and 
Research, 2018).   

30 

 
                                                           
                                                           
3.3. Labour market, education and social policies 

the  gender  gap  persists  (32).  The  proportion  of 
graduates  in  science,  technology,  engineering, 
mathematics)  –  who  play  a  key  role  in  R&D 
investments  –  is  increasing  (29 %  in  2017)  but 
their  proportion  (per  thousand-population  aged  25 
-  34)  is  low  (12.2 %  vs  EU-  15.5 %).  The  skills 
mismatch extends to transversal skills.  

in  Estonia  over 

Participation in adult learning is improving but 
further  upskilling  of  the  workforce  is  key  for 
economic growth in the long run. The proportion 
of adults participating in education or training has 
increased  to  17.2 %  (2017),  which  is  the  highest 
level  measured 
the  years. 
However, it is  still below Estonia's 2020 target of 
20 %.  Coverage  of  existing  instruments,  such  as 
financial  incentives  to  companies  for  training 
purposes, is well below the EU average (33). Public 
financial  incentives  or  grants  are  mostly  focused 
on medium- and large-sized businesses (34). Public 
support  to  benefit  smaller  companies  is  not 
sufficiently  targeted,  while  access  to  training, 
particularly 
is 
insufficient. 

disadvantaged 

adults, 

for 

Investment needs 

Increased  investments  in  skills,  education  and 
training,  healthcare  and  social  inclusion  are 
crucial  for  boosting  Estonia’s  productivity  and 
long-term  inclusive  growth.  Skills  shortages  and 
mismatches  are  among  the  main  obstacles  to 
business  investment,  pointing  at  the  need  to  align 
the  education  system  to  the  needs  of  the  labour 
market  and 
the  upskilling  and 
reskilling  of  the  workforce  to  keep  up  with 
technological 
the 
social 
demographic 
inclusion,  healthcare,  social  and  long-term  care 
services,  as  well  as  in  supporting  active  and 
healthy  ageing,  including  through  well-adapted 
to  ensure 
working  environment 
sustainable and inclusive economic growth. 

Considering 

is  crucial 

investment 

changes. 

trends, 

invest 

in 

to 

in 

(32)  41.6 % of men aged 30-34 have a degree compared to 55.6 

% of women in the same age group 

(33)  European  Commission  (2019),  based  on  Adult  Skills  and 

Learning benchmarking indicators. 

(34)  ibid 

31 

 
                                                           
3.4. COMPETITIVENESS REFORMS AND INVESTMENT 

3.4.1.  PRODUCTIVITY AND INVESTMENT NEEDS 

Graph 3.4.2:  Total factor productivity 

the  EU  average.  In 

Although  Estonia's  economy  has  shown  rapid 
convergence  with  the  EU  since  the  country's 
accession in 2004, continued strong productivity 
growth  is  needed  to  sustain  the  momentum. 
Starting  from  a  very  low  level  of  around  40 %  in 
2004, labour productivity (adjusted for purchasing 
power) increased to over 60 % in 2017, compared 
to 
line  with  economic 
developments,  labour  productivity  growth  has 
picked up over the past two years, recording 3.2 % 
in  2016  and  2017  respectively. 
and  2.1 % 
However,  although  these  growth  rates  are  above 
the  1.1 %  average  growth  rate  seen  in  Estonia 
since the crisis, their level is still one of the lowest 
in  the  EU  (see  Graph  3.4.1).  Continued  strong 
productivity growth will be required to ensure that 
the convergence process continues.     

Graph 3.4.1:  Labour productivity in PPS relative to the EU 

Source: European Commission 

total 

In  2017, 

The  absence  of  faster  growth  in  total  factor 
productivity can put a drag on future potential 
economic  growth. 
factor 
productivity  was  only  6 %  above  its  2000  level 
(see  Graph  3.4.2).  Total  factor  productivity 
contribution  to  growth  in  Estonia  was  negative 
during 
to 
technology  uptake (European 
companies' 
Commission,  2008).  In  the  Estonian  situation  of 
limited available labour resources, this represents a 
significant  challenge  to  economic  growth  and 
convergence  and  indicates  the  need  for  targeted 
policy  support  that  would  improve  technological 
uptake. 

the  after-crisis  period,  pointing 

low 

Source: European Commission 

in  skills, 

investment 

insufficient 

investments 

Efficient 
innovation, 
research,  and  infrastructure  are  crucial  for 
boosting  Estonia’s  productivity  and  long-term 
competitiveness.  Skills shortages and mismatches 
are  among 
to  business 
the  main  obstacles 
investment and limit larger productivity gains (see 
Section  3.3).  The 
in 
research,  development  and  innovation,  as  well  as 
links  between  companies’  needs  and 
weak 
institutions,  are 
priorities  of 
developments. 
bottlenecks 
Investing 
and 
automation  can  make  them  more  productive.  In 
addition,  ensuring  good  transport  connection  with 
the  rest  of  the  Europe,  as  well  as  within  the 
country  are  important  for  supporting  the  export 
competitiveness  of  Estonian 
potential 
companies.  

research 
productivity 

digitisation 

companies' 

and 

the 

in 

to 

than  in  the  EU  since 

Investment has been the key driver of economic 
convergence.  A  breakdown  of  GDP  growth 
components  shows  that  capital  intensity  increased 
on  average  around  2  percentage  points  faster  in 
Estonia 
the  country's 
accession  (see  Graph  3.4.3).  However,  the  strong 
overall  performance  over  the  last  two  decades 
masks  differences  in  investment  before  and  after 
the  financial  crisis.  Especially  private  investment 
declined after the crisis, and is now broadly at the 
average  EU  level.  This  slow-down  reflects  the 
adjustment 
the  period  of 
overheating,  and  signals  the  gradual  maturing  of 
the economy. It may also indicate the existence of 
investment bottlenecks (see Box 3.4.1).  

that  has  followed 

32 

020406080100120140160180200BGLVROPLHUEEHRELLTPTCZCYSKMTSIUKESITFISEATFRNLDEDKBELUIE2017EU200090100110120130140150160000102030405060708091011121314151617EstoniaLatviaLithuaniaFinlandEA 
 
 
 
Graph 3.4.3:  GDP per capita growth breakdown in absolute 

terms, 2005-2017 

Contributions to absolute annual GDP growth (2005-2017). 
The horizontal axis shows percentage point contributions to 
the absolute growth.  
Source: European Commission 

The  investment  structure  has  become  more 
productivity-oriented. There has been a change in 
Estonia's investment structure in recent years. The 
share  of  construction  in  overall  investment  has 
been  gradually  declining,  while  investments  in 
spending  on  machinery  and  equipment  have 
increased  (see  Graph  3.4.4).  This  shows  that 
to  a  more  productive 
Estonia  has  changed 
to  ongoing 
investment  composition,  pointing 
technological  upgrade  and  automatisation  of  the 
economy,  which  is  beneficial  for  productivity 
growth.  At  the  same  time,  productivity-enhancing 
private  investment  in  R&D  has  been  low  (see 
further on in this section). 

Graph 3.4.4:  Investment by asset type and year 

3.4. Competitiveness reforms and investment 

The  proportion  of  economy-wide  investment  in 
intangible  assets  increased,  but  remains  well 
below  the  EU  average.  In  2017,  investment  in 
total 
intellectual  property  was  10.4 %  of 
investment,  with  the  biggest  contribution  coming 
from  professional  and  scientific  activities  and  the 
information  and  communication 
technologies 
sector. Investment in intellectual property products 
by  the  manufacturing  companies  was  below  the 
economy-wide  average.  This  can  be  partially 
explained  by  the  structure  of  the  economy,  with 
many 
in  contract 
manufacturing,  and  small-size  firms  lacking  the 
knowledge  and  resources  needed  to  invest  in 
intellectual property.  

large  companies  engaged 

Graph 3.4.5:  Private and public investment rates 

Source: European Commission 

In terms of the internationalisation of small and 
medium-sized  enterprises,  Estonia  performs  in 
line  with  the  EU  average.  In  recent  years,  the 
country has introduced a number of measures that 
have led to improvements in this area.  In 2017 and 
the  first  quarter  of  2018,  Estonia’s  business 
diplomacy  strategy  was  announced.  It  aims  to 
in 
further 
Estonia and support the exports of Estonian firms. 
Further  effort  and  investments  is  important  as 
exporting  companies  are  characterised  by  higher 
productivity and growth prospects and can support 
the  transfer  of  innovation  and  knowledge  in  the 
country.  

increase  foreign  direct 

investment 

Source: European Commission 

Research, development and innovation 

Investment  that  supports  the  move  towards 
intensive 
high-technology 

and  knowledge 

33 

0.15-0.352.542.81-10123Initial education of labourTotal factorCapital intensityGDPProductivity0102030405008091011121314151617% of GDPIntellectual property productsMachinery and equipmentOther buildings and structures (gross)Dwellings (gross)Total construction0510152025303593959799010305070911131517% GDPEstonia publicEstonia privateEA publicEA private 
 
 
 
3.4. Competitiveness reforms and investment 

environment 
attainment.   

and 

high 

tertiary 

education 

in  terms  of  some 
Estonia  performs  well 
intellectual  property  production,  but  below  the 
EU average in terms of investment in this area 
(see  Graph  3.4.6).  Amount  of  trademark  and 
design  applications  was  above  the  EU  average 
(European  Commission,  2018i). 
In  patent 
application,  Estonia  is  doing  better  in  comparison 
to  its  Baltic  peers  but  well  below  the  EU  average 
and  the  Nordic  countries.  In  the  manufacturing 
sector,  the  number  of  companies  developing  new 
products  or  services  is  relatively  low,  and  the 
awareness and knowledge of procedures to acquire 
patents is limited.  

Graph 3.4.6:  Investment in intellectual property products 

(gross) 

Source: European Commission 

Investment  in  R&D  by  the  private  sector  is 
relatively  low  and  concentrated.  Business  R&D 
intensity  decreased  slightly  to  0.61 %  of  GDP  in 
2017  and  is  at  half  of  the  EU  average  (1.36 %). 
R&D investment appears highly concentrated in a 
small  number  of  firms,  and  has  declined  in  small 
and  medium-sized  enterprises  (from  0.55 %  of 
GDP in 2010 to 0.32 % in 2015, slightly above the 
EU 
average  of  0.30 %).  Business  R&D 
expenditure  is  largest  in  the  information  and 
communication 
and 
technology 
manufacturing (25 %) sectors. Although Enterprise 
Estonia  launched  a  scheme  to  support  product 
development and R&D, significant investment will 
be needed to help Estonian companies to catch up 
with  European  peers  and  foster  competitiveness 
and productivity.  

(40 %) 

in 

companies 

sectors  is  likely  to  be  required  to  sustain 
productivity  growth.  The  Estonian  economy  is 
dominated  by  low  and  medium-low  technology 
its  manufacturing 
sectors.  About  10 %  of 
companies operate in high-tech and medium high-
tech  manufacturing  sectors  and  create  about  21 % 
of  jobs  and  24 %  of  value  added.  The  share  of 
in 
fast-growing 
employment 
innovative  sectors  (35)  in  Estonia  is  low  (3.2 %), 
below the EU average of 4.8 %. At the same time, 
many  of 
in  contract 
these  firms  specialised 
manufacturing,  with  research,  development,  and 
innovation  activities  performed  abroad.  This 
makes  the  sectors  vulnerable  to  international 
competition as wages continue to increase. Income 
convergence  in  the  country  can  be  sustained  if 
more companies develop R&I activities and move 
up  in  global  value  chains.  This  contrasts  with 
Estonia’s strength in knowledge-intensive services 
that  increasingly  provide  value  added  to  the 
economy. Further investment from both the private 
and  the  public  sectors  is  required  to  ensure  that 
innovation is  wide-ranging, develop  new products 
and  services,  enter  new  markets  and  improve  the 
skills of available human resources.  

the 

innovator' 

Estonia's innovation performance has dropped, 
as  measured  by  the  European  Innovation 
Scoreboard.  Although  the  country  remains  a 
'moderate 
(European  Commission, 
2018h), the low proportion of innovative small and 
medium-sized  enterprises,  decline  of  non-R&D 
innovation expenditure and the weak collaboration 
between  companies  and  the  public  sector  drag 
down 
innovation  performance  (European 
Commission, 2018i). In 2017, small and  medium-
sized  enterprises  carrying  out  product  or  process 
innovation  stood  at  less  than  30 %  of  the  EU 
average,  and  for  marketing  or  organisational 
innovation  this  figures  was  less  than  20 %.  The 
proportion  of  small  and  medium-sized  enterprises 
that  reported  doing  in-house  innovation  is  a  little 
higher,  but  still  below  40 %  of  the  EU  average 
(ibid).  To  overcome  barriers  to  entry  in  new 
sectors  and  markets,  small  and  medium-sized 
enterprises need targeted support for innovation. It 
helps  that  Estonia  already  has  a  business-friendly 

(35)  Number of employees in high growth enterprises measured 
in employment (growth by 10 % or more) in the top 25 % 
most  innovative  sectors,  defined  according  to  CIS*KIA 
scores 

34 

012345670708091011121314151617% of GDPEUEstoniaLatviaLithuaniaFinlandSweden 
                                                           
 
3.4. Competitiveness reforms and investment 

for 

relevance 

the  economy  and 

is  a  persistent  shortcoming 

The  weak  link  between  the  science  and  the 
economy 
for 
Estonia’s R&I system.  On the one hand, there is 
a  lack  of  prioritisation  of  research  topics  in  areas 
of 
some 
adjustments to the smart specialisation strategy are 
needed. On the other hand, the research results are 
insufficiently exploited, partially due to the limited 
R&D absorption capacity of companies in Estonia.    
research 
Firms  only  commissioned  6 %  of 
activities 
to  universities  and  public  research 
organisations  which  is  close  to  the  EU  average. 
Most  doctoral  degree  graduates  remain  in  the 
research  sector,  and  their  employment  share  in 
business is rather low (an average  of 2 % per one 
thousand in the active population versus 4 % in the 
in 
EU).  To  engage  businesses  and  science 
collaborative  projects  and  increase  companies' 
technological  capacity,  policy  measures,  based  on 
the smart specialisation strategy, include incentives 
in  the  baseline  funding  of  R&D  institutions  and 
new infrastructure investments in strategic areas – 
mainly 
communication 
information 
technologies and resources valorisation. 

and 

in 

Measures designed to address the shortcomings 
in the R&I system have had limited impact. For 
example,  support  for  competences  centres,  the 
innovation  and  development  vouchers,  and  the 
'ADAPTER' platform (36) have not led to a visible 
increase  in  reported  R&D  activities.  The  role  of 
the  clusters  has  also  been  limited  because  of 
resource  constraints.  The  'NUTIKAS'  programme, 
promoting applied research in smart specialisation 
areas, is under revision due to its slow uptake. (37). 
New  initiatives  are  being  introduced  to  support:  
product  development  (‘My  First  Product’),  the 
commercialisation  of  breaking  scientific  results 
(‘Proof  of  Concept’)  and  digitisation 
the 
manufacturing 
addition,  Estonia 
sector. 
requested  an  external  analysis  of  its  R&I  system 
through  the  Horizon  2020  Policy  Support  Facility 
to support its efforts to better connect the research 
and economy.  

In 

in 

(36)  ADAPTER is a network of Estonian  universities, research 
and  development  organisations,  providing  a  quick  and 
reliable  link  for  companies  and  organisations  to  the 
research and development community. 

(37)  With  a  total  budget  of  EUR  50.7m,  only  over  EUR  12m 

have been granted among 35 awarded projects  

35 

 
                                                           
3.4. Competitiveness reforms and investment 

Box 3.4.1: Investment challenges and reforms in Estonia 

Section 1. Macroeconomic perspective  

In  line  with  the  global  trend,  investment  growth  in  Estonia  after  the  crisis  has  slowed 
down,  although  it  remains higher  than in  the  EU  on average.  The  investment  share  has 
been  around  23 %  of  GDP.  The  highest  share  of  investment  is  in  construction  and 
machinery and equipment. Investment in intangibles has increased, but remains below the 
EU  average.  The  year-on-year  investment  rate  has  fluctuated  quite  a  lot  in  the  past, 
reflecting the impact of important one-off projects and the cyclicality of the EU funds.  

Section 2. Assessment of barriers to investment and ongoing reforms  

Estonia  faces  a  number  of  challenges,  including  demographic  decline  and  regional 
disparities  (see  Section  2).  Public  institutions  are  generally  perceived  as  efficient, 
effective  and  supportive  of  business  activities.  However,  compared  to  the  EU  top 
performers,  the  Estonian  economy  has  relatively  low  capital  intensity  and  total  factor 
productivity. In recent years, Estonian companies have been affected by skills shortages 
and high barriers to entry in sectors where significant investment in R&D and innovation 
is needed to build a competitiveness base. Investment and productivity may be boosted by 
modernising the insolvency framework and by improving cooperation between academia, 
research and businesses. 

Selected barriers to investment and priority actions underway  

1.  Protecting  minority  shareholders  and  resolving  insolvency  remain  the  most  critical 
issues affecting businesses. Insolvency procedures in Estonia take around 3 years and the 
recovery  rate  is  slightly  above  40 %.  This  traps  labour  and  financial  resources  in  less 
productive firms. It has a negative impact on incentives to invest and provide financing.  
Legislative  amendments  linked  to  bankruptcy,  reorganisation  and  debt  restructuring  are 
expected in 2019 (see Section 3.4) 

2.  Cooperation  between  academia  and  businesses  remains  insufficient.  This  may  be 
related  to  the  limited  impact  of  the  measures  designed  to  promote  private  research  and 
innovation  activities,  and  also  to  some  regional  specificities.  All  Estonian  regions  are 
lagging  behind  in  industrial  digitisation  and  in  resource  and  energy  efficiency  (see 
Section 3.4).   

36 

Regulatory/ administrative burdenTaxationPublic administrationAccess to financePublic procurement /PPPsCooperation btw academia, research and businessJudicial systemFinancing of R&D&IInsolvency frameworkBusiness services / Regulated professionsCompetition and regulatory frameworkRetailEPL & framework for labour contracts ConstructionWages & wage settingDigital Economy / TelecomEducation, skills, lifelong learning EnergyTransportLegend:No barrier to investment identifiedSome progressCSRInvestment barriers that are also subject to a CSRSubstantial progressNo progressFully addressedLimited progressNot assessed yetPublic administration/ Business environmentFinancial Sector / TaxationR&D&ISector specific regulationLabour market/ Education 
 
it  has 

Public  expenditure  in  R&D  has  increased,  but 
remains  below 
the  EU  average.  Public 
expenditure  in  R&D  reached  0.66 %  of  GDP  in 
2017,  below  the  EU  average  of  0.69 %  of  GDP. 
While currently around 48 % of funding for R&D 
is  provided  by  the  EU,  Estonia  plans  to  increase 
the state budget allocation for R&D to 1 % of GDP 
(38). The quality of the country’s scientific results, 
measured by the number of published articles with 
the top 10 % of the most cited articles, is below the 
improved  (39). 
EU  average,  although 
Estonia’s  public  research  system  benefits  from  a 
international  scientific  co-
high  number  of 
publications  and  an  increasing  number  of  foreign 
researchers  (10 %  of  the 
total)  and  doctoral 
students  (17 %)  in  2017.  The  substantial  increase 
of  baseline  funding  for  higher  education  and 
research  institutions  (tripled  over  the  last  four 
years, from EUR 9 million to EUR 27 million and 
growth will continue in 2019) is likely to help the 
long-term sustainability of the public R&D system. 
However, the increase in the quality of the science 
base  in  Estonia  still  does  not  leverage  R&D 
activities carried out by companies. 

Digitisation 

in 

leading  position 

in  e-
Despite  Estonia's 
the  digitisation  of  Estonian 
Government, 
companies  remains  a  challenge,  leaving  its  full 
productivity  potential  untapped.  Estonia  scores 
below the EU average in the integration of digital 
industry,  despite  some  recent 
technology 
progress  (European  Commission,  2018j).  The 
proportion  of  Estonian  small  and  medium-sized 
enterprises  selling  online  (15.4 %)  remains  below 
the EU average of 17.2 %. Around 8.3 % of small 
and  medium-sized  enterprises  sell  online  across 
borders.  For  17.1 %  of  small  and  medium-sized 
enterprises  the  high  cost  of  delivery  is  the  main 
trade  barrier.  On  the  positive  side,  in  terms  of 
turnover  from  e-commerce,  Estonia  is  slightly 
outperforming the EU average (11.4 % vs 10.3 %). 
To  better 
is 
the  digitisation  and 
launching  an  audit  on 

target  public  support,  Estonia 

(38)  Implementation  Plan  2016-2019 

the 
objectives of the Estonian Research and Development and 
Innovation 
“Knowledge-based 
Estonia” 

for  achieving 

2014-2020 

Strategy 

(39)  Estonia has an average of 7.6 scientific publications ranked 
among  the  top  10  %  most-cited  worldwide  publications 
versus the EU average of 11.1  

automation  of  the  economy,  to  be  followed  by  a 
grant scheme. Further investment in  this area  will 
be  needed  from  both  the  public  and  the  private 
sector.  

sectors.  The 

Availability of digital skills remains a challenge 
for  certain 
information  and 
technology  sector  has  been 
communications 
important  for  creating  value-added 
jobs  (see 
Section  1  and  Graph  1.5).  Giving  priority  to 
addressing  skills  shortages  in  the  sector,  Estonia 
information  and 
has 
lifted 
the  quota  on 
from 
specialists 
technology 
communications 
countries  outside  the  EU  and  is  in  the  process  of 
increasing  support  for  the  recruitment  of  such 
specialists  in  industry,  including  through 
the 
planned 'digital nomad visa' scheme. Furthermore, 
the  pilot  training  programme  'Choose  IT'  offers 
targeted  skills  retraining  in  the  information  and 
communications technology sector. In addition, the 
to 
programme  “IT  Akadeemia”  contributes 
increasing  the  number  of  information  technology 
professionals with university degree. Although the 
information  and  communications 
technology 
sector  is  becoming  less  constrained  in  finding 
specialists, 
is  still 
encountering problems. In 2017,  the proportion of 
manufacturing 
an 
technology 
information  and  communications 
specialists  was 
is  also 
underperforming  in  terms  of  information  and 
communications  technology  training  provided  by 
companies – only 13% vs the EU average of 21% 
in 2017.   

the  manufacturing  sector 

just  14%.  Estonia 

companies 

employing 

Regarding  connectivity,  Estonia  performs  in 
line  with  the  EU  average,  but  there  is  further 
in  ultra-fast  broadband.  Fixed 
potential 
broadband  coverage  is  below  the  EU  average 
(partially  compensated  by  mobile  coverage), 
mainly  due  to  low  rural  availability.  Connectivity 
targets include providing all residents with internet 
access above 30 Mbps and achieving at least 60 % 
household subscription rates for speeds above 100 
Mbps  by  2020.  Although  ultra-fast  coverage  in 
the  EU  average  by  13 
Estonia  outperforms 
percentage points, its take-up has been well below 
the  EU  average.    Effective  deployment  of  the  5G 
networks  may  also  be  helpful  in  assuring  reliable 
and fast connectivity in rural areas in Estonia. This 
shows  that  completing  the  EstWin  and  Last  Mile 
projects  should  remain  a  priority.  In  contrast, 
Estonia  performs  very  well  when  it  comes  to 

37 

 
 
                                                           
 
mobile coverage: 4 generation has already reached 
96%  of  the  population  and  Estonia  is  a  leader  in 
mobile  broadband  take-up  with  125  subscriptions 
per 100 people.  

Transport 

As Estonia is situated at the EU periphery and 
has 
low  population  density,  a  functioning 
transport system is key for its economic activity. 
Estonia  ranks  highly  in  terms  of  infrastructure 
quality,  in  particular  as  regards  ports  (World 
Economic Forum, 2018). Airport infrastructure has 
improved  recently.  The  overall  trend  for  the 
quality  of  land  transport  infrastructure  is  also 
positive.  

traffic 

is  currently 

low  because 

Estonia  has  so  far  not  made  much  progress  on 
completing the Trans-European Transport core 
network. Investment  needs in the  transport sector 
are still considerable until 2030, estimated at EUR 
3.5  billion  by  Estonian  authorities  (40).  Full 
implementation  of  Rail  Baltica,  planned  for 
2026(41),  is  essential  for  addressing  challenges  of 
congestion, sustainability and connectivity with the 
rest  of  the  internal  market.  Freight  and  passenger 
rail 
the 
infrastructure  in  the  North/South  direction  is  not 
adequately  connected  or  interoperable,  and  traffic 
is  dominated  by  trucks  and  cars  with  associated 
negative  environmental  impact.  Other  sections  of 
the  Trans-European  Transport  network  as  well  as 
Trans-European 
connections 
Transport corridors and national or local transport 
also  need  to  be  developed  or  improved.  The 
number  of  national  and  local  rail  passengers  has 
grown significantly from 4.1 million in 2013 to 7.7 
million in 2018 due to the acquisition of new trains 
and quicker connections. The transport capacity of 
current  trains  on  key  routes  does  not  meet  the 
increased transport demand.  

between 

the 

3.4. Competitiveness reforms and investment 

Table 3.4.1:  Completion of TEN-T core network 2016 

Source: European Commission 

concern.  Although 

The sustainability of transport infrastructure is 
a 
transport 
infrastructure  has  been  developed,  the  overall 
quality  of  secondary  road 
infrastructure  and 
maintenance  of  the  existing  road  network  will 
require investment.  

primary 

system 

transport 

Estonia’s 
remains 
environmentally  unfriendly.  Estonia  intends  to 
reach  its  10 %  target  for  the  share  of  renewable 
energy in transport by 2020, as well as the targets 
set  for  2030  by  obligatory  biofuels’  supply  (7%) 
and  promoting  the  use  of  biomethane  in  vehicles 
(3%).  At  0.4 %,  the  level  of  renewables  in 
transport  has  remained  unchanged  since  2012. 
Moreover,  Estonia  has  the  most  environmentally 
unfriendly new vehicle fleet in the EU and most of 
Estonia's  rail  network  runs  on  diesel,  with 
electrification  limited  to  sub-urban  trains  around 
the capital (see Section 3.4.2). Sales of alternative 
fuel  vehicles  have  decreased  from  2.7 %  to  0.2 % 
between  2012  and  2017  notwithstanding 
the 
measures  taken  in  recent  years  (42).  While  the 
introduction of free public transport in Tallinn and 
in  some  other  municipalities  has  had  a  positive 
effect, congestion remains a problem, in particular 
in  Tallinn.  Further 
targeted  measures  and 
investments  in  public  transport  may  be  necessary 
to improve its availability and frequency. To reach 
its renewable energy target, Estonia has introduced 
a  mandatory  blending  of  transport  fuels  with 
biofuels  with  an  obligation  to  include  6.4%  by  1 
April 2019 and 10% by 1 January 2020 in certain 
transport  fuels.  However,  Estonia  lacks  targeted 
measures  such  as  transport  taxes  to  motivate  a 
switch to a more environmental friendly fleet (see 
Section  3.1.2)  and 
the  mandatory  blending 
obligation  may  not  ensure  achieving  the  target  as 
the obligation does not apply to all transport fuels.   

(40)  More specifically, an estimated EUR 2.4 billion is needed 
for  the  core  Trans-European  Transport  network,  EUR  0.6 
billion for the comprehensive network and EUR 0.5 billion 
for  other  transport  investments,  covering  projects  on  all 
modes  of  transport  with  Rail  Baltica  being  by  far  the 
biggest project.  

(41)  New  UIC  (International  Union  of  Railways)  standard 
gauge  high-speed  railway  on  the  North  Sea-Baltic  core 
network corridor, C (2018) 6969 final 

(42)  Build-up  of  nation-wide  network  of  electric  fast-charger 
stations, measures to promote the use of biofuels in public 
transport, tax incentives to promote liquefied petroleum gas  
and bio-methane use and innovative measures for reducing 
transport demand.  

38 

Road Conventional railHigh-speed railInland waterways34.12.70not applicable 
 
                                                           
 
 
 
                                                           
3.4. Competitiveness reforms and investment 

Graph 3.4.7:  Share of renewable energy in transport 

of non-compliance with the 2020 municipal waste 
recycling  target  of  50 %.  There  has  been  no 
progress  made  in  terms  of  dealing  with  excess 
incineration and mechanical biological treatment.  

take  actions 

Only  a  small  part  of  Estonian  small  and 
medium-sized  enterprises 
to 
improve their resource efficiency and to become 
greener.  About  21 %  of  small  and  medium-sized 
enterprises  in  Estonia  take  action  to  save  energy, 
but only 8 % save  water and 9 % minimise waste. 
Small and medium-sized enterprises in Estonia are 
the  least  likely  to  save  materials  (15 %),  or  to 
recycle  by  reusing  material  or  waste  within  the 
company  (13 %).  Only  5 %  of  companies  design 
products that are easier to maintain, repair or reuse. 
At  the  same  time  Estonia  is  among  the  countries 
where  small  and  medium-sized  enterprises  see 
fewer  barriers  to being  more  resource  efficient.  A 
high  proportion  of  small  and  medium-sized 
resource 
enterprises 
efficiency  actions  have  not  changed  production 
costs and 84 % are most likely to rely on their own 
financial 
investments. 
for 
According  to  the  European  Commission  (2017c), 
about 14 % of the companies do not currently offer 
green products or services, but plan to do so in the 
next two years (European Commission, 2018l)  

resources 

consider 

(42 %) 

such 

that 

3.4.2.  SINGLE MARKET INTEGRATION 

Energy Union  

final 

energy 

consumption 

The  share  of  renewable  energy  in  Estonia’s 
gross 
slightly 
increased  in  2017.  It  reached  29.2%,  which 
already  exceeds  the  country’s  2020  target  of 
25.0 %.  This  is  due  to  a  high  share  of  renewable 
energy in particular in heat and electricity. Estonia 
may  not  be  able  to  meet  the  renewable  transport 
fuel target of 10 % (see Section 3.4.1). It will need 
further efforts to maintain its 2020 national energy 
efficiency  targets.  There  is  great  potential  for 
energy savings in buildings (43).  

Estonia  has  identified  the  further  development 
of  renewable  energy  sources  and  energy 

(43)  In  2015,  the  residential  sector  was  the  largest  energy-
consuming  sector  in  Estonia,  representing  31 %  of  total 
final energy consumption, which is above the EU average 
(25.4 %) 

Source: European Commission 

Circular economy  

Estonia’s  investment  needs  in  the  transition 
towards the circular economy are clear. Despite 
the  government’s  support  for  eco-innovation  and 
the  circular  economy,  Estonia’s  composite  eco-
innovation  score  is  almost  40 %  below  the  EU 
average.  Resource  efficiency  is  one  of  the  most 
important  areas  of  the  circular  economy  and  eco-
innovation in Estonia, but it stands out as the most 
alarming  one.  Despite  some  improvements  in 
recent  years,  for  resource  productivity  Estonia 
remains among the worst performing EU Member 
States.  The  gap  with  the  EU  average  is  widening 
and  currently  Estonia  performs  about  three  times 
below  it.    In  contrast,  the  proportion  of  material 
recovered and fed back into the economy in overall 
material  use  stands  at  EU  average  levels,  around 
12 %. 

improvement 

in 
some 
Estonia  achieved 
reducing  municipal  waste,  but  the  recycling 
rate  remains  low.  Making  strong  conclusions  on 
trends  in  waste  treatment  methods  in  Estonia  is 
difficult due to adjustments made to waste data in 
the period between 2010 and 2015. However, it is 
clear  that  Estonia  made  progress  in  reducing 
landfilling of municipal waste, which was at 10 % 
in  2016,  below  the  EU  average  of  24 %.  Most  of 
this  waste  was  however 
towards 
incineration  which  is  now  the  predominant  waste 
treatment  method  in  Estonia  (46 %  in  2016).  The 
municipal waste recycling rate is 28 %, below the 
EU  average  of  46 %.  According 
the 
Commission’s  Early  Warning  Report  (European 
Commission, 2018k), Estonia is considered at risk 

shifted 

to 

39 

0123456781213141516% of renewable energy in total transport energy consumptionEstoniaEU 
 
                                                           
3.4. Competitiveness reforms and investment 

to  increased  competition  in  the  whole  Eastern 
Baltic Sea region. 

Further  efforts  are  needed  to  reach  the  2030 
greenhouse  gas  reduction  target  for  non-
emission  trading  system  sectors.  Under  the 
existing  policies,  Estonia  is  projected  to  fall  short 
of  its  2030  target  with  a  margin  of  26  percentage 
points. The challenges lie in particular in transport 
and  agriculture.  Emissions  in  both  sectors  are 
projected  to  increase  under  existing  policies. 
According  to  preliminary  data,  in  2017  emissions 
in  the  non-emission  trading  system  sectors  were 
slightly  higher 
emission 
allocations,  but  the  2020  target  is  projected  to  be 
reached.  Moreover,  the  Estonian  economy 
is 
among the most carbon intensive in the EU, due to 
the 
in  energy 
production.  

role  of  oil  shale 

important 

annual 

than 

the 

Climate change already affects Estonia through 
coastal  erosion  and  river  floods,  with  impacts 
on  the  economy  and  infrastructure  damage.  A 
national  adaptation  strategy  was  adopted  in  2017. 
The  plan  sets  out  priority  areas  that  will  require 
investments  in  land  use,  including  coastal  areas, 
other flood risk areas, land reclamation, irrigation, 
drainage and urban layout, as well as transport and 
energy infrastructure and buildings. 

Estonia’s  National  Energy  and  Climate  Plan  is 
to be adopted by 31 December 2019 in line with 
the  Regulation  on  the  Governance  of  the 
Energy  Union  and  Climate  Action45.  The  plan 
will  provide  an  overview  of  Estonia’s  investment 
needs until 2030 for the different dimensions of the 
Energy Union, including renewable energy, energy 
efficiency,  security  of  supply,  and  climate 
mitigation  and  adaptation.  The 
information 
provided, including in the draft plan submitted on 
28  December  2018,  will  further  contribute  to  the 
identification  and  assessment  of  energy  and 
climate-related investment needs for Estonia. 

3.4.3.  REGIONAL DIMENSION  

The  gap  in  social  and  economic  performance 
between  the  capital  region  and  the  rest  of  the 

45   Regulation (EU) 2018/1999 of the European Parliament and 
of the Council of 11 December 2018 on the Governance of 
the Energy Union and Climate Action 

efficiency  products  and  services  among  the 
actions  that  have  a  positive  impact  on  growth 
and  competitiveness.  The  estimated  total  cost  of 
implementing  measures  in  energy  efficiency  and 
supporting the use of alternative energy sources in 
the  transport  sector  in  2018-2021  is  EUR  380 
million.  The  main  sources  of  funding  include  EU 
cohesion  policy  funds  (EUR  240  million)  and 
revenues  from  the  EU  emission  trading  system 
(ETS),  EUR  71  million  (Ministry  of  Economic 
Affairs and Communications, 2017).  

Synchronising  of  Baltics  countries’  electricity 
grids  with  continental  Europe  remains  the  key 
priority  for  years  to  come  (44)  with  a  view  to 
increasing  the  security  of  supply  of  the  whole 
Baltic  region  and  reaping  more  benefits  from  the 
single  market.  Implementation  of  the  project  will 
necessitate reinforcing the internal grid of the three 
Baltic  states,  a  High  Voltage  Direct  Current  line 
between  Lithuania  and  Poland  and  optimization 
measures.  Significant  investment  will  be  required 
to realise the necessary infrastructure upgrades. 

Estonia  liberalised  its  retail  electricity  market 
in  2013,  and  is  among  the  EU  leaders  in  terms 
of availability of dynamic price contracts. These 
contracts  cover  about  1/3  of  the  population  and 
directly  reflect  the  price  in  the  wholesale  spot 
market.  Although  Estonia  completed  a  roll-out  of 
smart  meters  and  developed  a  data  hub  to  ensure 
the  efficient  handling  of  data  in  retail  energy 
markets, relatively low proportion of households is 
switching 
turn  allows 
incumbents  to  maintain  a  high  market  share. 
Additional  measures  could  increase  consumer 
engagement in the market. 

suppliers,  which 

in 

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  the  EU 
average  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  in  2020.  A  number  of 
infrastructure projects are already  underway (such 
as  the  Balticconnector  pipeline,  the  Karksi  gas 
metering  station,  and  the  Gas  Interconnection 
Poland–Lithuania  pipeline).  They  will  contribute 
to source and route diversification, thereby leading 

(44)  Planned to be completed by 2025. 

40 

 
                                                           
                                                           
3.4. Competitiveness reforms and investment 

country  has  increased.  Over  the  period  2012-
2016, GDP per capita increased by more than 20 % 
in  the  counties  of  Harju  and  Tartu,  while  it 
decreased  in  four  other  counties (46).  Regional 
disparities  are  also  high  in  terms  of  labour 
productivity  and  employment.  Several  regions  are 
actually  losing  ground  with  respect  to  the  rest  of 
the  EU.  This  reflects  changes  in  the  economic 
structure of the capital region, where 77 % of value 
added  is  generated  by  services,  with  a  high 
presence  of 
information  and  communication 
technology and financial services companies.  

90 % to the companies located in Harju and Tartu 
counties). All Estonian regions are lagging behind 
in terms of industrial digitisation and in improving 
resource  and  energy  efficiency,  which  negatively 
affects the country’s competitiveness. 

Graph 3.4.8:  Regional net migration 

behind 

differences 

The  urban-rural  divide,  depopulation  and 
social 
regional 
are 
disparities.  Around  30 %  of  population  live  in 
rural areas. People move to the capital region since 
job  opportunities  and  higher 
it  offers  better 
incomes 
result 
municipalities in rural areas face the challenges of 
adapting  their  services  to  declining  numbers  and 
an  ageing  population.  These  challenges  relate  to 
the  provision  of  social  infrastructure,  the  lack  of 
teachers and the lack of family doctors. 

(see  Graph  3.4.8).  As  a 

The  lack  of  a  qualified  workforce  and  an 
overall  skills  mismatch  heavily  affect  the 
competitiveness of peripheral regions and weigh 
on  overall  productivity.  The  problems  analysed 
in section 3.4 above are amplified at regional level, 
where  higher  unemployment  reflects 
lacking 
qualifications. Companies that are small, low-tech 
and  energy-intensive  are  more  dominant  in  rural 
areas.  As  most  private  sector  investments  is  in 
limited  sectors  (information  and  communication 
technology,  wood  processing,  etc.),  companies  in 
peripheral  regions  miss  out  on 
technological 
progress, which weighs heavily on productivity.  

innovation  and 

Weak  performance 
low 
in 
private investment in research and development 
hold  the  more  remote  regions  back  from 
increasing 
their  proportion  of  knowledge-
intensive  activities.  Current  public  support  for 
innovation  activities  has  not  met  regional  or 
the 
business  needs,  calling  for  strengthening 
involvement  of  businesses 
the  design  of 
innovation  policies  and  cooperation  between 
research  institutions  and  companies.  Only  around 
25 %  of  the  main  innovation  support  programme 
NUTIKAS  is  so  far  covered  by  contracts  (over 

in 

(46)  Data from the Ministry of Finance 

Source: European Commission 

Significant  disparities  in  mobility  and  digital 
infrastructure  endowments  underline  distinct 
investment  needs.  It  is  estimated  that  more  than 
100  000  people  commute  to  urban  settlements 
every  day,  which  puts  additional  pressure  on 
public  transport  and  traffic.  Thus,  the  number  of 
people  per  day  is  growing  most  in  Tallinn  (by  57 
000 people) and in Tartu (by 21 000  people). The 
quality  of  secondary  road  networks  remains  low 
due  to  the  underinvestment  in  road  maintenance 
(see  Section  3.4.1).  Mobility  difficulties  limit  the 
possibility  of  commuting  for  the  workforce  and 
reduce  the  attractiveness  of  regions  for  new 
investments. 

Regional  differences  in  the  quality  of  social 
infrastructure  and  public  services  have  an 
impact  on  regional  investment.  The  quality  of 
services  depends  on  the  adequacy  of  regional 
financing.  Although  Estonia  completed 
the 
administrative part of the local authorities’ reform 
in  2017,  reducing  the  number  of  municipalities 
from 213 in 2012 to 79 in 2018, it is not yet clear 

41 

 
                                                           
 
3.4. Competitiveness reforms and investment 

sectors, 

improving 

to  be  supported 

foster  regional  cohesion.  Therefore,  all  of  the 
following  need 
in  parallel: 
transforming  the  economy  towards  higher  value 
territorial 
added 
competitiveness,  reducing  access  inequalities  to 
some  public  services  (health,  education,  public 
transport)  and  developing  adequate 
transport 
connections  throughout  Estonia,  with  particular 
focus  on  the  poorest  regions.  Estonia  should 
continue  with  tailored  strategies  for  the  various 
regions  in  order  to  tackle  their  specificities, 
differentiating 
development 
economic 
perspectives of the border regions.   

the 

3.4.4.  INSTITUTIONAL QUALITY 

The generally favourable business environment 
could  benefit  from  further  reforms  in  specific 
areas.  Estonia  is  among  the  best  performing 
economies  in  the  World  Bank  Doing  Business 
Report.  However,  in  the  2018-2019  ranking  its 
position  (16  out  of  190)  was  slightly  downgraded 
due to reforms happening faster in other countries. 
Resolving  insolvency  and  protecting  minority 
shareholders  remain 
the  most  critical  points 
(World  Bank,  2018).  Insolvency  procedures  in 
Estonia  take  around  3  years  and  the  recovery  rate 
is  slightly  above  40 %.  The  lengthy  bankruptcy 
process traps labour and financial resources in less 
productive  firms,  which  has  a  negative  impact  on 
the economy. Together with the low recovery rate, 
it also has a negative impact on creditors and their 
incentives to invest and provide financing. Estonia 
the  2016  Council 
has  not  yet  addressed 
Recommendation 
a  National 
Productivity Board.  

appoint 

to 

areas 

It  is  envisaged  that  the  long-standing  issue  of 
modernising  the  insolvency  framework  will  be 
addressed in 2019. The government runs a project 
aiming  to  analyse  the  insolvency  framework  and 
identify 
improvements. 
for  potential 
Legislative  amendments  linked  to  bankruptcy, 
reorganisation and debt restructuring are for 2019. 
to 
The  main  objective  of  policy-makers 
encourage  the  use  of  reorganisation  and  debt 
restructuring  proceedings  to  prevent  insolvencies, 
where possible. In situations where the commercial 
risks  have  realised,  the  legislation  would  aim  to 
quickly give  conscientious entrepreneurs a second 
chance. 

is 

how the reform will help local authorities to ensure 
the  provision  of  key  services.  All  merged 
municipalities  have  to  prepare  new  development 
plans in 2019 to define their investment needed to 
guarantee access to and, the quality and efficiency 
of 
the  challenge  for 
governments for local government is to make their 
region more attractive to investors.   

their  services.  Part  of 

to 

(in 

East-Viru  county  faces  particular  challenges 
its  socio-economic  regression  and 
due 
disruptive 
former 
living  environment 
industrial  settlements).  Labour  market  indicators 
(long-term  unemployment  rate,  employment  rate) 
are  worse  in  this  region  than  the  country-wide 
average  (see  Section  3.3.1).  Health  indicators  are 
lower than anywhere else in the country (including 
the lowest life expectancy at birth and the highest 
unmet  need  for  specialised  medical  care  (see  also 
Section  3.3.3).  Entrepreneurial  activity  increased 
slightly  in  recent  years,  but  remains  the  lowest  in 
Estonia (44 companies per 1000 inhabitants  vs an 
Estonian  average  91.5  in  2016).  This  shows  that, 
despite  Estonia’s  good  overall  performance 
country in the area of entrepreneurship, significant 
territorial differences exist. 

to  any 

Cohesion policy investments are instrumental in 
tackling  the  regional  disparities  in  Estonia.  In 
the  absence  of  'space  aware'  sectoral  strategies, 
these  regional  investments  are  often  driven  by 
national  sectoral  priorities.  In  most  cases,  these 
regional 
linked 
strategies  are  not 
specialisation  or  potential  economic  development; 
they are limited  to administrative  boundaries  with 
no functional approach to building links that would 
allow  wealth  and  opportunities  to  spread  from 
richer  to  poorer  regions.  The  implementation  of 
integrated territorial development strategies is also 
hampered  by  the  low  capacity  of  municipalities 
and 
financial 
independence  and  generally  low  motivation  to 
attract investments and create jobs. 

regional  bodies, 

their 

low 

Cohesion  policy  has  the  potential  to  address 
territorial  imbalances  and  foster  competitive 
growth  of  the  economy.  Cohesion  policy  funds 
represent a significant proportion of overall public 
investments in Estonia, with an impact of 1.4 % on 
the  projected  2021-2027  GDP  (2.4 %  of  GDP, 
including national co-financing). In order to  boost 
convergence,  investments  are  needed  to  support 
the  competitive  growth  of  the  economy  and  to 

42 

 
3.4. Competitiveness reforms and investment 

innovation  procurement, 

tendering  more  innovative  solutions,  the  Estonian 
government  ran  ‘The  public  sector  as  a  smart 
customer’ project. It included the development of a 
raising 
manual  on 
awareness  among  contracting  authorities,  expert 
counselling  and  mentoring,  trainings,  creation  of 
sectoral  networks  and  support  for  innovation 
in 
procurement.  Further  professionalisation, 
particular in the health sector, could have positive 
effects  on  spending  public  money  in  a  more 
efficient and sustainable way. 

e-Government 

for  business.  X-road, 

The  well-developed 
system 
contributes  to  higher  efficiency,  transparency 
and integrity in the public sector. The country is 
a  frontrunner  as  regards  the  digital  provision  of 
public  services  and  has  the  highest  proportion 
(96 %)  of  e-Government  users 
in  Europe 
(European  Commission,  2018b).  It  is  also  among 
the  top  five  when  it  comes  to  using  pre-filled 
forms,  online  services  and  the  range  of  digital 
services  available 
the 
backbone  of  e-Estonia,  is  a  digital  information 
system 
connects  over  900 
organisations  every  day  and  is  continually  being 
updated.  Nevertheless,  the  State  Audit  Office 
reported  (Riigikontroll,  2016)  rather  low  (62 %) 
overall satisfaction with e-services, suggesting that 
there  is  still  a  need  to  make  them  more  user-
friendly.  It  also  showed  that  there  is  a  need  to 
invest  in  security  systems,  data  management  and 
information  storage  (Riigikontroll, 2018)  (mainly 
by  local  authorities).  Estonia  is  lagging  behind 
with as regards open data. The availability of open 
data stands at 58 % of the EU average. 

securely 

that 

in 

While  e-Government  has  helped  to  reduce 
bureaucracy,  some  further  action  is  being 
taken.  The  multiannual  ‘0  Bureaucracy’  project 
has  supported 
the  business 
improvements 
environment  by  reducing  red  tape,  removing 
unnecessary  regulations,  and  limiting  bureaucracy 
within  the  public  sector.  Significant  part  of  the 
initial  measures  have  been  implemented,  and  the 
focus  is  now  shifting  to  better  organisation  and 
consolidation  of  data  management, 
further 
simplification of regulations on economic activity, 
and the optimisation of processes within the public 
sector. 

The  use  of  public  procurement  to  support 
strategic objectives, including innovation, is still 
limited. Estonia is at the forefront of carrying out 
the 
electronic  public  procurements.  However, 
potential  to  achieve  broader  policy  objectives 
through  the  strategic  use  of  tendering  procedures 
remains  underutilised.   So  far,  Estonia  has  been 
predominantly  using  price  as  the  only  award 
criteria  for  public  tenders.  The  contract  was 
the  most  economically 
awarded  based  on 
advantageous 
in  about  19 %  of  all 
tender 
tenders(47).  To  support  contracting  authorities  in 

(47)  Tenders  Electronic  Daily,  average  data  for  2009-2018 

https://ted.europa.eu/TED/main/HomePage.do  

43 

 
                                                           
ANNEX A: OVERVIEW TABLE 

Commitments  

Summary assessment (48) 

2018 country-specific recommendations (CSRs)  

CSR  1:  Ensure  that  the  nominal  growth  rate  of  net 
primary  government  expenditure  does  not  exceed  4.1 
%  in  2019,  corresponding  to  an  annual  structural 
adjustment of 0.6 % of GDP. Improve the adequacy of 
the social safety net, in particular for older people and 
people  with  disabilities.  Take  measures  to  reduce  the 
gender  pay  gap, 
improving  wage 
including  by 
transparency in the private sector.  

Ensure  that  the  nominal  growth  rate  of  net  primary 
government  expenditure  does  not  exceed  4.1  %  in 
2019, corresponding to an annual structural adjustment 
of 0.6 % of GDP.  

Estonia has made Not Assessed in addressing CSR 1  

The  compliance  assessment  with  the  Stability  and 
Growth Pact will be included in spring when the final 
data for 2018 will be available. 

(48)  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. 

44 

 
 
 
 
 
                                                           
Improve  the  adequacy  of  the  social  safety  net,  in 
particular for older people and people with disabilities. 

A. Overview Table 

Some Progress: Estonia has achieved some progress in 
providing  a  more  adequate  social  safety  net.  The 
subsistence  level  for  the  first  household  member,  the 
basic  income  tax  allowance  and  the  pensions  through 
indexation  were  increased.  Furthermore,  to  reduce  the 
poverty  risk  of  pensioners  living  alone,  one-time 
allowance of EUR 115 was paid in 2017 and 2018. The 
parental  pension  supplement  was  introduced.  The 
situation of disabled is improving as the Work  Ability 
reform  helps  them  to  return  to  the  labour  market  and 
thus  increase  their  income.  In  addition,  the  reform  of 
the first pillar pension scheme has introduced – among 
others – a change that from 2021 the calculation of the 
pension index will add more value to the years worked, 
raising  the  income  of  low  wage  earners;  and  as  from 
2027 
life 
expectancy.  The  minimum  income  scheme  does  not 
protect people from falling below the absolute poverty 
line.  Furthermore,  providing  good  quality  and 
affordable social services remains a challenge. 

the  retirement  age  will  be 

linked 

to 

Take measures to reduce the gender pay gap, including 
by improving wage transparency in the private sector.  

CSR 2: Promote research and innovation, in particular 
by  providing  effective  incentives  for  broadening  the 
innovation base.  

Some Progress Estonia has achieved some progress in 
taking  measures  to  address  gender  pay  gap.  The  first 
phase of the parental leave and benefit system reform is 
already  being  implemented.  The  second  phase  of  the 
parental  leave  and  benefit  system  was  adopted  in 
October 2018. The change to the Gender Equality Act 
introducing  a  pay  transparency  requirement  for  the 
public  sector  is  in  the  Parliament  awaiting  second 
reading. The gender pay gap is decreasing but remains 
among the highest in the EU. 

in  companies, 

Some  progress:  Estonia 
introduced  some  new 
initiatives  in  2018  to  address  the  country-specific 
recommendation.  These  include  funding  schemes  to 
support  product  development 
the 
commercialisation  of  breaking  scientific  results,  and 
digitalisation  in  the  industry.  The  impact  of  the 
measures  remains  to  be  seen.  So  far,  measures 
introduced  in  the  previous  years  (innovation  and 
development  vouchers,  ADAPTER,  NUTIKAS)  had 
limited  impact.  The  innovation  performance  of  small 
and  medium-sized  enterprises  creating  new  products, 
introducing innovation in processes and innovating in-
house  remains  well  below  the  EU  average.  Estonia’s 
performance  is  low,  both  as  regards  business  R&D 
investment,  which  amounts  to  only  half  the  EU 
average,  and  as  regards  the  proportion  of  companies 
that report carrying out research activities. 

45 

 
Europe 2020 (national targets and progress)  

Employment  rate  target  set  in  the  National  Reform 
Programme: 76 %.  

target  set 

R&D 
the  2013  National  Reform 
Programme: 3 % of GDP, of which 2 % for the private 
sector. 

in 

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 
increased further in 2017 (78.7 %).  

In 2017, R&D investment in Estonia slightly increased 
to  1.29  %  of  GDP,  up  from  1.25  %  in  2016,  but 
remains below the EU average of 2.07 % of GDP.  
Business  enterprise  expenditure  in  R&D  decreased 
slightly  from  0.64  in  2016  to  0.61%  in  2017.  Private 
R&D  intensity  continues  to  be  far  from  the  National 
target  (2%  of  GDP)  and  the  EU  average  (1.36%  of 
GDP in 2017). 

National  greenhouse  gas  (GHG)  emissions  target:  
maximum11  %  increase  in  2020  compared  with  2005 
(in  sectors  not  included  in  the  EU  emissions  trading 
scheme)  

Emissions are projected to be 11 % higher in 2020 than 
in  2005,  according  to  national  projections  and  taking 
into  account  existing  measures.  This  means  that  the 
target is expected to be met.  

2020 renewable energy target: 25  %  

In  2017,  according  to  preliminary  data,  emissions 
the  annual  emission  allocation  (interim 
exceeded 
target) by 1 percentage point.  

With  a  renewable  energy  share  of  29.2  %  in  2017, 
Estonia is already above its 25 % target for 2020.  

With  a  0.4 %  share  of  renewable  energy  sources  in 
transport in 2017, Estonia is lagging behind the binding 
10 %  target  in  transport  to  be  achieved  by  2020. 
[provisional 2017 figures]   

Energy  efficiency,  2020  energy  consumption  targets: 
Estonia's  2020  energy  efficiency  target  is  6.5    Mtoe 
expressed  in  primary  energy  consumption  (2.8  Mtoe 
expressed in final energy consumption)  

 In  2017,  Estonia’s  primary  energy  consumption 
decreased  by  3%  to  5.6  Mtoe,  compared  to  2016.  On 
the other hand, final energy consumption increased by 
5% to 2.9 Mtoe. 

Early school/training 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.  

In 2017 the rate was 10.8 %, similar to the 2016 level 
(10.9  %).  Further  efforts  are  needed  to  achieve  the 
target. 

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

In  2017,  the  rate  was  48.4  %,  significantly  above  the 
EU average of 39.9 %.  

46 

 
 
 
 
A. Overview Table 

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  2017 
decreased  from  283  000  to  274  000.  The  national 
poverty  reduction  target  of  15  %  continues  to  be  very 
challenging. 

At-risk-of-poverty  rate  (survey  year):  2017:  21.0  %, 
compared  to  an  EU  average  of  16.9%.  The  rate 
decreased by 0.7 pp that is a speedier decrease than in 
the EU (of 0.4 pp). 

47 

 
 
 
 
 
 
ANNEX B: COMMISSION DEBT SUSTAINABILITY ANALYSIS AND 

FISCAL RISKS 

48 

General Government debt projections under baseline, alternative scenarios and sensitivity tests2017201820192020202120222023202420252026202720282029Gross debt ratio8.78.07.67.57.17.17.57.88.18.48.89.19.6Changes in the ratio (-1+2+3)-0.4-0.8-0.4-0.1-0.40.10.30.30.30.30.40.40.4of which(1) Primary balance (1.1+1.2+1.3)-0.30.60.50.20.1-0.3-0.5-0.5-0.5-0.5-0.5-0.5-0.5(1.1) Structural primary balance (1.1.1-1.1.2+1.1.3)-1.5-0.8-0.6-0.8-0.6-0.6-0.5-0.5-0.5-0.5-0.5-0.5-0.5(1.1.1) Structural primary balance (bef. CoA)-1.5-0.8-0.6-0.8-0.8-0.8-0.8-0.8-0.8-0.8-0.8-0.8-0.8(1.1.2) Cost of ageing-0.2-0.2-0.3-0.3-0.3-0.3-0.3-0.3-0.3(1.1.3) Others (taxes and property incomes)0.00.00.00.00.00.00.00.00.0(1.2) Cyclical component1.21.31.11.00.70.30.00.00.00.00.00.00.0(1.3) One-off and other temporary measures0.00.00.00.00.00.00.00.00.00.00.00.00.0(2) Snowball effect (2.1+2.2+2.3)-0.7-0.6-0.4-0.4-0.3-0.2-0.2-0.2-0.2-0.2-0.2-0.1-0.1(2.1) Interest expenditure0.00.00.00.00.00.00.10.10.10.10.20.20.2(2.2) Growth effect-0.4-0.3-0.2-0.2-0.1-0.1-0.1-0.2-0.2-0.2-0.2-0.2-0.2(2.3) Inflation effect-0.3-0.4-0.3-0.2-0.2-0.2-0.1-0.1-0.2-0.2-0.2-0.2-0.2(3) Stock-flow adjustments-0.10.40.60.50.00.00.00.00.00.00.00.00.0Note: For further information, see the European Commission Fiscal Sustainability Report (FSR) 2018. b. For the medium-term, the risk category (low/medium/high) is based on the joint use of the S1 indicator and of the DSA results. The S1 indicator measures the fiscal adjustment required (cumulated over the 5 years following the forecast horizon and sustained thereafter) to bring the debt-to-GDP ratio to 60 % by 2033. The critical values used are 0 and 2.5 pps. of GDP. The DSA classification is based on the results of 5 deterministic scenarios (baseline, historical SPB, higher interest rate, lower GDP growth and negative shock on the SPB scenarios) and the stochastic projections. Different criteria are used such as the projected debt level, the debt path, the realism of fiscal assumptions, the probability of debt stabilisation, and the size of uncertainties. c. For the long-term, the risk category (low/medium/high) is based on the joint use of the S2 indicator and the DSA results. The S2 indicator measures the upfront and permanent fiscal adjustment required to stabilise the debt-to-GDP ratio over the infinite horizon, including the costs of ageing. The critical values used are 2 and 6 pps. of GDP. The DSA results are used to further qualify the long-term risk classification, in particular in cases when debt vulnerabilities are identified (a medium / high DSA risk category). [2]Thechartspresentaseriesofsensitivitytestsaroundthebaselinescenario,aswellasalternativepolicyscenarios,inparticular:thehistoricalstructuralprimarybalance(SPB)scenario(wheretheSPBissetatitshistoricalaverage),theStabilityandGrowthPact(SGP)scenario(wherefiscalpolicyisassumedtoevolveinlinewiththemainprovisionsoftheSGP),ahigherinterestratescenario(+1pp.comparedtothebaseline),alowerGDPgrowthscenario(-0.5pp.comparedtothebaseline)andanegativeshockontheSPB(calibratedonthebasisoftheforecastedchange).Anadversecombinedscenarioandenhancedsensitivitytests(ontheinterestrateandgrowth)arealsoincluded,aswellasstochasticprojections. Detailed information on the design of these projections can be found in the FSR 2018.EE - Debt projections baseline scenario[1]Thefirsttablepresentsthebaselineno-fiscalpolicychangescenarioprojections.Itshowstheprojectedgovernmentdebtdynamicsanditsdecompositionbetweentheprimarybalance,snowballeffectsandstock-flowadjustments.Snowballeffectsmeasurethenetimpactofthecounteractingeffectsofinterestrates,inflation,realGDPgrowth(andexchangerates in some countries). Stock-flow adjustments include differences in cash and accrual accounting, net accumulation of assets, as well as valuation and other residual effects.[3] The second table presents the overall fiscal risk classification over the short, medium and long-term. a. For the short-term, the risk category (low/high) is based on the S0 indicator. S0 is an early-detection indicator of fiscal stress in the upcoming year, based on 25 fiscal and financial-competitiveness variables that have proven in the past to be leading indicators of fiscal stress. The critical threshold beyond which fiscal distress is signalled is 0.46. 0246810121416182020162017201820192020202120222023202420252026202720282029Debt as % of GDP -EEBaselineEnhanced lower GDP growth scenarioAdverse combined scenarioEnhanced higher interest rate scenario0102020162017201820192020202120222023(% of GDP)Stochastic debt projections 2019-2023 -EEp10_p20p20_p40p40_p60p60_p80p80_p90p50Baseline0246810121416182020162017201820192020202120222023202420252026202720282029Debt as % of GDP -EEBaselineHistorical SPB scenarioSGP scenario0246810121416182020162017201820192020202120222023202420252026202720282029Debt as % of GDP -EEBaselineHigher interest rate scenarioNegative shock on the SPBLower GDP growth scenarioBaselineHistorical SPBLower GDP growthHigher interest rateNegative shock on SPBStochastic projectionsRisk categoryLOWLOWLOWLOWLOWLOWDebt level (2029)9.68.29.99.810.0Debt peak year20292029202920292029Percentile rank71.0%69.0%Probability debt higher31.8%Dif. between percentiles3.0LOWLong termDSALOWDebt sustainability analysis (detail)Medium termLOWLOWShort termLOW(S0 = 0.2)(S1 = -4.3)S2LOW(S2 = 0.9)S1 
 
ANNEX C: STANDARD TABLES 

Table C.1: 

Financial market indicators 

1) Latest data Q3 2018. Includes not only banks but all monetary financial institutions excluding central banks. 
2) Latest data Q2 2018. 
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). 

49 

201320142015201620172018Total assets of the banking sector (% of GDP)1)105.4107.0112.5114.0107.7100.4Share of assets of the five largest banks (% of total assets)89.789.988.688.090.3-Foreign ownership of banking system (% of total assets)2)95.795.194.293.488.388.0Financial soundness indicators:2)              - non-performing loans (% of total loans)-3.22.21.71.91.8              - capital adequacy ratio (%)23.141.835.434.430.631.1              - return on equity (%)3)10.79.76.811.19.211.4Bank loans to the private sector (year-on-year % change)1)2.74.59.39.52.15.6Lending for house purchase (year-on-year % change)1)1.22.94.55.56.96.9Loan to deposit ratio2)-87.897.699.089.891.0Central Bank liquidity as % of liabilities1)-0.30.40.40.50.3Private debt (% of GDP)115.9116.1113.5112.2106.4-Gross external debt (% of GDP)2) - public7.67.97.16.96.26.1    - private47.448.645.342.544.144.8Long-term interest rate spread versus Bund (basis points)*------Credit default swap spreads for sovereign securities (5-year)*58.657.158.358.555.656.1 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
C. Standard Tables 

Table C.2: 

Headline Social Scoreboard indicators 

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 Long-term unemployed are people who have been unemployed for at least 12 months. 
4 Gross disposable household income is defined in unadjusted terms, according to the draft Joint Employment Report 2019. 
5 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). 
6 Average of first three quarters of 2018 for the employment rate, unemployment rate and gender employment gap. Data for 
unemployment rate is seasonally adjusted. 
Source: European Commission 

50 

201320142015201620172018 6Equal opportunities and access to the labour marketEarly leavers from education and training (% of population aged 18-24)9.712.012.210.910.8:Gender employment gap (pps)6.67.77.98.27.37.5Income inequality, measured as quintile share ratio (S80/S20)5.56.56.25.65.4:At-risk-of-poverty or social exclusion rate1 (AROPE)23.526.024.224.423.4:Young people neither in employment nor in education and training (% of population aged 15-24)11.311.710.89.19.4:Dynamic labour markets and fair working conditions†Employment rate (20-64 years)73.374.376.576.678.779.1Unemployment rate2 (15-74 years)8.67.46.26.85.85.6Long-term unemployment rate3 (as % of active population)3.83.32.42.11.91.5Gross disposable income of households in real terms per capita4 (Index 2008=100) 96.4101.0105.7109.4113.7:Annual net earnings of a full-time single worker without children earning an average wage (levels in PPS, three-year average)12566130481374114373::Annual net earnings of a full-time single worker without children earning an average wage (percentage change, real terms, three-year average)1.63.05.25.2::Public support / Social protection and inclusionImpact of social transfers (excluding pensions) on poverty reduction526.823.222.324.927.3:Children aged less than 3 years in formal childcare21.019.421.430.227.1:Self-reported unmet need for medical care8.411.312.715.311.8: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 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 
2 PISA (OECD) results for low achievement in mathematics for 15 year-olds. 
3 Impact of socio-economic and cultural status on PISA (OECD) scores. Values for 2012 and 2015 refer respectively to 
mathematics and science. 
4 Average of first three quarters of 2018. Data for youth unemployment rate is seasonally adjusted. 
Source: European Commission, OECD 

51 

Labour market indicators201320142015201620172018 4Activity rate (15-64)75.175.276.777.578.8:Employment in current job by durationFrom 0 to 11 months15.315.214.815.616.6:From 12 to 23 months11.911.211.911.411.6:From 24 to 59 months19.020.320.921.219.6:60 months or over53.853.152.251.651.9:Employment growth* (% change from previous year)1.20.82.90.32.71.4Employment rate of women(% of female population aged 20-64)70.170.672.672.675.175.4Employment rate of men (% of male population aged 20-64)76.778.380.580.882.482.8Employment rate of older workers* (% of population aged 55-64)62.664.064.565.268.168.4Part-time employment* (% of total employment, aged 15-64)8.98.39.59.99.510.8Fixed-term employment* (% of employees with a fixed term contract, aged 15-64)3.53.13.43.73.13.6Participation in activation labour market policies(per 100 persons wanting to work)4.74.25.016.0::Transition rate from temporary to permanent employment(3-year average)63.062.555.745.037.5:Youth unemployment rate (% active population aged 15-24)18.715.013.113.412.111.3Gender gap in part-time employment6.95.57.46.57.39.0Gender pay gap1 (in undadjusted form)29.828.126.925.3::Education and training indicators201320142015201620172018Adult participation in learning(% of people aged 25-64 participating in education and  training)12.611.612.415.717.2:Underachievement in education2::11.2:::Tertiary educational attainment (% of population aged 30-34 having successfully completed tertiary education)42.543.245.345.448.4:Variation in performance explained by students' socio-economic status3::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: European Commission, OECD 

52 

201220132014201520162017Expenditure on social protection benefits* (% of GDP)Sickness/healthcare4.24.14.34.54.9:Disability1.71.81.71.81.9:Old age and survivors6.66.66.57.06.9:Family/children1.71.61.62.02.1:Unemployment0.50.50.40.40.5:Housing0.00.00.00.00.1:Social exclusion n.e.c.0.10.10.10.10.1:Total14.814.714.715.916.4:of which: means-tested benefits0.10.10.10.10.2: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)21.522.622.622.822.7:Children at risk of poverty or social exclusion (% of people aged 0-17)*22.422.323.822.521.218.8At-risk-of-poverty  rate1 (% of total population)17.518.621.821.621.721.0In-work at-risk-of-poverty rate (% of persons employed)8.37.611.810.09.69.3Severe material deprivation rate2  (% of total population)9.47.66.24.54.74.1Severe housing deprivation rate3, by tenure statusOwner, with mortgage or loan2.34.42.21.90.91.8Tenant, rent at market price3.75.18.14.36.15.6Proportion of people living in low work intensity households4 (% of people aged 0-59)9.18.47.66.65.85.8Poverty thresholds, expressed in national currency at constant prices*281229653151342837544043Healthy life years (at the age of 65)Females5.55.76.05.37.0:Males5.45.14.95.35.5:Aggregate replacement ratio for pensions5 (at the age of 65)0.50.50.50.40.50.5Connectivity dimension of the Digital Economy and Society Inedex (DESI)6::44.851.856.762.2GINI coefficient before taxes and transfers*48.648.951.649.947.546.5GINI coefficient after taxes and transfers*32.532.935.634.832.731.6 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
C. Standard Tables 

Table C.5: 

Product market performance and policy indicators 

1 Value added in constant prices divided by the number of persons employed. 
2 Compensation of employees in current prices divided by value added in constant prices. 
3 The methodologies, including the assumptions, for this indicator are shown in detail here: 
http://www.doingbusiness.org/methodology.  
4 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 
75% and above, two if received below 75%, three if refused or rejected and treated as missing values if the application is still 
pending or don't know. 
5 Percentage population aged 15-64 having completed tertiary education. 
6 Percentage population aged 20-24 having attained at least upper secondary education. 
7 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  
8 Aggregate OECD indicators of regulation in energy, transport and communications (ETCR). 
Sources: 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). 

53 

Performance indicators201220132014201520162017Labour productivity per person1 growth (t/t-1) in %Labour productivity growth in industry4.804.847.30-0.813.211.29Labour productivity growth in construction6.16-4.73-7.13-9.5729.3213.85Labour productivity growth in market services3.16-1.230.570.38-0.100.11Unit Labour Cost (ULC) index2 growth (t/t-1) in %ULC growth in industry9.611.522.050.991.083.74ULC growth in construction5.116.055.218.23-6.44-2.37ULC growth in market services5.283.235.904.232.161.99Business environment201220132014201520162017Time needed to enforce contracts3 (days)425455455455455455Time needed to start a business3 (days)6.56.54.53.53.53.5Outcome of applications by SMEs for bank loans4:0.910.660.190.820.91Research and innovation201220132014201520162017R&D intensity2.121.721.431.471.25:General government expenditure on education as % of GDP6.306.005.706.105.90:Number of science & technology people employed as % of total employment515151515151Population having completed tertiary education5323233333435Young people with upper secondary education6818483828485Trade balance of high technology products as % of GDP-0.88-0.31-0.33-0.34-0.49-0.66Product and service markets and competition200320082013OECD product market regulation (PMR)7, overall:1.371.29OECD PMR7, retail:1.401.50OECD PMR7, professional services:1.811.79OECD PMR7, network industries83.342.602.40 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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 industry 
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) 

54 

Green growth performance201220132014201520162017MacroeconomicEnergy intensity kgoe / €0.330.360.340.310.330.30Carbon intensity kg / €1.221.301.221.021.07-Resource intensity (reciprocal of resource productivity)kg / €2.162.252.152.051.912.02Waste intensity kg / €1.33-1.26-1.33-Energy balance of trade % GDP-1.3-2.2-2.1-1.5-1.0-0.6Weighting of energy in HICP%14.714.414.413.610.611.7Difference between energy price change and inflation %7.27.4-4.6-4.1-5.1-2.9Real unit of energy cost% of value added17.717.916.616.716.7-Ratio of environmental taxes to labour taxesratio0.170.160.160.160.18-Environmental taxes% GDP2.72.62.72.73.02.9Sectoral Industry energy intensity kgoe / € 0.140.150.130.120.100.09Real unit energy cost for manufacturing industry excl. refining% of value added12.813.612.512.612.8-Share of energy-intensive industries in the economy% GDP12.312.713.213.413.213.9Electricity prices for medium-sized industrial users€ / kWh0.080.100.090.090.090.09Gas prices for medium-sized industrial users€ / kWh0.040.040.040.030.020.03Public R&D for energy % GDP0.020.010.010.020.000.00Public R&D for environmental protection% GDP0.030.040.040.050.020.01Municipal waste recycling rate%19.117.931.328.328.128.4Share of GHG emissions covered by ETS*%69.773.571.167.768.4-Transport energy intensitykgoe / €0.650.620.600.640.640.60Transport carbon intensitykg / €1.841.781.731.861.85-Security of energy supplyEnergy import dependency%19.813.911.19.67.94.1Aggregated supplier concentration indexHHI79.673.076.611.559.4-Diversification of energy mixHHI0.490.540.550.520.530.57 
 
 
 
 
 
ANNEX D: GUIDANCE ON INVESTMENT NEEDS FOR COHESION 

POLICY 

ANNEX D   Investment Guidance on Cohesion Policy Funding 2021-2027 for ESTONIA(49) 

Building  on  the  Commission  proposal  for  the  next  Multi-Annual  Financial  Framework  for  the  period 
2021-2027 of 2 May 2018 (COM (2018) 321), this Annex presents the  preliminary Commission services 
views  on  priority  investment  areas  and  framework  conditions  for  effective  delivery  for  the  2021-2027 
Cohesion  Policy.  These  priority  investment  areas  are  derived  from  the  broader  context  of  investment 
bottlenecks,  investment  needs  and  regional  disparities  assessed  in  the  report.  This  Annex  provides  the 
basis  for  a  dialogue  between  Estonia  and  the  Commission  services  in  view  of  the  programming  of  the 
cohesion policy funds (European Regional Development Fund, Cohesion Fund and European Social Fund 
Plus). 

Table D.1: 

Policy Objectives 

(49)  This  Annex  is  to  be  considered  in  conjunction  with  the  requirements  for  thematic  concentration  and  urban  earmarking,  as 
outlined  in  the  EC  Proposal  for  a  Regulation  of  the  European  Parliament  and  of  the  Council  on  the  European  Regional 
Development  Fund  and  on  the  Cohesion  Fund  COM(2018)  372  and  in  the  EC  Proposal  for  a  Regulation  of  the  European 
Parliament  and  of  the  Council  on  the  European  Social  Fund  Plus  COM(2018)  382  and  in  particular  the  requirements  for 
thematic concentration and urban earmarking outlined in these proposals.   

(Continued on the next page) 

55 

Policy Objective 1: A Smarter Europe – Innovative and smart industrial transformation The relative strengths of Estonia are in business-friendly environment, very good start-up’s’ ecosystem and well-developed research infrastructure. In contrast, the general innovation performance of the country is moderate and rather in decline, the industry relies on a narrow base of high-tech companies, and the proportion of employment in fast-growing companies in innovative and high value added sectors remains low and holds back productivity growth and competitiveness. High priority investment needs1 have been identified to enhance research and innovation capacities and the uptake of advanced technologies, where appropriate in cooperation with other countries and in line with the EU Strategy for the Baltic Sea Region. This is, in particular to: • strengthen innovation performance and foster productivity growth by identifying smart specialisation areas on the basis of national and regional needs and potential; • increase the number of innovative companies in the smart specialisation sectors; • strengthen the supply side of research and innovation by increasing the attractiveness, competitiveness and sustainability of the research system and diversification of the applied research areas; • support collaborative research between universities and businesses, making it possible to transfer technologies, commercialise research results and increase the capacity and role of clusters and competence centres. Estonia ranks high in the provision of digital public services, however some weaknesses present in areas such cyber security and open data availability. Despite the good performance in public sector, companies do not make a full use of digital opportunities. Priority investment needs have been identified to reap the benefits of digitisation for citizens, companies and governments, and in particular to: • increase information and communications technology uptake in small and medium-sized enterprises, including digitalisation, marketing and e-commerce; • increase public sector capacity to analyse and safely manage open and big data; • upscale and improve the user-friendliness of public e-services, including in a cross-border context.                                                             1 The intensity of needs is classified in three categories in a descending order - high priority needs, priority needs, needs.  
 
 
 
 
 
                                                           
D. Guidance on investment needs for cohesion policy 

Table (continued) 

(Continued on the next page) 

56 

Small and medium-sized enterprises are important in terms of overall added-value and employment. However, they are small, productivity growth remains relatively slow and they are not sufficiently integrated in domestic and international clusters and relatively low positioning in the global value chains. High priority investment needs have been identified to enhance growth and competitiveness of small and medium-sized enterprises, and in particular to: • internationalise their activities so that they can move up in global value chains; • increase productivity and growth prospects of the small and medium-sized enterprises; • promote entrepreneurship and increase start-ups survival rates; • identify new export markets and promote participation in international cooperation networks and clusters, particularly in the Baltic Sea region. Despite the leading position of Estonia in e-Government, the transition of industry and small and medium-sized enterprises to new technologies is held-back by the low capacity of the companies to innovate and insufficient digital skills within companies. Investment needs have been identified to help companies to develop skills for smart specialisation, industrial transition and entrepreneurship, and in particular to: • provide small and medium-sized enterprises and research institutions with targeted trainings on management skills, innovation, technological transfer and on re-skilling in smart specialization areas; • develop the capacity of universities’ and research institutions’ to improve the commercial viability and market relevance of their research projects, including through more researcher mobility between research institutions and companies; • increase the level of digital skills  available in companies to boost productivity. Policy Objective 2: A low carbon and greener Europe – Clean and fair energy transition, green and blue investment, circular economy, climate adaptation and risk prevention2 Even though Estonia is expected to over-achieve its 2020 emission reduction targets, its economy however remains highly energy-intensive, with energy consumption levels well above the EU average. Priority investment needs have been identified to support clean energy for EU islands initiative and to promote energy efficiency measures and renewable energy, and in particular to: • reduce energy consumption levels in buildings;  • reduce energy consumption in businesses by improving the energy efficiency of small and medium-sized enterprises, including their premises, installations and processes; • support a transition to renewables in heating and cooling, including district heating and small-scale installations. The economy of Estonia remains resource inefficient and landfilling remains the cheapest and most widely used way to treat waste in the country, despite some progress in this area. Priority investment needs have been identified to promote the transition to a circular economy, and in particular to: • support the shift towards highest steps of the waste (municipal and industrial) management hierarchy; • develop alternatives to raw materials and promote recycled materials as secondary raw materials.  Regarding climate change risks, Estonia is subject mainly to coastal erosion and floods, which damage infrastructure. Investment needs have been identified for climate change adaptation, risk prevention, disaster resilience, and in particular  to: • address the risks identified in the national risks assessment, with a focus on prevention; • promote coordinated and cooperative preventive measures and actions in line with the EU Strategy for the Baltic Sea Region.                                                             2 While outside of the scope of the ERDF and the Cohesion Fund (art. 6, paragraph 1(h), COM (2018)372), energy interconnectors could be financed by the Connecting Europe Facility in line with its objectives (art. 3, paragraphs 1 and 2 (b), COM(2018) 438).  
 
 
 
 
D. Guidance on investment needs for cohesion policy 

Table (continued) 

(Continued on the next page) 

57 

Policy Objective 3: A more connected Europe – Mobility and regional Information and Communications Technology connectivity The coverage and quality of Estonia’s transport infrastructure have improved in recent years, whereas Estonia remains below EU average in terms of the networks’ extension, research and development investments, carbon emissions and safety. High priority investment needs have been identified to develop a sustainable, climate resilient, intelligent, secure and intermodal Trans-European Transport Network and its accessibility, and in particular to:  • complete the rail and road Trans-European Transport Network, including the access to them and cross-border sections to connect with neighbouring networks. The fact that the population is concentrated in cities and their surrounding areas puts additional pressure on sustainable urban mobility, leading to issues with accessibility, traffic congestion and emissions. Investment needs have been identified to develop sustainable multimodal urban mobility, and in particular to: • promote sustainable, cleaner and efficient urban transport systems as part of the relevant integrated territorial development strategies and sustainable urban mobility plans with a focus on functional areas; • support low-carbon public transport and active modes of transport. Estonia performs well in terms of overall broadband connectivity, but a digital divide between urban and rural area, both in terms of coverage and take-up is still present. Investment needs have been identified to enhance digital connectivity, and in particular to; • deploy very-high capacity networks; • improve the cyber and physical security of the public very high capacity networks investments. Policy Objective 4: A more social Europe – Implementing the European Pillar of Social Rights The population of Estonia is ageing and labour shortages are increasing, while labour market participation of some groups (including women due to caring duties and difficulties re-entering the labour market) is limited and the capacity of social partners is weak. High priority investment needs have been identified to improve access to employment, promote the social economy and promote women’s labour market participation, including through access to childcare, and in particular to: • increase participation in active and preventive labour market measures; • promote the social economy and support start-up social entrepreneurs; • support work-life balance and address the gender pay gap in the labour market; • support labour market reintegration of people with caring duties, and improve access to childcare; • improve the capacity building of social partners. Health and safety at work is weak in Estonia. Priority investment needs have therefore been identified to promote a healthy and well–adapted working environment that addresses health risks, and supports active and healthy ageing, and in particular to: • support safe and healthy working lives and develop a sustainable occupational health system; • preserve the work ability of the workforce and promote innovative ways to organise work.   
 
 
 
 
D. Guidance on investment needs for cohesion policy 

Table (continued) 

(Continued on the next page) 

58 

The education and training systems in Estonia are not sufficiently responsive to labour market needs and skills mismatches and shortages are increasing. High priority investment needs, including in infrastructure, have therefore been identified to improve the quality, effectiveness and labour market relevance of education and training systems, support the acquisition of key competences including digital skills, and promote lifelong learning, notably flexible upskilling and reskilling, and in particular to: • prevent early school leaving, and support inclusive education for people with disabilities; • improve the quality, effectiveness and labour market relevance of education and training and support key competences, including digital and transversal skills and innovation management at all educational levels; • improve the quality and continuous training of the education and training workforce; • support vocational education and training and work-based learning and co-operation between educational institutions, including through infrastructure; • improve career guidance, better anticipating change and new skills requirements. Despite improvements, poverty, social exclusion and income inequality are high in Estonia. The provision of good quality and affordable social services is low, health outcomes are weak and inefficiencies in the health care sector persist. High priority investment needs, including in infrastructure and modernisation, have therefore been identified to: enhance the equal and timely access to services, improve the accessibility, effectiveness and resilience of healthcare and long-term care services; foster active inclusion and address material deprivation, and in particular to: • improve equal access to affordable and good-quality social services, long-term care and healthcare; • support the reskilling and upskilling of the long-term care, healthcare and social care workforce;  • complete the transition from institutional care to independent living and community-based services and strengthen cooperation between social, health and vocational support services; • develop measures to increase healthy life years and improve primary and outpatient care, and secondary and tertiary healthcare; • support integrated measures for active inclusion, with the engagement of local communities and civil society; • support the provision of food and/or basic material assistance to the most deprived, including accompanying measures. Policy Objective 5 – A Europe closer to citizens by fostering the sustainable and integrated development of urban, rural and coastal areas and local initiatives In Estonia, there are inequalities between regions and an urban-rural divide. These need to be addressed by creating links between the areas concerned. Priority investments into tailor-made sustainable and integrated development of urban-, rural- and coastal areas and local interventions, that address urban-rural links are needed in order to complement policies to address the socio-economic disparities, and in particular to:  • support actions that improve the attractiveness of the urban areas, creating business opportunities and links with functional urban areas; • address the needs of the regions and territories that are lagging behind in economic and social development (special focus on East Viru), based on integrated territorial strategies; • strengthen the capacity of local authorities to develop sound integrated territorial strategies and to assess and select projects.   
 
 
 
 
D. Guidance on investment needs for cohesion policy 

Table (continued) 

Source: European Commission 

59 

Factors for effective delivery of Cohesion policy • promotion of social innovation and social experimentation in projects; • revised and simplified procedures that eliminate overlaps and excessive documentation and coordination requirements in programming and implementation of EU funds; • increased capacity of intermediate bodies and beneficiaries to prepare and implement projects; • strengthened partnership capacity of social partners and civil society organisations; • broader use of financial instruments and/or contributions to a Estonian compartment under InvestEU for revenue-generating and cost-saving activities; • improved public procurement performance, in particular by reducing single-bidding numbers.    
 
 
 
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