STATE BUDGET STRATEGY 2017-2020

April 2016

Table of Contents Introduction...... 5 1. PRIORITIES OF THE GOVERNMENT OF THE REPUBLIC...... 9 2. PERFORMANCE AREA GOALS ...... 19 2.1. Family policy ...... 19 2.2. Increasing income and fostering entrepreneurship ...... 22 2.2.1. Public finance ...... 22 2.2.2. Enterprise and innovation ...... 23 2.2.3. Transport ...... 25 2.2.4. Information society...... 27 2.3. State reform and stopping peripheralisation ...... 29 2.3.1. Public administration ...... 29 2.3.2. Regional development and rural life ...... 32 2.4. National security and defence ...... 34 2.5. Foreign and EU policy ...... 37 2.6. Energy ...... 40 2.7. Social protection and healthcare ...... 42 2.7.1. Labour market ...... 42 2.7.2. Social protection ...... 43 2.7.3. Healthcare ...... 46 2.8. Legal order ...... 49 2.9. Internal Security ...... 53 2.10. Research and education policy ...... 57 2.10.1. Research ...... 57 2.10.2. Education ...... 59 2.11. Culture and sports ...... 63 2.11.1. Culture ...... 63 2.11.2. Sports ...... 66 2.12. Estonian language and identity ...... 67

2 2.13. Citizenship policy and integration ...... 69 2.14. Environment ...... 71 2.15. Agriculture and fishing ...... 74 2.16. Development of civil society ...... 79 3. FISCAL FRAMEWORK ...... 81 3.1. Fiscal policy objectives of the Government of the Republic ...... 81 3.1.1. Budgetary position objective of the general government ...... 82 3.1.2. Tax burden objective ...... 82 3.2. Budgetary position of the general government ...... 82 3.2.1. Cyclically adjusted position of the general government’s budget ...... 84 3.2.2. Structural position of the general government’s budget ...... 86 3.2.3. Budgetary position of the central government ...... 88 3.3. State budget’s position ...... 89 3.3.1. State budget revenue ...... 89 3.3.2. State budget expenditure ...... 90 3.4. Position of other central government ...... 106 3.4.1. Budgetary position of local governments ...... 106 3.4.2. Budgetary position of social security funds ...... 108 3.5. Tax policy, tax burden and tax expenditure ...... 111 3.5.1. Tax differences ...... 112 3.5.2. Implicit tax rate and tax wedge ...... 114 3.5.3. Tax expenditure ...... 116 3.6. The general government’s debt burden and reserves ...... 118 3.6.1. General government debt ...... 118 3.6.2. General government reserves and net position ...... 122 SUMMARY ...... 123 APPENDICES ...... 124 Appendix 1. . Ministry of Finance, economic forecast of spring 2016 ...... 124 Appendix 2. Financial plan of the State Budgetary Strategy 2017-2020 by areas of government ...... 129 Appendix 3. Use of revenues from EU scheme for greenhouse gas emission allowance trading in 2013-2020...... 132

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Introduction

Essence of State Budget Strategy The objective of the State Budget Strategy is to ensure fiscal sustainability and to enhance the effectiveness of the government in steering national and sectoral policies. The State Budget Strategy ensures compliance between the state’s needs in sectoral policies and its financial opportunities resulting from forecasts. 1 The first document to serve as a budget strategy was drawn up in 2000. The State Budget Act (in 2002 and 2014) clarified the requirements for the annually prepared budget strategy to be approved by the Government of the Republic, at the proposal of the Minister of Finance, no later than eight months before the beginning of the next fiscal year. The current State Budget Strategy is updated each spring by specifying the plans for the next three years and supplementing the plan for at least one year. This will ensure that medium- term plans are constantly adjusted to changes in the economy, fiscal environment and sectoral operating environment. The budget strategy includes the next four years’ main directions of the state’s budgetary policy, a forecast of economic development, priorities of the Government of the Republic, situation analysis of performance areas, targets with indicators, main policy changes, and a funding plan for areas of government.

Implementation and updating of State Budget Policy The State Budget Strategy is implemented via implementation and action plans of sectoral development plans. According to the regulation of the Minister of Finance on drafting the state budget2, constitutional agencies, the Government Office and ministries shall submit draft budgets to the Ministry of Finance for the following year, i.e. action plans and financial plans for the first year of the development plans. Drawing on the summer economic forecast, the Ministry of Finance first analyses the drafts and resolves possible disputes and then submits a draft budget along with an explanatory memorandum to the Government of the Republic for approval. The Riigikogu begins a proceeding of the draft budget no later than three months before the start of the budgetary year. Upon entry into force of the State Budget Act, the Government of the Republic approves the wholesome State Budget Action Plan across areas of government and a supplementary budgetary nomenclature. Each year, ministries add another year to their development documents directed to achievement of the Government’s objectives, thereby ensuring a four-year outlook in strategic planning. The supplements are based on the current State Budget Strategy. As a rule, development plans are submitted to the Ministry of Finance no later than by 1 March.

Monitoring the State Budget Strategy Over the course of the current budget year, regular overviews of the state’s financial situation are prepared. Monthly overviews of revenue receipts, the use of budgetary instruments, changes in liquid asserts, the budgetary position and the situation in the economy and the general government sector are prepared and published on the website of the Ministry of Finance.

1 https://www.riigiteataja.ee/en/eli/ee/529022016004 2 https://www.riigiteataja.ee/akt/113012015029

5 At the end of each budget year, each governmental agency will prepare annual accounts and submit a report on the performance of action plans for that year to the Ministry of Finance. The State Shared Service Centre will prepare an overview of the state’s financial situation, financial performance and cash flows as well as the implementation of state budget. Based on those inputs, the Ministry of Finance prepares state annual accounts reflecting wholesome information about the performance and resources of the general government sector. The Government of the Republic will approve the state annual accounts and will submit those together with the audit report of the National Audit Office to the Riigikogu for approval.

Preparation of State Budget Strategy 2017-2020 The State Budget Strategy 2017–2020 was prepared simultaneously and in material consistency with the preparation of the Government of the Republic Action Plan and the updating of the national competitiveness plan “Estonia 2020” and the Stability Programme. The ministries prepared the area of government development plans for the years 2017–2020 and submitted these along with financial plans to the Ministry of Finance by 1 March. The data received from the ministries was used as an input for preparing the economic forecast, the Stability Programme and the State Budget Strategy. In January-February, prior to discussions in the Government, the Ministry of Finance and the Government Office collaborated to arrange discussions involving all ministries related to the fulfilment of the Government’s priorities. In March, negotiations took place between the Minister of Finance and other ministers, discussing the needs of the areas of government in order to fulfil the objectives. The outcome of the negotiations was an input to the Government’s discussions. Cabinet meetings were held to discuss economic and fiscal policy objectives as well as budget priorities in April. The State Budget Strategy 2017–2020 was submitted to the Government of the Republic for approval on 28 April 2016. The document will be introduced to the commissions of the Riigikogu.

Inclusion of partners in preparation of the State Budget Strategy 2017-2020 The participation of partners in the preparation of development plans is organised by the responsible ministries. The inclusion of relevant interested persons and authorities and effective cooperation between sectors is unavoidable, in order to achieve an integral perspective view and coordination of development documents. The Government has also provided the persons preparing the development plans with guidelines on good practice of inclusion.

Structure of State Budget Strategy 2017-2020 This State Budget Strategy comprises three chapters. The first part of the document describes in detail the priorities of the Government of the Republic. It provides an overview of the achievement of objectives thus far and sets out the most important development activities to implement the next four year’s priorities. The second part describes important activities performed to achieve the objectives in 2016 and 2015, includes a table of indicators and their target levels from the baseline to the next four years, as well as important activities of the next four years to achieve the objectives. The third part describes the economic and fiscal policy objectives and priorities of the Government of the Republic as well as the fiscal framework of the public sector for the following four years. The document has three appendices setting out the following:

6  the main indicators of the economic forecast prepared by the Ministry of Finance in spring 2016;  the funding plan of the areas of government for the next four years;  the plan for the use of revenues from the EU scheme for greenhouse gas emission allowance trading in 2013-2020.

Chapters and performance areas of the State Budget Strategy 2017-2020 After the parliament elections of 2015, the Government of the Republic entered the office on 9 April 2015; this document reflects the targets and priorities set by that Government for the state’s activities. The Government is guided by the need to increase the flexibility of Estonian governance, which brought about the restructuring of the areas of government on the basis of the priorities of the Government of the Republic. In compliance with the current Coalition Programme, the Government’s action plan was prepared and the State Budget Strategy 2017- 2020 was approved. The sectoral view provided in the State Budget Strategy is guided by the Government’s political directions and based on that, the sectoral view in the state’s fiscal management is updated. In compliance with the State Budget Act, the State Budget Strategy sets out the performance areas that the state is active in. The performance areas are jointly used in both fiscal management and strategic planning of the state, in order to better connect development plans and budget information.

State Budget Strategy 2017-2020

State Budget Strategy’s chapter Performance areas 1. Family policy 1. Family policy 2. Increasing income and fostering entrepreneurship 2.1. Public finance 2.2. Enterprise and innovation 2.3. Transport 2.4. Information society 3. State reform and stopping peripheralisation 3.1. Public administration 3.2. Regional development and rural life 4. National security and defence 4. National security and defence 5. Foreign and EU policy 5. Foreign and EU policy 6. Energy 6. Energy 7. Social protection and healthcare 7.1. Labour market 7.2. Social protection 7.3. Healthcare 8. Legal order 8. Legal order 9. Internal security 9. Internal security 10. Research and education policy 10.1. Research 10.2. Education 11. Culture and sports 11.1. Culture 11.2. Sports

7 12. Estonian language and identity 12. Estonian language and identity 13. Citizenship policy and integration 13. Citizenship policy and integration 14. Environment 14. Environment 15. Agriculture 15. Agriculture and fishing 16. Development of civil society 16. Development of civil society

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1. PRIORITIES OF THE GOVERNMENT OF THE REPUBLIC 1. INCREASING THE NATIONAL SECURITY Overview of the performance of the indicators of achieving the priority’s objectives  Defence expenditure is retained at the level of at least 2% of the GDP, plus the funding of additional costs for Estonia as a hosting country In order to strengthen Estonia’s national security, the defence expenditure has been retained at the level of 2% of GDP or higher since 2012. According to the economic forecast of spring 2016, the state budget of 2016 includes the defence expenditure as 2.11% (449 million euros). In the state budget of 2015, the planned proportion of defence expenditure together with additional costs for Estonia as a hosting country and investments in the allied infrastructure was 2.04% of GDP. In 2015, four State Parties besides Estonia out of all 28 State Parties of NATO complied with the agreement of 2% defence expenditure – the United States of America (3.62% of GDP), Greece (2.46%), Poland (2.18%) and the United Kingdom (2.07% of GDP).  Membership of the Defence League and its specialised organisations increases to 30 thousand. Increasing the membership of the Defence League is important for the society’s overall defence readiness as well as for improved actual military defence capability. The membership of the Defence League and its specialised organisations (women’s and youth organisations) has consistently grown. As of 2015, the Defence League and its specialised organisations had a total of 25,001 members, of which 15,896 were members of the Defence League (up by 1,389 members, compared with 2014). The number of members of the Defence League has been growing consistently over the past ten years. A decade ago, the Defence League together with its specialised organisations had a total of 18,740 members, incl. 9,980 members of the Defence League. The threshold of 20,000 members was first passed in 2010.  Most important development activities being implemented to fulfil the priority: In order to achieve the Government’s objective, the Defence League’s membership should grow by nearly 1,300 members in the coming four years, which presumes the continuation of the recent year’s growth speed. For that, the Defence League has initiated or is currently initiating various activities. There are plans for an outdoor campaign; seeking and training of additional volunteers from among the Defence League’s membership has started, to give them the task of active recruitment as well as active communication and counselling of the people who have filed an application to join; co-operation with various programmes of the ERR is being intensified; introduction of the Defence League at various public events, trade fairs and in military units is continuing. Also, work is continuing to actively involve people who are in the Defence League’s list but have meanwhile become passive. In order to improve Estonia’s national defence, works are continuing to develop the infrastructure for hosting the allied units being deployed in Estonia, for storing the pre- deposited materiel and for improving the training opportunities. To develop independent defence capability, the 1st and the 2nd Infantry Brigade will be supplied and developed further, military intelligence and early warning capability will be aggressively developed, and the housing and training opportunities of Defence League members and recruits will be improved (new barracks at Tapa, establishing the conditions for mortar and anti-tank shooting at Nursipalu exercise area, completing the service centre of Sirgala exercise field, completing the design works for the Central Polygon’s roads and training buildings as well as Soodla

9 exercise field, etc.). There are plans to start establishing the long-distance anti-tank capability. The more detailed priorities in developing the military defence capability and the non-military branches of national defence (the civil sector’s support to military defence, ensuring internal security, supporting international activities, developing vital services, and strategic communication) are ultimately defined in the National Defence Development Plan for 2017– 2026, to be approved at the end of 2016. By the beginning of 2019, the eastern border will be fully built (incl. coverage by technical and electronic surveillance) – the State Budget Strategy for 2017–2020 plans 50 million euros for that. The border will have a total of more than 700 border control posts, over 300 floating border signs, borer fences, as well as drones and cameras that help the border guard work better. The network of command posts is being developed – the command posts of Vändra and Vastseliina will be built and the joint building of internal security in Pärnu will be designed and built. Additionally, police special forces and the rapid response capability of the police will be developed. With the development of the field of civil defence, the awareness and crisis behaviour skills of residents and agencies are being increased. Focus is also on developing the volunteers of national defence and internal security, as well as reinforcing the internal security in the context of wide-scale national defence with the purpose of preventing activities aimed against Estonian security and constitutional order. The improvement of the work conditions and the equipment of the police, the rescue services and the Alarm Centre continues. The implementation of the new Emergency Act improves the capability to cope with crises and increases the functional robustness of vital services. A programme will be launched to develop the defence willingness of the people as well as their knowledge about national defence. 2. PROMOTING ECONOMIC GROWTH AND REDUCING LABOUR TAXES Overview of the performance of the indicators of achieving the priority’s objectives:  Productivity per employed person as a ratio to the EU average increases to 73.6% by 2016 and to 79.1% by 2019. The productivity indicator of 2014 exceeds the target level set for 2016. Looking at the long- term trend and especially compared with the pre-crisis years, the productivity indicators have clearly improved. While in 2006, Estonian productivity per employed person was 60.7% of the EU average, in 2014 (the latest year with available data) the productivity level was up to 73.8% of the EU average. The achievement of the target set for 2019 requires additional activities by the state, regardless of the positive trend. An important prerequisite for a significant increase of productivity is the growth of investments, first and foremost investments in making entrepreneurship more knowledge-intensive. Yet, investments have rather decreased in the recent years.  Employment rate in the 20–64 age group increases to 74.8% by 2016 and to 75.7% by 2019. The employment rate of 2015 was 76.2%, exceeding the target level of both 2016 and 2019. The employment rate in that age group has not yet reached the level of 2008 where it was high for its time, i.e. 77%, although if that trend continues, the level will soon be reached. Although Estonian population is aging, unemployment is low and there is a shortage of labour on the labour market, the retaining of the achieved level in the coming years will still be a challenge.  Implicit tax rate on labour decreases to 33.1% by 2016 and 2019. According to the latest data, the indicator of the implicit tax rate on labour will be below the target set for 2016. Although the trend has been positive since 2010 and the implicit tax rate on labour has decreased every year, the tempo has not been sufficient and the 34.6 percent

10 implicit tax rate on labour of 2014 exceeds that of 2006 (the 2014 indicators do not yet reflect the effect of the recent years’ reduction in labour taxes). The achievement of the target level set for 2019 presumes a faster annual reduction speed. Compared with the foregoing productivity and employment indicators, the implicit tax rate on labour is an indicator that the Government can directly influence through fiscal policy. For others, that relation is more indirect because they are affected by many other factors as well.

Most important development activities being implemented to fulfil the priority: The main trial of the coming years will be the quickening of the productivity growth. The state can do it by supporting investments to increase knowledge-intensity and added value in various sectors. The Ministry of Economic Affairs and Communications and the Ministry of Education and Research will invest a total of 660 million euros from European Structural Funds in various measures supporting entrepreneurship and developing research in 2015- 2020. This includes 145.5 million euros for various financial instruments, of which 48 million euros of structural fund moneys will in turn go to a venture capital fund. 144 million euros will be invested into the smart specialisation strategy, which includes five measures with the central objective of promoting co-operation between enterprises and universities and other research institutions. In the period of 2017-2020, works will continue to tidy and consolidate the network of universities, research institutions and institutions of professional higher education, in the amount of 110 million euros (the activity “Institutional development programme for R&D institutions and higher education institutions”, i.e. ASTRA). In addition to those measures approved and currently being implemented (see the chapter on research), additional activities are needed. The main step is additional funding for research and development expenditure. We set the target of increasing the private sector’s R&D expenditure to 2% and the public sector’s R&D expenditure to 1% of GDP by 2020. “Starting with 2017, 8 million euros will be continually allocated to research and development activities, increasing the public sector’s share in research and development to 0.86% of GDP in 2017.” So that the public sector’s R&D expenditure would have an effect on the productivity growth, it is important that money from the private sector and abroad is involved for investments. Increasing the state’s contribution has to motivate the private sector to contribute more to R&D investments. In order to promote economic growth, the construction of Rail Baltic and other strategic infrastructure will continue as well. Based on the preliminary design of Rail Baltic to be completed in 2018, preparations for the design works and construction procurements can start in 2017 and the technical designing and constructing of some sections of the railway can start in 2018. At the first stage, the body of the railway will be built and the construction of the power supply and multi-level crossings will start. In 2019, the construction of passenger terminals in Pärnu and Ülemiste will start, intended to be completed by the end of 2020. By the end of 2017, the tramway section between Ülemiste passenger terminal and Tallinn Airport will be completed; this is also considered included in the Rail Baltic works. In 2017, the expropriation of lands needed for the construction of Rail Baltic will start. Also, activities continue in order to reduce the administrative burden of entrepreneurship. A work group has been established for that, with the task to ensure the implementation of the suggestions made by entrepreneur organisations, and to develop and implement the mechanism of continuous reduction of the enterprises’ administrative burden stemming from communication with the state and from the legislation’s requirements, and of continuous reduction of bureaucracy in the public sector. The costs of the workgroup’s activities and the necessary developments are 150,000 euros. To get funding for the necessary IT developments,

11 the agencies will file their applications with the Ministry of Economic Affairs and Communications. The costs will be covered from the EU Structural Funds. Several agencies have launched or are planning wide-scale developments intended to reduce the administrative burden. The most extensive among those are Aruandlus 3.0, Maksukogumine2020 (the Ministry of Finance), SKAIS2 (the Ministry of Social Affairs) and KOTKAS (the Ministry of the Environment). Statistics Estonia will review the need for the statistics being collected and will seek opportunities to reduce the statistics-related obligations and for cross-use of data with the registers of the Tax and Customs Board and Eesti Pank. There are also plans to analyse the process of assessing the administrative burden of enterprises and if necessary then to develop the calculator created by the Ministry of Economic Affairs and Communications.

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3. INCREASING SUSTAINABLE LIVELIHOOD OF LOW INCOME PEOPLE Overview of the performance of the indicators of achieving the priority’s objectives:  Absolute poverty rate decreases to 5.9% by 2019. In 2014, 6.3% of the population lived in absolute poverty. Before the economic crisis i.e. in 2007 and 2008, the poverty rate was below 5%; poverty increased with the economic crisis, reaching its maximum in 2010 when 8.7% of the population lived in absolute poverty. The poverty rate did decline in subsequent years, but it has not achieved its pre-crisis level. In 2014, 6.3% of the people lived in poverty and the achievement of the relevant target requires additional efforts. According to the latest indicators, the absolute poverty indicator improved over the 2013 value in almost all household types, except families with three or more children, the absolute poverty rate of which rose by 3 percentage points. Also, single parents and the unemployed are in a poor state, as their absolute poverty rate remained essentially the same. The achievement of this target is facilitated by various measures of the education, youth work, labour market and social sectors. It is important to increase the education level of people with a low level of education, to reduce the share of people without specialised or professional education, and to increase employment through measures directed to various groups (the unemployed, young people, the elderly, etc.). It is simultaneously important to secure weaker social groups with effective and well targeted social benefits, as well as to ensure the availability of public services intended to empower the persons (incl. education, youth work, etc.) to reduce the effects of the risk of poverty and social exclusion.  The proportion of adults (25–64 years) without specialised or vocational education decreases below 26% by 2019. A large part of Estonia’s labour force (25-64 years) has either basic or general secondary education and has no specialised education (vocational or higher education). The share of such people in 2009 was 35%. By 2015, the share of adults without specialised and vocational education decreased to 29.2%, but the reduction has been rather slow. The highest proportion of people without specialised education is among those aged 25–29 years; their share is higher than average also among those aged 30–40 years and those aged 60–64 years. The share of young people not in studies and having a low level of education (in 2015: 11%) has not decreased over the recent years. Also, no positive sustainable changes are observed in the participation in lifelong learning. It provides for a conclusion that there will be difficulties in the future, both with achieving the intended level and with retaining the results already achieved. Still, in the recent years, the rate of dropout from day studies in general education schools has decreased and the share of those continuing their education among all graduates from basic education has been stable. There is also a positive trend of the increased participation of adults in vocational education. The number of dropouts from vocational education has decreased. But the main negative trend in the reduction of the share of adults without specialised and professional education is the reduction in continuing studies after upper secondary education. The achievement of the set target requires additional efforts in all fields affecting this indicator. These are successful graduations from general education, choosing and successful completion of a vocational education after basic school, support to the continuation of studies after basic school and upper secondary school, reduction of dropouts from vocational and higher education, returning of adults without specialised education (and also adults in general) to vocational or higher education studies, returning of young people to the system after they

13 have dropped out of education and out of the labour market. Most important development activities being implemented to fulfil the priority: In order to improve the coping of people with low income, various activities will continue in the field of education, intended to reduce the share of people without specialised and vocational education and to improve the qualification of people with a low level of education. In the coming years, it must be ensured that the services provided with the state’s support will turn into a sustainable chain of services to develop the skills of labour force, to prevent unemployment and to increase productivity; this entails studies and analysis of the labour market’s needs, assessment of skills, and the provision of integrated counselling services and training opportunities for target groups of high priority for the state. It is also important that various social transfers be of adequate level, supporting the independent coping of people. For that purpose, the Government decided to increase the subsistence limit to 130 euros starting with 2016. It is also important to implement the support scheme for pensioners living alone, as a result of which the pensioners will receive additional support of 115 euros from the state, starting with 2017. In 2017, the repayment system for people with low income will be launched; with that system, persons having worked full-time for at least 6 months and having an income of less than 7,782 euros in 2016 can apply for annual repayments when filing their natural person income declaration. 4. IMPROVING THE SUSTAINABLE LIVELIHOOD OF FAMILIES WITH CHILDREN, DEVELOPING AN ENVIRONMENT SUPPORTING CHILDBIRTH Overview of the performance of the indicators of achieving the priority’s objectives:  Absolute poverty rate among children aged 0–17 years decreases to 7% by 2019. The absolute poverty of children was the lowest before the economic crisis, in 2007 when 6.5% of children lived in poverty. This or any lower level has not been reached again to this day. As a result of the economic crisis, the absolute poverty rate of children rose to 11.4% in 2010. Thereafter, the indicator decreased somewhat, but the achievement of the set target remains a challenge. In 2014, the absolute poverty rate of children was 9.1%. The most important factors influencing the poverty of children are the labour market status of their parents and various social transfers. In 2014, social transfers (incl. pensions, family allowances) reduced the absolute poverty rate of children by 8.7 percentage points (i.e. by nearly 49%). The amendments to state family allowances that have entered or will enter into force in 2015-2019, as well as the increase of the subsistence limit will presumably entail a significant effect to reduce the poverty of children.  Summary childbirth ratio i.e. the number of children per woman increases to 1.67 by 2019. The highest childbirth ratio of the past decade in Estonia occurred in 2008 and 2010 when on average 1.72 children were born per woman. Starting with 2010, the childbirth ratio has declined. The decline stopped in 2014 when the indicator rose a little to 1.54 (in 2013: 1.52). Thus, there were on average a little more childbirths per the number of fertile women than in 2013. Still, it cannot be said yet whether the growth trend is a sustained one and as the indicator is far from the set target, additional efforts are needed to increase the childbirth ratio. Most important development activities being implemented to fulfil the priority: In order to fulfil the priority related to children and families, it is important to develop in equal extent all the various services, allowances and support systems intended for families and promoting the growth of childbirths and the security of the children’s environment. Concerning the system of parental leave and parental benefit, the Government has decided to

14 analyse the possibilities to make the system more flexible, in order to support the labour market participation of parents. It is important to implement the measures of creating childcare places funded from structural funds and improving the availability of the childcare service in regions where there is a shortage of places. In total; approximately 3,200 new childcare places will be created by 2020. Also, funds will be directed into the field of substitute care, for the purpose of increasing the quality of substitute care. The coping of families is very significantly influenced by the increases of family benefits that have been decided until 2019. In 2015, the Government decided to raise the child allowance to 60 euros by 2019 (50 euros by 2016, 55 euros by 2018), and a new allowance for families with many children entered into force on 1 July 2017, intended for families with three or more children. The allowance for families with many children is 200 euros per month for a family raising 3 to 6 children and 370 euros per month for a family raising 7 or more children. Also, the support scheme for hobby activities will be launched, in order to secure all children with access to varied hobby activities, accounting for the socioeconomic situation of the children and young people. To support single parents, the maintenance allowance scheme will be launched on 1 January 2017; as a result, 100 euros of allowance will be paid to a child whose separately living parent is ordered with a court judgement to pay maintenance for the child but does not fulfil that payment obligation. In March 2016, additional coercive measures for maintenance debtors were established and the Government will continue to develop measures facilitating the fulfilment of maintenance payment obligations. 5. REFORMING PUBLIC AND LOCAL ADMINISTRATION, ALLEVIATING PERIPHERALISATION Overview of the performance of the indicators of achieving the priority’s objectives:  The share of general government employees among employment-age population does not increase (below 12%). In 2014, the share of general government employees among employment-age population was 12%, which is within the target set for 2019. Compared with the pre-crisis indicators, the share has decreased but in comparison with 2013, the share has increased. The achievement of the 2019 target presumes that agreements are kept and structural reforms are implemented in areas of government.  Employment rate in rural regions (20–64 age group) increases (above 73.2%). The employment rate in rural regions has improved somewhat in the recent years. In 2013, that figure was 72.9%; in 2014 it was 73.2%. Similar to the employment rate in urban settlements, the employment rate in rural regions has fluctuated in the past decade. In 2005, the employment rate in rural regions was 65.4%, growing to 73.3% by 2008. In the years of economic decline, the employment rate decreased in both cities and rural regions; since 2011, it has grown again. It is notable that the recovery of employment rate after the economic decline has been faster in rural areas than in urban settlements. The achievement of the target set for 2019 presumes that the measures foreseen for the employment rate and the business environment in rural regions will be continued and made more effective.  By the end of 2018, at least 95% of residents are living under local governments complying with the criteria approved in the Government3.

3 In the action programme of the Government of the Republic, this indicator is called “By the end of 2018, at least 95% of residents are living under local governments complying with the capability and sustainability criteria approved in the Government”. As the merger criterion was set as the minimum number of residents, although that also reflects the capability and sustainability of the local government, the indicator’s wording has been amended.

15 In November, the Government agreed as a criterion for the reform that the minimum number of new local government regions shall be 5,000, in order to form local governments with 11,000 or more residents. Experts have assessed that 5,000 residents is the lower threshold of a local government having the capability to provide services with sufficient choice, to prepare a budget enabling investments, and to hire more competent specialists. The number of residents in local government regions with 5,000+ residents has slowly increased. While in 2013, 74.5% of the population lived in local government regions with 5,000 people, the indicator was higher in 2015: 76.1%. Yet, 80% of the current local government regions have less than 5,000 residents, which is why the achievement of the set target requires wide-scale reorganization. Most important development activities being implemented to fulfil the priority: The state reform has three main objectives. The first among them is to provide public services in all of Estonia that are of higher-quality, more effective and better corresponding to the needs of the consumers of the services. In order to make high-quality public services available in all of Estonia, the Government will implement a state reform by the local government elections of 2017. As a result of analyses and expert assessments, the Government has reaches an opinion that local governments with 5,000 residents can better ensure the specialization of officials in the local government’s main tasks, the management expenses per resident will markedly decrease and such local governments have a sufficient investment capability – which is why such local governments have a better capability to provide the necessary services to their residents. The merging local governments will be supported financially. For merger support, the state budget has allocated 65 million euros for the period of 2017–2020. Additionally, those local governments will be provided with support for organising the merger and for developing services in the merged local governments. As the number of students has decreased, the school network has not adapted to the situation and smaller schools have difficulties with high-quality and multiple-choice upper secondary education. The state accepts partial burden of the provision of upper secondary education, in order to adapt the school network to the demographic changes and to guarantee strong upper secondary education in counties and to stop the outflow of children from most Estonian counties to larger cities. In order to have a school network that takes into account demographic changes and ensures access to high-quality education in all regions of Estonia, 240 million euros will be invested in the period of 2017-2020. This will be accompanied by a more reasonable use of the education sector’s resources. By the year 2023, we can do with 3 million square metres instead of the current 3.5 million square metres and with fewer than 100 upper secondary education units (today: 171); the resources being released can be combined with additional resources and directed into ensuring the quality of education. Through the networking of major hospitals and county hospitals, the state shall ensure uniform availability of the healthcare service in all of Estonia. The substantive co-operation of county hospitals with major hospitals helps provide specialised medicals services in all county centres (at the local level). Realistically, small hospitals cannot solve all problems of their shortage of medical personnel on their own, and young specialised physicians would rather work in a larger collective where there are better opportunities for professional development and for retaining their competence. In co-operation and with shared responsibility between hospitals, the availability of medical help can be ensured. To ensure available and high-quality healthcare services, 207.6 million euros will be directed into investments in the modernisation of the first contact health centres and the competence centres of the hospital network. Also, investments will be made into e-Health services (remote services, pan-Estonian digital prescription system, standardisation of health information, a parent portal supporting the involvement of patients, pre-emptive monitoring of chronic diseases, etc.), in order to

16 improve the availability and quality of healthcare services). In order to ensure a horizontal increase of the quality of service provision in all fields of life, works will be performed in the next budget strategy period to implement a system of measuring the service quality, so as to have an ongoing overview of the volume of services provided, the satisfaction of users, the administrative burden, and the costs. Also, innovative solutions to increase the service quality will be promoted. To improve the availability, effectiveness and usage convenience of the services, the opportunities of e-channels will be maximally utilised. For that, a central fund has been established under the Ministry of Economic Affairs and Communications, supporting the solutions through which it is planned to fund the development of services with the amount of 90 million euros in the years 2017- 2020. The second objective of the state reform is to reduce the administrative burden of entrepreneurs. For that, a so-called zero bureaucracy initiative has been established, so as to reduce the burden of enterprises when communicating with the state. In co-operation with entrepreneurship organisations, a total of 204 suggestions to reduce the bureaucracy were collected, 80% of which are planned to be implemented. First and foremost, the burden of entrepreneurs upon presenting the data of wages and labour force will be reduced by 1 January 2018. The state will also take steps to improve the quality of the services provided to enterprises, and works will continue to develop and simplify services for e-residents; the latter would improve the quality of the services also for resident users (e.g. Estonians would also be able to open bank accounts digitally). Third, in order to improve the effectiveness of the public sector and the use of the taxpayers’ money, the Government is guided by the principles that the number of employees in general government will decrease in proportion to the reduction of the employment-age population. But this must not take place by way of compromising the quality of the necessary services; instead, the government system must be organised more effectively and openly, and overregulation and bureaucracy must be reduced. To achieve that objective, the reforms of the previous periods have been analysed at the central government’s level with the initiative of the Minister of Public Administration and based on that, decisions differentiated by ministries (0.7%-2.4%) have been adopted to reduce the public governance costs and staffs during the budgetary period of 2016, so that those effectiveness-increasing initiatives would not be one- off, the Minister of Public Administration will present the results of the first public audit to the Government in May and will then prepare additional suggestions based on that for structural reorganisations in making the government system more effective. Upon implementing the changes, areas of government can receive support for less resource- intensive reorganisation of their management systems and services. The achievement of the objective of more efficient government system is also helped along by initiatives already launched, like the centralisation of support services (accounting, personnel accounting, procurement and real estate administration), the transition to e-invoices, the consolidation of public procurements and public demands. The focussing of standardised activities will provide remarkable savings in costs and in the number of employees. Also, bureaucracy in communication between state agencies will be reduced and works will continue to take into use e-solutions so as to simplify and automate the processes. 6. PREPARING FOR AND SUCCESSFUL CONDUCTING OF EUROPEAN UNION PRESIDENCY Estonia will be the presiding country of European Union from January to June 2018. The Government will continue the preparations for Estonia’s presidency in European Union Council pursuant to the Action Plan to Prepare for European Union Presidency, so as to plan

17 and implement the presidency well, both substantively and organisationally. The preparation of Estonia’s officials and personnel to the presidency will take place on the basis of the personnel strategy and the training plan for the presidency. The precise programme of the presidency will be adopted in December 2017. As the presiding country, Estonia wishes to stress the development of information society and e-services in all sectors. The presidency budget is around 74 million euros. The presidency preparations are co-ordinated by a Government committee to prepare for presidencies, established in 2012.

18

2. PERFORMANCE AREA GOALS This chapter provides an overview of the current situation in performance areas; all the performance areas together cover the entire activities of the state and all funds reflected in the State Budget Strategy. The overall objectives of the Government of the Republic as well as their target levels and indicators describing their achievement and are presented under performance areas. This chapter also outlines the most important activities contributing to the achievement of the objectives. The overview of the current situation in performance areas presents only the most general trends in the performance areas as well as their central indicators and an international comparison. A more detailed overview of the situation in performance areas can be found in the relevant sectoral development plans and the development plans of the ministries’ areas of government. A more detailed overview of the latest achievements in performance areas can be found in management reports of the relevant ministries’ annual reports and in the overview of action plan performance reports included in the state’s annual report. An overview of the more specific planned actions is provided by the Government of the Republic Action Plan.

2.1. Family policy

Sector’s objective and indicators: Estonian people are a growing nation and the welfare and living quality of children and families have improved.

Important activities to achieve the target levels of 2015–2016  On 1 January 2015, the subsistence level of every minor-age member of a family was equalled to the subsistence level of the first member of the family. The relevant change in the Social Welfare Act was adopted on 19 June 2014 with the Act Amending the State Family Benefits and Other Acts; the subsistence benefit’s budget for 2015 is 19.1 million euros.  Starting with 1 January 2015, the needs-based family allowance is 45 euros per month for a family with one child and 90 euros per month for a family with two or more children. The relevant amendment to the Social Welfare Act was adopted on 19 June 2014 with the Act Amending the State Family Benefits and Other Acts; the needs-based family benefit budget for 2016 is 4.6 million euros.  In May 2015, the allowance conditions for “Creating childcare places and supporting the service provision for children aged 0–7 years” were approved; with that, approximately 1,200 childcare places will be created by the year 2020.  In June 2015, the Riigikogu approved the amendment to the State Family Benefits Act, setting out the increase of child allowance for the next four years: starting with 1 January 2016, the child allowance for the first and the second child of a family is 50 euros (additional funds allocated: 14.3 million euros); starting with 1 January 2018 it will be 55 euros (additional funds allocated: 28.7 million euros); starting with 1 January 2019, it will be 60 euros (additional funds allocated: 42.9 million euros). A new allowance for families with many children was established for families with three or more children, to be paid to families raising at least three children eligible for child allowance. For a family raising three to six children, the allowance is 200 euros per month and for a family raising seven or more children, it is 370 euros per month. The new family allowance will enter into

19 force on 1 July 2017; the additional funds allocated are 17.3 million euros in 2017, 37.8 million euros in 2018, and 40.8 million euros per year in 2019–2020.  In November 2015, the state started to provide support for the provision of the services of childcare, support person and transportation services intended for children with severe and profound disabilities and in high need for care; funding: 38.32 million euros of structural funds in 2014+, incl. 257,892 euros in 2015. Additionally, an open round of applications was used to support local governments in creating new childcare and kindergarten places; funding: 7.66 million euros of structural funds in 2014+.  In November 2015, the methodology and measures of the Family-Friendly Employer’s sign were approved. The intention to prepare a Draft Act Repealing the Juvenile Sanctions Act and Consequently Amending Other Acts was presented for an approval round.  In December 2015, a suggestion to amend the allowance system for the parents of children with a profound disability was discussed in the Government Office, intending to increase the allowance for a parent of a child with a profound disability if that parent is declared the child’s caregiver. The objective is to implement the support scheme for children with a profound disability and their caregivers starting with 1 January 2017; the funds allocated from the state budget to the childcare services for children with a severe or a profound disability are 2.65 million euros.  In December 2015, an analysis of the Lanzarote Convention i.e. the Council of Europe Convention on the Protection of Children against Sexual Exploitation and Sexual Abuse was presented to the Ministry of Justice, mapping the needed changes and the challenges to improve Estonian legal system and the Estonian services of children’s welfare and victim support, in order to make the Estonian situation comply with the Convention’s requirements.  In December 2015, the preparation of a concept of help for an abused child i.e. an integrated system was completed; the elimination of the shortcomings listed and the implementation of the cross-sectoral activity discussed in that analysis make it easier to notice abused children and provide them with help and to ensure their legal protection in an integrated and child-friendly manner. Target level Target Base Actual level Indicator level 2016 2017 2018 2019 2020 level 2015 2015 Natural population growth Negative -1,841 5 Source: (2014)4 Positive Negative Positive Positive Positive Positive Positive Statistics Estonia Total fertility rate 1.54 2015 data 1.61 1.63 1.65 1.67 Source: published in (2014) 1.58 1.67 Statistics May 2016 Estonia Percentage of 21 (0-2 33% (0– 22.8% (0-2 33 (0-2 34 (0-2 34 (0-2 34.5 (0- 35% (0–

4 Initial data of Statistics Estonia. 5 Initial data of Statistics Estonia: -1,416.

20 Target level Target Base Actual level Indicator level 2016 2017 2018 2019 2020 level 2015 2015 children y) 2 years) y) 93% (3-6 y) y) y) 2 y) 2 years) attending y) (2015) 94.3 (3-6 92% (3– 92 (3-6 92 (3-6 92 (3-6 92 (3-6 92% (3– formal y) 6 years) y) y) y) y) 6 years) childcare in the 0–2 and 3–6 (2014) age groups, % Source: Statistics Estonia Number of children removed from their families / 380 children percentage in 382 / ... 2015 the 0–17 age children population Decrea- group, % /0.16 Decrea- data Decrea- Decrea- Decrea- Decrea- sing sing sing sing sing sing Source: (2014) published in Ministry of 2016 Social Affairs, Statistics Estonia Rate of absolute6 poverty among 2015 data children aged 0– published in 177, % 9.1 7.0 7.7% February 7.3 7.1 7.0 .7.0 Source: (2014) 2017

Statistics Estonia

Important activities to fulfil the targets of 2017–2020  Supporting the coping of single parent families, incl. implementing the maintenance allowance scheme (starting with 2017, the state budget will allocate 7.2 million euros per year for that);  Developing the childcare service and the support services for children with disabilities (starting with 2017, the state budget will allocate 1.0 million euros for that, the total allocated for the childcare service of children with severe or profound disability will be 2.65 million euros and the ESF funds allocated for the years 2017-2020 will be 32.5 million euros);

6 The indicator “Rate of absolute poverty among children aged 0–17, %” has been omitted because the indicator does not so much reflect the impact of measures as it is instead affected mainly by developments in the economy (for example, during an economic decline, the relative poverty indicator decreases because the number of people earning high income decreases; if the economy grows, the relative poverty increases as well, regardless of the increase of allowances). Therefore, it is not possible to use the indicator of relative poverty to measure the effectiveness of political measures. 7 Since 2013, the source of the income data used as a basis for the relative and absolute poverty indicators changed – in addition to Estonian Social Survey and the previously used databases (Estonian National Social Insurance Board, Health Insurance Fund, Unemployment Insurance Fund), the data of the Tax and Customs Board are now used. The poverty indicators of 2012 have been recalculated up to the new methodology in 2015. Thus, the data of 2012 must be considered an interruption of the time series due to a presumed material effect of the data source.

21  Ensuring the implementation of the arrangement of state child protection, incl. the implementation of the health check based monitoring system for children aged 0–6 years, the early warning monitoring measures for school-age children and NEE!T youths, and the implementation of the parenting programme. A total of 1,374,240 euros will be allocated from the state budget for the implementation of the child Protection Act starting with 2017.  Updating the arrangement and substance of substitute care (the base funding for the substitute home service will be a total of 15.26 million euros, starting with 2017);  Changing the parental leave system, in order to facilitate the combining of work and family life and the participation of fathers in parental leave;  Launching the cross-sectoral support system for abused children. The Children and Families Development Plan 2012–2020 and its Operational Programme are available here: http://sm.ee/et/lapsed-ja-pered-0

2.2. Increasing income and fostering entrepreneurship

2.2.1. Public finance

Sector’s objective and indicators: The fiscal policy is sustainable and balances the macro economy. Important activities in 2015 and 2016 to achieve the target levels The developments related to the target of the implicit tax rate on labour are described above under the relevant priority of the Government of the Republic.  In order to increase the transparency of the state budget, the Government will gradually transition to activity-based budget by 2020. As the first such area of government, the state budget for 2016 includes the budget of the Ministry of Education and Research as an activity-based budget i.e. a budget structured on the basis of the Government’s targets in the fields of education, research and language together with the costs of activities.  In order to increase the effectiveness and impact of using public resources and to support the implementation of the Government’s priorities, a spending review concept will be developed. The purpose of preparing and implementing a spending review is to review specific expenditure from the state budget and to provide the Government with suggestions in the process of preparing the budget to decrease or increase the expenditure or to arrange the sector more effectively (incl. more effective provision of public services) in the process of preparing the budget. In 2016, a pilot of the spending review, titled “Organising the official travel of government agencies”, will be conducted. Target level Target Base Actual Indicator level 2016 2017 2018 2019 2020 level 2015 2015

The general government’s structural budgetary position, % 1.2 of GDP 0.2 1.0 0.6 0.2 0.0 0.0 0.0 (2014) Source: Ministry of Finance

Net debt position (difference of (2014) reserves and debt, as proportion of GDP, %) 1.0 0.5 >-1.2 >-1.0 >-0.8 >-0.4 >-0.4

22 Target level

Source: Ministry of Finance > -1.8

Reserves (proportion of GDP, %) (2014) -9.5 9.3 >8.4 >8.6 >8.1 >8.0 >8.0 Source: Ministry of Finance 11.3 Implicit tax rate on labour, % (2013) 34.1 33.1 32.9 33.1 33.1 Source: Ministry of Finance 34.6

Important activities to fulfil the targets of 2017-2020  Balanced economic development will be ensured through responsible fiscal policy and structural balance. The economic resources of Estonia will not be utilised optimally in the near future, so the economic growth will be stimulated by the state through nominal budgetary deficit.  The threshold for registering as a value added tax payer will be increased from 16,000 euros to 40,000 euros, helping reduce the administrative burden and increase the competitiveness of micro-enterprises.  The social tax rate will be reduced by 1% in order to support entrepreneurship.  Increasing the basic tax-free allowance to 205 euros per month in 2016-2019. In order to increase the state budget’s transparency, the Government of the Republic will transition to accrual-based budget (by 2017) and to activity-based budget (by 2020).

2.2.2. Enterprise and innovation

Sector’s objective and indicators: Productivity per employee when compared with the European Union average has increased to 80%. Important activities in 2015 and 2016 to achieve the target levels  Opportunities were created for enterprises to obtain financial instruments (loans, suretyships, export credit insurance) by signing funding agreements with KredEx Foundation (SA KredEx) and the credit insurance branch of KredEx Foundation (SA KredEx Krediidikindlustus). A venture capital fund agreement was signed between Estonian state and European Investment Fund (EIF), improving the availability of early stage venture capital for enterprises.  Estonia joined European Space Agency, ensuring high-level research and development activities and entrepreneurship co-operation with other State Parties.  Enterprise Estonia started implementing the activities supporting the export of enterprises.  The entrepreneur development programme, the innovation and development unit measures and the startup aid measure were developed and implemented. Additionally, the cluster programme and the technology development centres’ measure were started. The Startup Estonia programme was launched. Enterprise Estonia will continue to grow the enterprise awareness by implementing the enterprise awareness programme, and will order the enterprise counselling service from country development centres.  In 2016, the programme of procurements supporting innovation will launch.

23  The zero bureaucracy project and the analysis of administrative burden assessment processes will continue, in order to ensure the implementation of bureaucracy reduction suggestions made by organisations of enterprises (see the Government of the Republic priorities in the State Budget Strategy).  The green paper on Estonian industrial policy is being completed, containing a long-term view to increase the competitiveness of industry’s international competitiveness. Target level Target Actual Indicator Base level level 2016 2017 2018 2019 2020 2015 2015 Labour productivity per employed person, 73.8 % of EU average 72.4 - 73.6 75.4 77.1 79.1 80 (2014) Source: Eurostat Proportion of Estonian export in world trade, 0.096 % 0.1 - 0.105 0.106 0.108 0.109 0.11 (2014) Source: World Trade Organisation Estonia’s ranking in the World Bank report 17. “Doing Business” 17 16 16. 15. <15. <15. <15. (2015) Source: The World Bank Group In- crease Increase Increase of Increase of of labour labour of labour labour Increase of labour expenditu expenditure expenditu expendi expenditure compared re does Increase of labour expenditure 6.5%, re 5.8%, ture with productivity not does not exceed productivity productivit productiv does growth, % exceed growth y growth ity not productiv Source: Eurostat 2.1% growth - exceed ity (2014) 1.8% product growth ivity growth

Important activities to fulfil the targets of 2017-2020  The zero bureaucracy project will continue under the lead of the relevant task group, as well as the analysis of the assessment processes of administrative burden of enterprises. As a result, a mechanism of continuous reduction of the enterprises’ administrative burden stemming from communication with the state and from the legislation’s requirements, and of continuous reduction of the bureaucracy within the public sector will be developed and implemented.  Enterprise Estonia will start offering support for large investors, to encourage both enterprises already active in Estonia and potential foreign investors to make larger investments, thus creating new jobs with higher than average salary, increasing export and improving Estonia’s reputation as a country supporting innovation. There are plans to support significant extension of production units or the creation of new ones, the purchase of equipment, the hiring and training of people, and product development (3 million euros).

24  Estonia is an active member of the European Space Agency. Enterprises and research institutions participate in ESA procurements for high-tech solutions and in other activities, as well as in other international co-operation networks (11.4 million euros, funds from the state budget).  Enterprise Estonia will implement an entrepreneurship awareness programme and support export development activities, incl. funding export advisors in foreign markets (26.2 million euros, ERF).  Enterprise Estonia will implement the development programme intended for entrepreneurs, in order to improve the added value and the export capability of enterprises (57 million euros, ERF). The programme supports well-considered development of enterprises, better planning of activities, the applying of innovation, and product development. In the course of the development programme, every enterprise participating in the programme will bring new and more profitable products or services to the market.  Enterprise Estonia will implement the programme of public procurements supporting innovation, in order to support the conducting of innovative public procurements and to increase the supply of innovation (13.3 million euros, ERDF).  Enterprise Estonia will continue the implementation of the e-residency project (3.2 million euros).  Enterprise Estonia will continue to offer startup aid to starting entrepreneurs (6.3 million euros, RED). Its purpose is to support the founding of enterprises with good development potential, which will enliven regional business and elongate the list of exporters. Enterprises are helped with conducting marketing activities and acquiring fixed assets.  The offering of state guarantees, loans, export insurance and venture capital to enterprises through Kredex financial instruments will continue (47.5 million euros, ERDF).  Enterprise Estonia will continue to support technology development and clusters (25.4 million euros, ERF).  Enterprise Estonia will continue to offer the innovation and development unit to entrepreneurs, in order to support initial contacts between enterprises and innovation service providers (6.6 million euros, ERDF).  The counselling of enterprises in county development centres will continue (7.3 million euros, ERDF and state co-funding). Estonia’s Entrepreneurship Growth Strategy is available here: https://www.mkm.ee/et/eesmargid-tegevused/majanduse-arendamine.

2.2.3. Transport

Sector’s objective and indicators: Estonia’s transport system enables accessible, convenient, fast, safe and sustainable movement of people and goods. Important activities in 2015 and 2016 to achieve the target levels  In order to increase the share of people using the public transport among all employed people, the reconstruction of Tapa-Tartu railway started in 2015. The project’s goal is to increase the traffic speed on that railway section to at least 120 km/h.  In 2015, a public procurement was started to acquire a ferry for ensuring Sõru-Triigi connection. The ship will be completed by spring 2017.

25  In 2016, the reconstruction of the tramways of Tallinn and the taking of new energy- efficient trams into use will be completed (the trams are bought with the funds of AAU quota sales).  In order to fulfil the indicator “Company managers’ assessment of Estonian transport system (road, railway, air and water transport; average on a 7 point scale)”, two projects were started: “Improving the environmental state of the air traffic area of Tallinn Airport and increasing flight safety” and the extension of a tramway to the Airport, which facilitates a convenient and fast connection of the Airport and other important destinations, using a sustainable electric public transport (passenger terminal, city centre and the future Rail Baltic terminal i.e. Balti jaam). The estimated time of completion of those projects is the end of 2017.  Also, the Road Administration will continue the implementation of the Road Maintenance Plan and will improve the quality of the TEN-T highways. Target level Target Base Actual Indicator level 2016 2017 2018 2019 2020 level 2015 2015 Number of traffic fatalities, three-year 82 average (2012- 75 75 <70 <65 <60 <55 ≤ 50 Source: Road 2014) Administration Company managers’ assessment of Estonian transport system (road, railway, air and water transport; average on a 4.4 4.5 4.4 4.6 4.6 4.7 4.7 4.8 7 point scale). (2014) (2014) Source: World Economic Forum Percentage of public transport users among 22.6 employed persons, % 23.6 21.9 23.8 24.0 24.3 24.6 ≥ (2014) 25.0% Source: Estonian Labour

Force Survey Increase in road traffic, Traffic three-year average intensiti es on Sources: Road national Administration, roads Statistics Estonia grew by 4.1% in 2014 compare d with Below half the economic growth 2013. GDP growth - - was 1.8 % accordin g to initial data.

26 Important activities to fulfil the targets of 2017-2020  The implementation of the projects started in 2015 and 2016 will continue. Works will continue with the development projects of railway infrastructure and the reconstruction of Tapa-Narva railway section will start (7.1 million euros, CF). The state will contribute to sustainable movement and will initiate the project “Developing the movement environment between the Old Harbour and the City Centre” (8.7 million euros, CF) in the City Centre of Tallinn. The state will contribute to border connections and will initiate the reconstruction of the transit road passing through Narva (Rahu-Kerese tn.) (6 million euros, CF); a stationary imaging device will be acquired for imaging the goods passing through Narva railway border crossing point (2.5 million euros, CF and the state’s co- funding).  Works will start to widen the Kose-Mäo highway section into a 4-lane road (90 million euros).  The implementation of the Road Maintenance Plan will continue, its most important projects being the construction of Tallinn ring road to have 2+2 lanes in the section of Jüri-Väo; constructing 2+1 bypass lanes in the sections of Tallinn-Pärnu and Tallinn- Tartu; and constructing Sillamäe traffic node in order to increase the traffic safety of Tallinn-Narva highways.  The implementation of the Rail Baltic project will continue: studies (4.6 million euros), design works (54.6 million euros), construction works (163.2 million euros), land acquisition (20.8 million euros), other services (15.3 million euros).  The Transportation Development Plan and its Operational Programme are available here: https://www.mkm.ee/et/arengukavad#transport

2.2.4. Information society

Sector’s objective and indicators A well-functioning environment has been established in Estonia for wide-scale use of ICT and creation of smart solutions, having thereby increased the economy’s competitiveness, the well-being of people and the effectiveness of governance. Important activities in 2015 and 2016 to achieve the target levels  The cataloguing and quality measurement of public services has been started. The Ministry of Economic Affairs and Communications has created an online catalogue of services where ministries and their agencies enter the services provided by them. The following data, inter alia, must be stated about the services: the number of times the service has been provided, the level of satisfaction for the year, the administrative expenditure for the year, the client’s administrative burden. The catalogue of services is published on the website of the Ministry of Economic Affairs and Communications and all ministries have the possibility to interface the catalogue with their own website.  A programme to establish interoperability between public services has been opened. Additionally, the development of public e-services and the development of the base infrastructure’s components are being supported. Those activities provide a direct contribution to improving the quality of the services and will also ensure the growth of satisfaction with the services in longer term.  The development of digital literacy in order to increase personal welfare has been an ongoing priority and the share of people not using the Internet among all Estonian residents aged 16–74 years has quickly decreased. In 2015, the conditions for granting the aid “To improve digital literacy” were developed, the activities of which contribute to the achievement of this target level.

27  The development of the broadband base network (EstWin) continued in 2015 and 2016. In 2015, 1,400 km of the broadband base network were constructed, with the cost of 15 million euros. The extent of investments planned for 2016 is about 13.6 million euros. The administrative burden entailed in the construction of communications networks has been simplified with an amendment to the Building Act and the Planning Act Implementing Act. Owners of immovables are obligated to tolerate technical networks and/or facilities (incl. the construction of communications networks) on their immovable and to permit their construction on the immovable if the technical network or facility is necessary for public interest.  In 2015, the project to map the broadband infrastructure was completed, with the purpose of determining the actual extent of the broadband availability. The database is complete, but the legislation needs to be supplemented in order to make it publicly available. The database makes it possible for a user to see whether Internet connectivity is available at the address of interest, and with what parameters (the data communications speeds) and by which communications undertakings the data communications service is provided at that address.  Also, an overview of the resources of Estonian external data communications connections was completed in 2015. Target level Target Base Actual Indicator level 2016 2017 2018 2019 2020 level 2015 2015 Satisfaction with the quality of public services among 67% No data residents aged 16–74 years 73% were 76% 79% 83% 85% 85% (2012) Source: Information System collected Authority for 2015 Satisfaction with the quality of public services among No data 76% were entrepreneurs 82% 82% 84% 86% 88% 90% (2012) collected Source: Information System for 2015 Authority Proportion of non-users of internet among Estonia’s 15.8% residents aged 16–74 years 14% 10.9% 12% 10% 8% 6% 5% (2014) Source: Statistics Estonia Proportion of using 100 Mbit/s or faster Internet connection, among all 4.36% broadband Internet 7% 4.36% 10% 14% 20% 40% 60% connections (2014) (2014) Source: Digital Agenda Scoreboard

Important activities to fulfil the targets of 2017-2020  Support for the development of public services and the base infrastructure and support for the improvement of interoperability between public services will continue. These are activities of the “Operational Programme for Cohesion Policy Funds 2014-2020”: o Smart development (incl. analysis) of the existing and new information systems (47.4 million euros (ERF and the state’s co-funding));

28 o Creating interoperability between public services (1.9 million euros); o Developing the base infrastructure for services supporting the creation and implementation of e-services (18.6 million euros); o Increasing the awareness of information society (3.4 million euros).  As a result of smart development of the existing and new information systems, the satisfaction of both residents and entrepreneurs with public services should grow. The prerequisite for the development and implementation of good services is that the base infrastructure supporting the services is in good order, so a separate support scheme will be used for infrastructure- related developments (incl. for the implementation of applications related to e.g. X-Road and data centres).  The planned activities of the programme of creating interoperability between public services (incl. e.g. training courses/seminars) will facilitate the smart and secure development, functioning and taking into use of the infrastructure for services. The activities together contribute to the development of higher-quality public e-services and to actively taking them into use.  The investments to improve digital literacy will continue (7.2 million euros). The programme’s goal is to improve the digital literacy of Estonia’s residents and to increase the proportion of adults with higher ICT skills. As a result of the programme, the number of computer and internet users will grow, and the proportion of ICT specialists in total employment will also grow. For example, training courses for various target groups as well as requalification programmes will be conducted, the availability of hobby education in the field of ICT will be improved, etc.  Investments in the ICT infrastructure of schools will continue (7.8 million euros), modernising the local area networks of the schools and making it comply with the requirements for the local area networks of general education schools. Additionally, modern presentation equipment can be purchased for the schools.  Investments in new generation broadband networks will continue (23 million euros), improving the availability of Internet connectivity in those regions where broadband connectivity has not been available to end users until now. The development of the base network creates the prerequisites for a growth of the proportion of households with fast broadband Internet connection in the future. Documents pertaining to the Information Society Development Plan are available here: https://www.mkm.ee/et/tegevused-eesmargid/infouhiskond. Direct link to the Development Plan: https://www.mkm.ee/sites/default/files/elfinder/article_files/eesti_infouhiskonna_arengukava. pdf; Direct link to the Operational Programme 2015-2018: http://www.mkm.ee/sites/default/files/infoyk_rak_plaan_012015.xlsx.

2.3. State reform and stopping peripheralisation

2.3.1. Public administration

Sector’s objective and indicators: Unified and effective public administration, accounting for the population’s needs. Important activities in 2015 and 2016 to achieve the target levels The activities related to the state reform and the local administration reform as well as the objective of alleviating peripheralisation are also described above under the relevant priority of the Government of the Republic.

29  Public administration will be arranged so that the number of general government jobs will be reduced in proportion to the decrease in the employment-age population. In the process of preparing the draft state budget for 2016, the Government adopted a decision to reduce the number of employees by areas of government.  The transition to centralised services through the centralisation of the state’s support services, i.e. the gathering of the financial, personnel and salary accounting into the State Centre of Support Services was continued.  Analyses pertaining to public administration were conducted, based on which the proposals to rearrange the areas of government of the ministries were submitted to the Government of the Republic.  The Green Paper on participation policy was completed, concerning state enterprises and state foundations and providing an overview of the current situation of the state’s companies, foundations and NGOs, describing problems and offering solutions. The Green Paper will be the basis for updating the participation policy’s general principles.  The Government of the Republic decided the principles and merger criteria of the local government reform, pursuant to which the criterion to be used for the state reform is the minimum number of residents –5,000 residents. At the same time, the Government promotes the emergence of larger rural municipalities with at least 11,000 residents. Exceptions can be made if merging sparely populated rural municipalities or at least four geographically and culturally diverse local government territories. Additionally, the rural municipalities consisting of sea islands are an exception due to their geographical specifics.  The new Draft Public Procurement Act was completed; its processing in the Riigikogu will continue in 2016. The Public Procurement Act adds flexibility and simplicity to the arranging of public procurements, reduces the burden of contracting authorities and undertakings, and also reduces the time and money needed for the procurement procedure.  In 2016, the Government of the Republic will be presented with proposals for moving the general government’s organisations out of the capital city.  The zero bureaucracy project will continue.  Local government mergers are being consulted and directed in preparing voluntary mergers and developing region-specific solutions, as well as in planning post-merger developments; support is provided to the co-ordination of the preparation of mergers of local government territories with 11,000 or more residents.  State officials are being prepared to ensure the readiness for Estonia’s presidency of European Union in 2018.

Target level Tar- Actu Base get Indicator al 2016 2017 2018 2019 2020 level level 2015 2015 Proportion of general government expenditure in 38.8% Does Does Does Does Does GDP does not increase 37.9 not not not not not (2014) 38.0% % grow grow grow grow grow Source: Ministry of Finance The proportion of general Does Does Does Does Does government employees in 12.0% not not not not not employment-age population (2014) grow grow grow grow grow does not increase 12

30 Target level Tar- Actu Base get Indicator al 2016 2017 2018 2019 2020 level level 2015 2015 Source: Ministry of Finance Government effectiveness 33.69 points, Retain Retain Retain Retain Source: Institute for positio positio positio positio 4th Management Development n in top n in top n in top n in top place five five five five (2014) Proportion of residents living under local governments complying with the capability and sustainability criteria (76%) 76% 76% 76% 76% 99% 99% 99% approved in the (2015) Government. Source. Ministry of Finance

Important activities to fulfil the targets of 2017-2020 Activities supporting the implementation of the state reform  Developing the concept of the Government of the Republic Act, which will establish a better basis for the organisation of the Government’s work and for more flexible public administration.  Preparing the concept of administrative arrangement (concerning the administration of state agencies, i.e. the founding of new agencies, mergers of existing agencies, ceasing activities, the roles and the work arrangement of the agencies)8.  The proposals for moving the general government’s organisations out of the capital city will be implemented in the period of 2017-2020.  By autumn 2017, the local government mergers initiated by local government councils and also those initiated by the Government will be conducted.  Implementing the zero bureaucracy initiative to reduce the administrative burden of undertakings; conducting the activities of the task group to reduce bureaucracy. Implementing the initiative to reduce bureaucracy within the public sector.  Centralising the state’s support services i.e. gathering the financial, personnel and salary accounting into the State Centre of Support Services (2017). Implementing the project to transition to e-invoices; consolidating public procurements and public requests.  Shaping the state’s immovable property policy, the state’s participation policy, and the state’s unified personnel and salary policy.  Reducing the volume of public administration, incl. updating the supply of public and internal services, increasing their effectiveness and reducing their duplication.

8 This topic was discussed in the Government Office meeting on 30 June 2015 (“About the analysis and suggestions concerning the arrangement of government and administration”).

31  Implementing various administrative organisation types to fulfil the state’s functions, and implementing the relevant roles and responsibility principles corresponding to those.  Reorganising the rural local governments in the course of the state reform, incl. reorganising the work arrangement to make the role of the regional public administration level correspond to the developments caused by changes in sectoral policies, incl. implementing changes in supervision over local governments and if possible then handing the local government type tasks over to local governments. Activities supporting the implementation of the state reform:  Law amendments have been adopted in the course of the state reform in order to promote the co-operation and the founding of joint agencies between local governments and regulating the activities of the joint agencies of local governments, and supporting measures have been implemented (counselling, guidelines prepared, etc.) (2018).  Under the administrative capability priority’s measure “Increasing the state’s capability through developing human resources and improving institutional capabilities”, activity “Local and regional development capability”, support has been provided for the consultation of local government mergers by a central team of merger consultants, using the funds of European Social Fund; additionally, the co-ordination of the preparation of the local government mergers is supported where the number of residents after the merger is 11,000 or more (3.1 million euros, ESF).  Regulation of the Government of the Republic to change the arrangement of Estonian administrative territory both on the initiative of local government councils and, in case of local governments not meeting the criteria, on the initiative of the Government of the Republic, in order to ensure local governments with good administrative capability and a sustainable system of local governments, to enter into force upon announcing the results of the local government council election in 2017.

2.3.2. Regional development and rural life Important activities in 2015 and 2016 to achieve the target levels of the objective’s indicators  County action plans for strengthening their competitiveness and sustainable development action plans of five largest urban regions were completed and are the basis for applying for support funds for the region’s development.  The programming of the cross-border co-operation programmes between Estonia and Latvia as well as Estonia and Russia for 2014-2020 was completed.  The first application round for the Central Baltic region’s programme took place; 49 projects were funded. 35 projects were funded. Under the first application round for the Baltic Sea region’s programme, 35 projects were funded. The Interreg Europe programme and the URBACT III programme also had their first application rounds. The first application round of the Estonia-Latvia programme was completed.  The network for the management of the development activities of the largest Estonian cities and rural centres is functional. In order to increase the development planning and management competence of city governments, the co-ordination of Estonian activities in the European city development co-operation programme URBACT II and III has been continued.  The relevant methodology has been developed and published for the preparation of marine area plans; the marine area plan of Pärnu has been adopted.  The necessary implementation instruments have been prepared after the adoption of the new Planning Act; more than 20 training days have been conducted; the portal planeerimine.ee is in active use.

32  Preparing and approving the “LEADER” development strategies, based on which the local community will choose the projects to be funded (the assigned grant is 1.7 million euros; *RDP). In Estonia, “LEADER” projects have been implemented since 2006.  Non-agricultural activity development investments in buildings, constructions, stationary equipment and machines as well as other necessary furnishing and mobile stores in rural regions (assigned grant: 16.9 million euros, 2016 budget: 12 million euros; *RDP).  Fostering the timely conducting of practical training for school and university students by paying support to agricultural and rural economy enterprises in order to improve the quality of production training and studies (assigned grant: 0.15 million euros, 2016 budget: 0.16 million euros).

Target level Tar- Base get Actual Indicator level 2016 2017 2018 2019 2020 level 2015 2015 Employment rate in rural areas (20–64 age group), 73.2 % grows grows grows grows grows (2014) Source: Statistics Estonia Business activity in rural areas1 52 52 (companies per 1,000 52 52 52 53 53 53 (2014) (2014) residents) Source: Statistics Estonia

GDP growth of all GDP counties (in current GDP of growth prices). counties in 12 grows grows grows grows grows in 2012 counties Source: Statistics Estonia (2014) 1 – Target level is highlighted because the target level 50 was achieved in 2014.

Important activities to fulfil the targets of 2017–2020  Preparing the Operational Programme for 2017-2020 of Estonian Regional Development Strategy for 2014-2020 and implementing it.  In order to increase entrepreneurial activity and employment in all Estonian regions, the activities of the regional competitiveness measure “Operational Programme for Cohesion Policy Funds in 2014–2020” will be implemented9 (156 million euros, ERF).  Implementing the sustainable urban development measures of the “Operational Programme for Cohesion Policy Funds in 2014–2020” (95 million euros, ERF).  Implementing the activities of European territorial co-operation (7 programmes: Estonia- Latvia, Estonia-Russia, central Baltic Sea region, Baltic Sea region, Interreg Europe, URBACT III, Interact III, Epson 2020, a total of 903.5 million euros) and European Neighbourhood Instrument (Estonia-Russia: 16.8 million euros, ERF) with Estonian participation in EU budgetary period 2014-2020. The aforementioned programmes

9 http://www.fin.ee/struktuuritoetuse-meetmed

33 contribute to the improvement of the people’s living quality through the provision of better public services.  Works will continue to implement domestic grant programmes and support schemes to improve the development conditions of various Estonian regions and to direct the state’s regional development10.  Supporting regional enterprises in establishing electrical connections and joining communications networks and in constructing access roads.  Completing the spatial plan of the entire marine area.  Implementing the projects chosen by the local community on the basis of the approved “LEADER” development strategies of 2015-2016 (grant budget: 88.3 million euros, *RDP).  Continuing non-agricultural activity development investments in buildings, constructions, stationary equipment and machines as well as other necessary furnishing in rural regions (possible budget: 28.2 million euros, *RDP).  For regional promotion of fishery, projects chosen by local communities will continue to be supported from European Maritime and Fisheries Fund, with the forecasted budget of 27 million euros.  Practical training aid will continue to be allocated to agricultural and rural economy enterprises (forecasted aid in 2017: 0.2 million euros).  To facilitate the development of rural regions, young people are being motivated to start living and working in rural regions; the programme “Noored maale” (“Young people go to countryside”) will be launched to increase the proportion of young people in the population of rural regions (planned budget: 2 million euros per year).  The creation of new jobs in rural regions will be diversified through regional programmes taking into account inter alia the regional specifics and development potential. As a result of increasing the funds of regional programmes, the following amounts will be allocated: o A total of 0.84 million euros per year for Setomaa and Peipsiveere programmes; o A total of 0.5 million euros per year for Vana-Võromaa and Mulgimaa programmes.

* RDP – Rural Development Plan 2014–2020 (the listed amounts include the EAFRD’s participation and the state’s co-funding; the budgets of the measures are fixed for the entire programming period in RDP 2014–2020). Estonian Regional Development Strategy 2014-2020 is available here: http://www.fin.ee/regionaalareng-ja-poliitika Estonia Rural Development Plan (RDP) 2014–2020: http://www.agri.ee/et/eesmargid-tegevused/eesti-maaelu-arengukava-mak-2014-2020

2.4. National security and defence Sector’s objective and indicators Increased deterrence against military aggression, faster development of independent military defence capacity, ability to stand against an attack with the entire society’s activities, ability to quickly solve hybrid conflicts, increasing the cohesion of Estonia’s society, and ensuring

10 http://www.fin.ee/siseriiklikud-toetused

34 readiness to withstand an information war. Target level Tar- Base get Actual Indicator level 2016 2017 2018 2019 2020 level 2015 2015 Mobility of defence forces: proportion of deployable units in the army, %, 34.0/ 37.9% / 45%/ proportion of sustainably 9.0 33 / 10 33 / 10 33 / 10 33 / 10 37% / 3.5%11 10% deployable units in the (2014) 10% army, % Source: Ministry of Defence Proportion of defence expenditure in GDP, supplemented by additional funding for 1.93 ≥2.0 Estonia’s activities as a 2.04% 2% 2% 2% 2% ≥2.0% (2014) % hosting country, % Source: Ministry of Defence Total number of members of the Defence League and its special 23,612 organisations 24,750 25,001 25,500 26,250 27,000 30,000 30,000 (2014) Source: Ministry of Defence Voluntary defence i.e. readiness of Estonia’s residents to personally participate in defence activities in case Estonia is attacked, % (proportion of respondents replying 56 “Yes, definitely” and ≥56 55 ≥56 ≥56 ≥56 ≥56 ≥56 “Probably yes” (would (2014) personally participate in defence activities)) Source: Ministry of Defence, survey “Public opinion and national defence“ Residents’ belief in defendability (residents’ assessment to Estonia’s 51 defence ability in case of ≥51 53 ≥51 ≥51 ≥51 ≥51 ≥51 (2014) an armed attack by a foreign country, % – (proportion of

11 Based on the mandates given, the capability was 9.9%

35 Target level Tar- Base get Actual Indicator level 2016 2017 2018 2019 2020 level 2015 2015 respondents replying “Yes, definitely” (would be possible to defend Estonia) and “Probably yes”) Source: Ministry of Defence, survey “Public opinion and national defence“

Important activities in 2015 and 2016 to achieve the target levels  In recent years, the number of members of the Defence Forces on missions has constantly been over 200. ~10% of all units are sustainably prepared and ready to participate in missions. There were fewer missions available in 2015, so the actual annual average proportion of units being out and ready was 3.5%.  Estonia’s defence expenditure in 2015 was 417.6 million euros, making up 2.04% of GDP according to the economic forecast of summer 2015. Defence expenditure without the additional funds of allies (the host country’s expenditure of 4.112 million euros and infrastructure investments of 5.64 million euros) were 407.89 million euros, making up 1.99% of GDP.  The number of members in the Defence League and its specialised organisations has continued to grow quicker than expected. At the end of 2015, the Defence League and its specialised organisations had a total of about 25,000 members (target level: 24,750), which is about 1,400 persons more at the end of 2014.  The voluntary defence and the residents’ belief in dependability continue to be high. An important achievement is the establishment and launch of a NATO command element in Estonia in 2016. This is supplemented by the use of Ämari for security measures, and the increasing presence of allies. A top-level meeting will take place in Warsaw in 2016 where several resource decisions concerning Estonia’s defence ability are expected to be adopted. The decision made a few years ago to consistently invest in better work conditions for active conscripts started to bear fruit in 2015 when the planned growth of the number of active conscripts was reached for the first time. In 2015, new barracks were completed at Tapa, Jõhvi and Ämari. The same year also saw important new activities concerning the expansion of the hazard zones of the Central Polygon, which enable to create training conditions for the modern infantry fighting vehicles being purchased for the Scouts Battalion, and for the guest forces training with them, thus making Estonia an attractive location for allied forces. The anti-tank capacity of the Defence Forces reached a new qualitative level last year, when the Javelin anti-tank systems arrived here. The past year will also be remembered for SIIL 2015, the largest training exercise of the reindependence times, which brought valuable feedback about the capability of forming units and the leading of the 1st Infantry Brigade’s battle activities. The exercise saw over 13,000 participants from reserves, the Defence League, conscripts, active duty and allied defence forces. The highest contribution to the success of the exercise was brought by reservists who numbered more than half of all participants.

36 Important activities to fulfil the targets of 2017-2020  The coming years will continue the preparation and supplying of fast-reacting and sustainable reserve units and their participation in foreign missions. Early warning capability and national airspace control system are ensured, as well as readiness to launch and implement a collective defence operation and to ensure host country support for allied forces.  The existing weapons will be modernised (e.g. taking into use modern anti-tank weapons), as will be weapon systems (e.g. modernising mine hunters); also, new weaponry will be acquired (e.g. infantry fighting vehicles).  Conditions will be established for permanent presence of allies in Estonia, and the infrastructures of Tapa and Ämari will be developed quicker with the help from US allies.  Contributions will continue into the NATO first-response forces, and the 1st and 2nd Infantry Brigade will be developed further. The supplying and training of the first- response structure, incl. land defence structure will continue. The Scouts Battalion will be given modern infantry fighting vehicles, and the infrastructure needed to support those has been completed.  A central place is also occupied by aggressive development of military intelligence and early warning capability, large-scale ammunition procurements and the launching of the next qualitative development programme set out in the current National Defence Development Plan – long-distance anti-tank capability. Also, the replacement of firearms will start. The construction of a modern warehouse complex will continue.  Based on the results of the NATO top-level meet in Warsaw (July 2016), the decision can be expected to establish a NATO cyber-defence training range (NATO Cyber Range) in Tallinn, based on the cyber lab of Estonian Defence Forces; this indicates ongoing demand for Estonian cyber-defence experience and technical competence and increases the presence of NATO in Estonia.  Supply procurements significantly increasing the fighting capability of the Defence Forces (night vision equipment, ballistic vests, etc.) will continue.  One of the development priorities of the area of government of the Ministry of Defence is to achieve better effectiveness and transparency in the procurements and infrastructure administration of that area of government. To do so, the State Centre for Defence Investments will launch under the Ministry in 2017, consolidating the procurement and infrastructure functions of the Defence Forces and the Ministry of Defence.  The uncertainty of the security environment demands that the area of government of the Ministry of Defence mobilise all resources in that area of government to develop military capabilities – the growth of upkeep costs will be reduced and additional savings on the annual upkeep costs of the Defence Forces will be effected, in order to direct more funds into procurements for ammunition and equipment. More information about the Ministry of Defence’s development plan is available here: http://www.kmin.ee/et/eesmargid-tegevused/alusdokumendid-ja-oigusaktid.

2.5. Foreign and EU policy

Sector’s objective and indicators Ensuring the sustainability of Estonia’s independence by increasing Estonia’s international impact and promoting democracy and security in the world, protecting the interests of the country and its citizens, and establishing better opportunities for Estonian enterprises in global competition.

37 Important activities in 2015 and 2016 to achieve the target levels  Participating in the decision-making process of North Atlantic Treaty Organisation (hereinafter NATO) and the shaping of decisions in matters most important for Estonia;  Strengthening the external and internal security policy and the joint security and defence policy of European Union (hereinafter EU), convincingly and capably ensuring EU’s operative response capability, participating in international crisis management and operations of EU, and developing crisis management capability;  Developing transatlantic relationships and security co-operation with the US;  Developing relationships with neighbouring countries and regions;  Preparing and implementing the Action Plan of Participation in Civil Missions 2016-2020 (contributing to the civil missions of NATO, EU and the Organization for Security and Co-operation in Europe (hereinafter OSCE), pre-mission preparations, training, etc.);  Supporting entrepreneurs (business visits, briefings, contact establishment, etc.) in international activities, facilitating the entry of investors and investments into Estonia;  Developing the Estonian network (in order to enliven export and to bring investments into Estonia, a global Estonian network will be developed, involving Estonian embassies abroad, honorary consuls / business ambassadors, compatriots living and working abroad, Estonia’s friends and their associations);  Providing consular services and consular assistance, protecting the interests of Estonian people in trouble in crisis and accident regions;  Estonia’s membership in the United Nations (hereinafter the UN) Human Rights Council (participation in sessions, giving of speeches, organisation of events e.g. side events dedicated to native people, freedom of expression, etc., side events to promote the International Criminal Court, etc.);  Estonia’s presidency of European Council in 2016 (Estonia being the speaker for Member States, leading the Committee of Ministers’ Deputies and organising numerous events: e.g. a high-level conference on gender equality, a conference on Internet freedom, a conference for the anniversary of combating cyber-crime, European dialogue on Internet governance (hereinafter EuroDig), etc.);  Developing EU Neighbourhood Policy, incl. the Eastern Partnership (participation in preparing the joint texts of EU, participation in platform meetings of the Eastern Partnership, policy formation, organisation of events in co-operation with the Centre of Eastern Partnership, etc.);  Reinforcing Estonia’s image concerning human rights and democracy through participation in international organisations and co-operation formats founded for the purpose of promoting fundamental democratic values;  Preparing and implementing International Personnel Strategy 2016-2020 (proposing and supporting candidates for work in European External Action Service, NATO and international organisations);  Gathering support for Estonian candidates to be proposed as temporary members of the UN Security Council in 2020-2021 and in other organisations and sub-organisations.

38

Target level Target Base Actual Indicator level 2016 2017 2018 2019 2020 level 2015 2015 639 queries of The capacity to respond to and Retain Estonian process the requests from the enterprise Estonian enterprises concerning capacity s and 445 Retain the capacity to respond to business and economy/ No. of to 1,550 requests according to their number requests per year (2014) respond queries of Source: Ministry of Foreign to location Affairs requests country’s enterprise s No. of experts participating in international civil missions 25 According to the Civil Missions > 30 19 Source: Ministry of Foreign (2014) Action Plan and its budget Affairs 33 embassie 34 s embassie 35 7 s, 7 embassies permane permane , 7 nt nt permanent represent represent representa ations ations in tions in internatio Estonia represented in foreign 4 internatio nal Sustainable level of diplomatic countries consulate nal organisat representation corresponding to s general organisati Source: Ministry of Foreign ions, 3 Estonia’s needs and possibilities ons, 3 Affairs 1 consulate consulates chancelle s general, general, 1 ry 1 chanceller chancelle 190 y and 195 ry, 210– honorary honorary 220 consuls consuls honorary (2014) consuls

172 557 visa 230 000 132 395 visa Readiness to provide consular applicati visa applicatio services and assistance ons applicati Readiness to provide consular ons; 95 ns; services according to the number 63 970 Source: Ministry of Foreign 000 and locations of clients consular 78 173 Affairs consular acts consular acts acts (2014) The proportion of GNP allocated to development cooperation and 0.15 humanitarian aid (% of GNP) 0.156% 0.15% of Retain at least the actual level of (2014) of GNP GNP 2015. Source: Ministry of Foreign Affairs

39 Important activities to fulfil the targets of 2017-2020  Intensive activity to ensure the deterrent effect and collective defence of NATO;  Strengthening the external and internal security policy and the joint security and defence policy of EL; developing the crisis management capability of Estonia and EU;  Developing transatlantic relationships and security co-operation with the US;  Retaining close allied relationships with all State Parties of NATO and all Member States of EU (developing a policy, meeting partners, co-ordinating policies with allies and EU countries, finding joint solutions, etc.);  Intensifying the political and practical co-operation with the Baltic Sea countries belonging to EU and/or NATO, in order to ensure the region’s security;  Supporting entrepreneurs (business visits, contact establishment, information spreading, counselling, etc.) in international activities, facilitating the entry of investors and investments into Estonia;  Providing consular services and consular assistance, incl. assistance in crisis and accident regions;  Introducing Estonia’s positive image in the world;  Gathering support for Estonian candidates to be proposed as temporary members of the UN Security Council in 2020-2021 and in other organisations and sub-organisations, conducting implementation activities of the Candidates Action Plan (introducing the Estonian candidates, organising events introducing Estonia, involving representations in campaign activities, etc.) in 2017-2018: 1 million euros;  Developing EU Neighbourhood Policy, incl. the Eastern Partnership (participation in preparing the joint texts of EU, participation in platform meetings of the Eastern Partnership, policy formation, organisation of events in co-operation with the Centre of Eastern Partnership, etc.);  Euro DIG (European Dialogue on Internet Governance) – in 2017, we will organise an international inclusive conference in Tallinn on promoting the field of Internet governance;  Continuing to develop Estonian network in co-operation with partners;  Organising African Forum II for entrepreneurs in co-operation with foreign partners;  Organising the events of “Republic of Estonia 100”, “Ministry of Foreign Affairs 100” and “EU presidency” and facilitating the organisation of those events. The Development Cooperation and Humanitarian Aid Development Plan is available here: http://www.vm.ee/sites/default/files/content-editors/development- cooperation/2016_2020_arengukava_tekst.pdf

2.6. Energy

Sector’s objective and indicators Energy supply with reasonable price and availability as well as low environmental impact. Important activities in 2015 and 2016 to achieve the target levels  In 2015, the separation of the gas transmission network from other gas networks was completed and the gas transmission network was acquired by AS Eesti Gaas.  In 2015, the energy projects funded with green investment schemes were completed (modernising the street lighting in 7 cities, apartment building renovation support) and

40 preparations were made for taking structural funds into use; these activities will also continue in 2016.  In 2015, Elering AS signed a funding agreement with European Commission, under which European Union shall fund the construction of the third Estonian-Latvian electricity connection with 112 million euros.  In 2015, a joint decision of the governments of Finland and Estonia was reached about presenting European Union with an application for support to the construction of the Baltic Connector connection between gas networks.  In 2015, the major projects of Eesti Energia AS and other oil shale enterprises (Enefit 280, Auvere Power Plant, Petroter 3) were effectively developed further, regardless of the recession in energy economy. Target level

Indicator Target Base Actual level 2016 2017 2018 2019 2020 level 2015 2015

Proportion of renewable energy in end consumption To be 25.6/0.1 determined of energy, including 25/0.2 26/5 27/7 27/7 27/7 27/7 transport fuels, % (2013) in January 2017 Source: Eurostat

End consumption of To be energy, PJ 117.4 determined 119 119 119 119 120 119 (2013) in June Source: Statistics Estonia 2016

Proportion of imported To be energy, % 11.9 determined - 20 20 20 20 20 (2013) in January Source: Eurostat. 2017

Energy intensity, To be kgoe/1,000 €GDP 4.06 determined - 4 4 4 4 4 (2013) in January Source: Eurostat 2017

Important activities to fulfil the targets of 2017-2020  A support measure will be launched for biomethane production and its consumption in transportation sector (16.8 million euros, incl. 8 million euros of CF money and 8.8 million euros of EU GHG trading system’s auction revenue).  The renovation and/or construction of district heating boilers and transitions to alternative fuel will be supported (24 million euros, CF).  The renovation of depreciated and ineffective heat pipe systems and/or the construction of new heat pipe systems will be supported (16 million euros, CF).  The renovation of the infrastructure of street lighting for the purpose of energy savings will be supported (38 million euros, CF).  The reconstruction of apartment buildings for the purpose of energy savings will be supported (81.4 million euros, CF).

41  Financial support for the housing sector in order to save energy (incl. support for the modernisation of electrical installations of dwellings, support for the awareness raising about energy savings and for the conducting of relevant studies, support for the increasing of energy efficiency of small dwellings and for the ordering of near-zero energy designs, as a total of 23.0 million euros). The development of an energy-efficient rental dwelling base will be initiated 17.5 million euros). The Draft Development Plan for Energy Economy 2030 is available here: https://eelnoud.valitsus.ee/main/mount/docList/d66b8bff-1b8d-48ff-8c4b-f7a8188f29d2.

2.7. Social protection and healthcare

2.7.1. Labour market

Sector’s objective and indicators: Increase the employment rate in the age group of 20-64 years to 76% by 2020.

Important activities in 2015-2016 to achieve the target levels  In September 2015, the Government approved the Draft Act Amending the Work Ability Allowance Act and Related Acts, which postponed the launching of the work ability reform by six months to 1 July 2016. The postponement will ensure better preparation for the launch of the work ability reform. The base budget for work ability allowance will be 80.96 million euros in 2017, 195.8 million euros in 2018, 277.7 million euros in 2019, and 340 million euros in 2020, plus other funds related to the work ability form (for example technical aids for adults of employment age, the Unemployment Insurance Fund’s costs for assessing work ability, etc).  With the ESF programme implemented by the Unemployment Insurance Fund, new services12 for the work ability reform’s target group opened on 1 January 2016. The budget is 7.8 million euros for 2016 and 135 million euros for years 2017-2020.  For the purpose of increasing the opportunities of employment-age special needs people with reduced work ability to participate in the labour market, the allowance conditions “Increasing the work ability of the work ability reform’s target group and facilitating their working” were undersigned. The budget for 2016: 6.2 million euros; for years 2017-2020: 39 million euros.  In 2015, the Labour Market Services and Allowances Act and the employment programme were implemented with the total extent of 24.5 million euros. Target level Target Base Actual Indicator13 level 2016 2017 2018 2019 2020 level 2015 2015

Employment rate in the 20– 74.0 64 age group, % 74.5% 76.2% 74.8 75.1 75.4 75.7 76% (2014) Source: Statistics Estonia,

12 Mobile counselling to support the transition from school to work; the work rehabilitation service to support work life; sheltered work for a person for transition to the open labour market; support for commuting to work, in order to reduce the additional costs of special transportation related to starting work; increasing the awareness of employers upon hiring people with reduced work ability, together with counselling and salary support. 13 Average gross monthly wage (in euros) has been omitted from the indicators. The activities of the Welfare Development Plan 2016-2023 are not directly related to the growth of average wage.

42 Target level Target Base Actual Indicator13 level 2016 2017 2018 2019 2020 level 2015 2015 Estonian Labour Force Survey Youth unemployment rate in the 15–24 age group, % 15.0 Source: Statistics Estonia, 13.0% 13.1% 12.8 12.4 11.6 10.8 10% (2014) Estonian Labour Force Survey Long-term unemployment rate14, % 3.3 Source: Statistics Estonia, 2.8 2.4 2.8 2.7 2.7 2.6 2.5 (2014) Estonian Labour Force Survey Working life duration, in years15 36.5 - - 36.9 37.1 37.2 37.4 37.5 Source: Eurostat, Estonian (2013) Labour Force Survey

Important activities16 to fulfil the targets of 2017-2020  Implementing the work ability reform to support the employment of people with health damage;  Preserving the employee’s work ability by early intervention to prevent work-caused health damage, to compensate for health damage and to retain the employee;  Developing labour market measures for various target groups (young people, long-term unemployed and inactive people, people with reduced work ability, non-Estonians, older people);  Developing the in-service training and requalification measures preventing unemployment;  Implementing the support for job creation in order to balance the labour market of Ida- Viru County. The Draft Welfare Development Plan 2016–2023 and its Draft Operational Programme are available here: http://sm.ee/et/heaolu-arengukava-2016-2023

2.7.2. Social protection Sector’s objective and indicators: Reducing social inequality and poverty, ensuring gender equality and increasing social

14 The target levels were brought into compliance with the Welfare Development Plan 2016-2023. 15 The indicator was added from the new Welfare Development Plan 2016-2023 and it indicates the years of being active on the labour market, starting with age 15, based on the demographic and labour market data. It is an important indicator in the context of increasing life expectancy and aging population, reduced labour force and sustainability of the social protection system. The EU28 average duration of work life in 2014 was 35.3 years; the relevant Estonian average was 36.4. 16 The activities will be funded mainly from the EU Structural Funds for the 2014+ period and from the Unemployment Insurance Fund’s money.

43 inclusion Important activities in 2015-2016 to achieve the target levels  In January 2015, the Government fixed the state pension’s 2015 index at 1.063; as a result, pensions increased by an average of 6.3 percent, starting with 1 April 2016. Also, the income tax exemption of the average pension continues to be ensured, as the additional basic exemption for pensions was increased from 210 euros to 220 euros. The cost of indexing state pensions in 2016 will be approximately 69 million euros; the budget for state pension insurance in 2016 is 1,655 million euros.  On 1 January 2016, the subsistence level was increased from 90 euros to 130 euros. The subsistence benefit’s budget in 2015 was 19.1 million euros; for 2016, it is 22.5 million euros.  In June 2015, the initial task for the support scheme for pensioners living alone was introduced to the Government, and it was decided that starting with 2017, 115 euros of additional support shall be paid to an old-age pensioner living alone according to the Population Register whose pension remains below double the minimum means of subsistence. The state budget will include 10 million euros for the payment and implementation of the benefit starting with 2017.  The process to amend the Equal Treatment Act was initiated, presenting an intent of preparation for approval.  To promote equals treatment, the project “Erinevus rikastab” (“Difference enriches”) was conducted with the purposes of promoting equal treatment at workplaces and perform awareness-raising activities concerning the rights of disabled people and sexual minorities.  An agreement was signed with the Gender Equality and Equal Treatment Commissioner to perform the functions of a supervisory institution of the Convention on the Rights of Persons with Disabilities. An amendment to the Equal Treatment Act is being prepared to provide the Equal Treatment Commissioner with the competence to conduct supervision under the Convention on the Rights of Persons with Disabilities. In relation to that, the budget of the Commissioner’s Office was increased by 80 thousand euros.  In April, the Accessibility Council was formed with the task to make proposals and offer solutions to improve accessibility for persons with disabilities and to utilise the principles of universal design more widely.  In September, a social insurance treaty was signed between the Republic of Estonia and Australia, ensuring social protection in the field of pension insurance and avoiding double insurance of employees on cross-border business trips between Estonia and Australia.  The project to modernise the public services of social protection continued in order to increase the effectiveness of applying for, processing and paying out the Social Insurance Board’s state pensions, allowances, benefits, social services, etc. (creating the SKAIS2 information system). The SKAIS2 budget for 2014- 2017: 7.77 million euros.  In March, the allowance conditions for the measure “Welfare services supporting participation in the labour market” were approved. The cost in 2015: 258 thousand euros, the budget in 2016: 6.8 million euros.  In September 2015, the Draft General Part of the Social Code Act and the Draft Special Part of the Social Welfare Act were presented to the Government and in December, the Riigikogu adopted them. The General Part of the Social Code Act establishes a unified basis for Estonian social protection system and the arrangement of social protection in Estonia, abolishing the current fragmentation between many special acts on social

44 protection. The purpose of the Special Part of the Social Welfare Act is to make the regulation of the public authorities’ obligation of assistance clearer through codification.  In December, the Minister of Social Protection approved the regulation „Abivahendite loetelu, abivahendite eest tasu maksmise kohustuse riigi poolt ülevõtmise otsustamise ja erandite tegemise tingimused ja kord ning abivahendi kaardi andmed“ (“List of technical aids; the conditions and procedure for deciding the state’s takeover of the obligation to pay for technical aids and for making exceptions; data on the technical aid card”), with which the arrangement of technical aids was transferred from county governments to the Social Insurance Board and the list of technical aids and the benefit thresholds were tidied. The amendments improved the people’s opportunities to choose a technical aid necessary for them and the market of technical aids opened to competition. The new regulation of technical aids entered into force on 1 January 2016. Thanks to the implementation of the work ability reform and the ESF money, the budget for acquisition and rental of technical aids is bigger starting with 2016; the budget for 2016: 8.6 million euros, incl. foreign funds: 3.14 million euros.  To transfer to the new rehabilitation system (rehabilitation was divided into occupational and social rehabilitation), a number of regulations of the Minister of Social Protection17 were adopted in December 2015. The changes to the rehabilitation system entered into force on 1 January 2016. Thanks to the implementation of the work ability reform and the ESF money, the budget for the rehabilitation service is bigger starting with 2016; the budget for 2016: 12.5 million euros, incl. foreign funds: 3.6 million euros.  In order to reduce the pay gap, the implementation of the Action Plan to Reduce the Gender Pay Gap was continued. Using the funds of the gender equality promotion programme 2011–2013 of the ESF, information activities to celebrate the Equal Wage Days were organised in April; also, career days for girls and boys were organised. In order to support the implementation of gender mainstreaming, ministry-based practical training courses for gender mainstreaming were organised in six ministries and consultations were started for more effective arrangement of co-ordination.  Under the order of the Gender Equality Council, stage I of the Gender Equality Act’s implementation study was conducted, focussing on the awareness, attitudes and activities of employers. Also, the Council’s proposals were prepared for the political parties elected into the Riigikogu in spring 2015 for promoting gender equality in 2015–2018.  In order to prevent gender-based violence and to support its victims, the Violence Prevention Strategy 2015–2020 was implemented. An amendment to the Victim Support Act was prepared, to ensure better access of victims of trafficking in human beings to the relevant services; the Draft Act also worded the service of women’s support centre to ensure specific requirements, consistency and supervision of that service.

17 ”Sotsiaalse rehabilitatsiooni teenuse eest tasu maksmise kohustuse riigi poolt ülevõtmisel teenusevajaduse otsustamiseks ja teenuse osutamiseks vajalike andmete loetelu” (“List of data necessary for deciding the service need upon the state’s takeover of the obligation to pay remuneration for the social rehabilitation service, and for the provision of the service”), Sotsiaalse rehabilitatsiooni teenuse raames osutatavate teenuste loetelu ja hindade, ülevõetava tasu arvestamise korra ja maksimaalse suuruse ühes aastas ning sõidu- ja majutuskulude hüvitamise korra, maksimaalse maksumuse ja sõidukulu määra ning rehabilitatsiooniprogrammi hindamiskriteeriumide kehtestamine” (“Establishing the list of services provided in the framework of the social rehabilitation service and their prices, the procedure for calculating the remuneration taken over and its maximum amount per year, and the procedure for compensating travel and accommodation costs, their maximum amount and the rate of travel costs, as well as the assessment criteria for the rehabilitation programme”), “Rehabilitatsioonimeeskonna spetsialisti koolituskava” (“Training plan for a rehabilitation team specialist”) and “Kogemusnõustaja koolituskava” („Training plan for an experience counsellor”).

45

Target level Indicator Target Base Actual level 2016 2017 2018 2019 2020 level 2015 2015

Rate of relative 2015 data poverty, %. 39.4 / will be 40.1 / 40.1 / 39.8 / 39.5 / 39.1 / 21.6 published ... / 15 Source: Statistics 16.5 16.5 16.2 15.9 15.5 Estonia; Estonian (2014) at the end Social Survey of 2016 Absolute poverty rate, 2015 data %. 6.3 will be 6.4% published 6.2 6.1 5.9 5.9 5.8 Source: Statistics (2014) in February Estonia 2017 Difference between average hourly wages 2015 data of women and men will be 22.5 i.e. gender pay gap, % 21.7 published 21.3 20.9 20.5 20.1 19.7 (2013) Source: Statistics in January Estonia, gender pay 2017 gap database

Important activities to fulfil the targets of 2017-2020  Improving the availability and quality of social services, incl. launching the investment programme for the energy efficiency of the social sector’s buildings (approximately 12 million euros of the CO2 quota funds will be used in 2016-2017 to support the renovation of local government care homes to be more energy efficient; in the same period, the state will support local governments with approximately 14 million euros in renovating kindergartens);  Creating and developing the services needed to meet the requirements of the Istanbul and Linarite Conventions and to implement the Victim Support Act, as well as providing the service of women’s support centres (starting with 2017, the budget will be 1,416,659 euros);  Preventing and reducing the care burden to enable long-term caregivers to work, and to support the coping of households with a member needing long-term care;  Activities to reduce the gender pay gap, incl. extending the supervision authority of the Labour Inspectorate;  Keeping the subsistence level at a level corresponding to the indicators of the minimum means of subsistence and updating the methodology of the minimum means of subsistence (the base budget of subsistence allowance is 22.5 million euros). The Draft Welfare Development Plan 2016–2023 and its Draft Operational Programme are available here: http://sm.ee/et/heaolu-arengukava-2016-2023

2.7.3. Healthcare

Sector’s objective and indicators: The healthy life expectancy of Estonian people has increased.

46 Important activities in 2015-2016 to achieve the target levels  The goal of achieving high-quality healthcare services and better health of people is furthered by the application conditions of the support measure “Modernising first-contact health centres” approved in August by the Health and Labour Minister’s regulation. As a result of the measure, 85 million euros will be invested in the development of first-contact health centres. The application round opened on 21 January 2016.  In order to ensure the availability of better-quality healthcare services for the entire population, taking also account of demographic trends and sustainable resource use, the direction has been taken to network county hospitals (for co-operation) with regional hospitals. The purpose is to ensure, upon co-ordinating the competence centres of the hospital network (SA PERH, SA TÜK), the continued availability of specialised medical help in county centres and the as close to home as possible provision of the services critical to the growth of the proportion of first-contact healthcare. In 2015, 1.7 million euros were paid as support.  The e-ambulance system has been taken into use by all operators of ambulance brigades (except Tallinn Ambulance). The target for 2016 is to implement e-ambulance in all of the country. The displaying of treatment invoices to patients has been developed in the patient portal.  Works continued to prepare the Draft Public Health Act, guided by the principle of “healthcare in all policies”.  At the beginning of 2015, Estonian healthcare system’s research, development and innovation strategy “Research and innovation working for healthcare” 2015–2020 was completed; it sets out a unified understanding of how research, development and innovation can more effectively support Estonian healthcare system’s objectives.  In October, the Government presented the Riigikogu with the Draft Act Amending the Tobacco Act, making the next step towards reducing the consumption of tobacco products.  In October, the Ministry of Social Affairs sent the Draft Act Amending the Alcohol Act and the Advertising Act to the approval round; it is intended to implement the principles set out in the Green Paper on alcohol policy.  In November, the work of the state e-healthcare strategy task group was completed, in co- operation with the Ministry of Social Affairs and led by the Government Office; as a result, the E-Health Strategic Development Plan until 2020 was completed with the purpose of developing e-services in healthcare.  In December, the Riigikogu adopted the Draft Act Amending the Health Services Organisation Act and Other Acts, initiated by the Government and increasing the role of family physicians and family nurses.  Works continued to implement the activities of the Norwegian Financial Mechanism’s programme “Public health” (expenditure in 2015: 2.7 million euros). Tallinn Children’s Mental Health Centre was completed (as a wing of Tallinn Children’s Hospital). The suitability of the international quality assessment system for children’s psychiatry services was piloted in Tallinn Children’s Hospital, Tartu University Hospitals, North-Estonian Regional Hospital and Pärnu Hospital. Works continued to develop online services in the fields of mental health and reproductive health and to pilot the long-term rehabilitation service for children with a severe psychiatric disorder.  Social campaigns “Joome poole vähem!” (“Drink half as much!”) and “Passiivne joomine” (“Passive drinking”) were conducted.

47  For sufficient training of specialised physicians, the resident training system was funded in agreed extent, ensuring the accepting of 142 physicians into resident training. To alleviate the shortage of nurses, the project “Õed tagasi tervishoidu” (“Nurses back to healthcare”) was funded through Tallinn Healthcare College; the project was very successful: we got 22 new nurses in the healthcare system (in 2015, the expenditure of both activities was in total 12.8 million euros; in 2016, the resident training’s budget is 13.61 million euros). To ensure the sufficiency of healthcare personnel in the future, a training order for healthcare specialists was agreed, increasing the number of residents accepted according to the demand. The relevant proposals were presented to the Ministry of Education and Research.  In April 2016, the Draft Act Amending the Act on Narcotic Drugs and Psychotropic Substances and Precursors thereof was adopted in the Riigikogu, setting out the possibility to add new psychoactive substances to the list of narcotic drugs and psychotropic substances as groups of substances, enabling fast and effective restriction of the spreading of new psychoactive substances. Target level Target Base Actual Indicator level 2016 2017 2018 2019 2020 level 2015 2015

Life expectancy 2015 data Men (separately for Men to be Men Men Men Men 72.32 Men 75 men and women), 72.5 published 73.0 73.5 74.0 74.5 Women Women years Women in Women Women Women Women 81.54 84 82.2 Septembe 82.5 82.9 83.2 83.6 Source: Statistics (2014) Estonia r 2016 Healthy (without limitations) life Men 2015 data expectancy at birth Men Men Men Men Men 53.1 to be Men 60 (separately for 57.1 57.5 58.1 58.6 59.2 Women published Women men and women), Women Women Women Women Women 57.1 in June 65 years 62 62.5 63.1 63.7 64.4 (2014) 2016 Source: Statistics Estonia Fatalities from accidents, poisonings and 71 traumas per 81 78 74 70 65 61 100,000 residents (2014) Source: Statistics Estonia

Important activities to fulfil the targets of 2017-2020  Implementing the renewed development directions of healthcare, incl. ensuring a regionally uniform, sustainable provision of healthcare services, as well as strengthening first-contract healthcare though constructing the necessary infrastructure and supporting the further optimum development of the hospital network providing high-quality specialised medical aid (expenditure in 2017-2020: 76.6 million euros).  Ensuring the sustainability of funding healthcare.  Treatment and prevention activities concerning HIV and substance addictions (starting with 2017, the budget will be 16.43 million euros per year).

48  Translating the information sheets of over-the-counter medicines into Russian and English (100,000 euros per year);  Implementing the e-health strategic development plan and the personal medicine pilot project (the personal medicine project: 50,000 euros per year).  Implementing the measures set out in the Green Papers on alcohol, tobacco as well as nutrition and exercise (expenditure: 10.4 million euros).  Implementing the programme of adult dental repair (the budget will be 6 million euros per year starting with 2017 and 12 million euros per year starting with 2018). The Public Health Development Plan 2009–2020 and its Operational Programme are available here: http://sm.ee/et/tervis

2.8. Legal order

Sector’s objective and indicators: A country with legal certainty, functioning well institutionally, having low crime levels and a high-quality criminal justice system. Important activities in 2015 and 2016 to achieve the target levels  Concerning corruption, a prevention project was conducted to increase the corruption awareness of Russian-speaking entrepreneurs; in 2015, training materials and instructions were prepared to prevent corruption in the private sector and in the councils of state and local government agencies. In 2016, works will continue to implement the Anti- Corruption Strategy, incl. organising a competition for preparing the training materials to increase the corruption awareness of the members of management and supervision bodies of companies with state or local government holding. Also, there are plans to establish an anti-corruption council under the Ministry of Justice.  To prevent violence, the MDFT programme (Multi-Dimensional Family Therapy) was launched, intended for young offenders and involving more than 200 families by now. The programme will also continue in 2016.  Offering the support person service across Estonia to persons released from prison, also supported by the housing and counselling service (with ESF money).  In 2015, the Penal Code revision’s amendments entered into force, reducing excessive criminalisation and making the punishment system more flexible.  In 2016, a personnel reform was initiated in the Prosecutors Office – 8 consultants and 5 prosecutors will additionally be hired during the year. The purpose of the consultants’ project is to relieve prosecutors from more technical tasks, thereby making criminal proceedings, incl the confiscation of criminal proceeds faster and more effective.  At the start of 2016, amendments to the Code of Criminal Procedure entered into force, being related to the transposing of the Victims’ Directive, which will bring about better and more knowledgeable treatment of offence victims, and prevention of secondary victimisation.  The Offence Prevention Council has started in a new format; a penalty policy task group was established under the Offence Prevention Council in 2016, with the objective to start assessing the penal policy as a whole and assess possible new measures to prevent (repeated) crime.  In 2015, the procedural goals to implement the project of more effective administration of justice were supplemented; the procedural goals are the same for all courts. One of the most important goals is the expedience of solving matters, which cannot be below 100%

49 in long term for any type of proceedings. This goal was mostly achieved in 2015 (except misdemeanour matters in Harju, Viru and Tartu County Courts and administrative matters in Tallinn Administrative Court). In the rest, the goals of the project of more effective administration of justice have been fulfilled.  In 2016, works continued to support the project of more effective administration of justice in courts and to conduct supervision over the achievement of agreed targets. Target level Target level Actual Indicator Base level 2016 2017 2018 2019 2020 2015 2015

Corruption Perceptions Index of Transparency 69 69 70 >69 >69 >69 >69 >69 International (2014) Source: Ministry of Justice

Proportion of crime victims among residents, 12% in the past 12 months, % (2014) <8% Source: Ministry <10% 8% <10% <10% <10% <10% of Justice

50 Target level Target level Actual Indicator Base level 2016 2017 2018 2019 2020 2015 2015

More effective Civil The productivity Total for first The productivity of solving matters is administration of matters of solving matters instance courts: positive in all courts and all types of justice in court 145, is positive in all productivity in proceedings; appeal proceedings in any proceedings administrat courts and all civil matters county court, administrative court or any (productivity and ive matters types of 101.5%, criminal other court instance are generally not longer duration of 144, proceedings; matters 98.5%, than 365 days. criminal appeal misdemeanour proceedings matters in proceedings in matters 93%. Source: Ministry general any county court, Proportion of of Justice proceeding administrative proceedings

s 243, court or any other longer than 365 misdemean court instance are days in civil our matters generally not matters 12.4% 69 longer than 365 and in criminal days. matters 6.6%. (2014) Total for administrative courts: productivity 104.5%, proportion of administrative proceedings longer than 365 days 14.3%. Total for second instance courts: productivity in civil matters 100%, in criminal matters 99.1%, in misdemeanour matters 100.5% and in administrative matters 95.3%. Proportion of proceedings longer than 365 days: civil matters 1.4%, criminal matters 0% and administrative matters 3.5%.

Number of people who died from violent 40 attacks 40 40 38 37 <35 < 30 <25 (2014) Source: Ministry of Justice

Confiscated 18.7 million Above the level 2 million Above the level of 2014 criminal euros euros of 2014

51 Target level Target level Actual Indicator Base level 2016 2017 2018 2019 2020 2015 2015 proceeds in high- (2014) priority offences have increased, compared with 2014 Source: Ministry of Justice

Duration of pre- trial proceedings Victim: 4.6 of a criminal Victim: not Victim: below 4 Victim: below 3.5 months; Victim: below 3.5 matter with a calculated for months months months minor-aged Suspect: 2015 Suspect: below Suspect: below 2 victim / a minor- 2.8 months Suspect: below Suspect: 3 2.5 months months aged suspect 2.5 months (2014) months Source: Ministry of Justice

Important activities to fulfil the targets of 2017-2020  Ensuring special treatment of minors during and after proceedings (the police, prosecutor’s offices, probation supervision, victim support).  Supporting the return of the prisoner to the society through as smooth as possible process of release from prison, incl through an increase of the number of prisoners released through open prison and probation supervision as well as the implementation of the support service for persons released from prison (housing, counselling and support person services) across Estonia (the project for ESF support services for persons released from prison will continue).  Increasing the flexibility and effectiveness of the system of penalties through wider implementation of electronic surveillance.  Developing and implementing a suitable system for offenders in need of treatment (sexual offenders, addicts, alcoholics), as a measure decreasing repeat offending.  Ensuring higher employment of prisoners in prisons.  As a result of revision of the Code of Criminal Procedure, implementing changes that ensure quicker pre-trial proceedings.  Continuing the project of more effective administration of justice in all courts of the first and the second instance.  Implementing an administrative reform to increase the efficiency of resource use in the judicial system.  By the end of 2019, after successful implementation of the pilot project, civil and administrative proceedings have transitioned to paperless court procedure.  Implementing structural changes in Pärnu County Court, Viru County Court, Tallinn Circuit Court and Tallinn Administrative Court to increase the effectiveness of the administration of justice.  Constructing a new building to increase the security of the courthouse of Harju County Court.

52 The development plan for the area of government of the Ministry of Justice is available here: https://www.just.ee/et/ministeerium-kontaktid/arengukavad-ja-tooplaanid

2.9. Internal Security

Sector’s objective and indicators To ensure that people in Estonia feel that they live in a free and secure society where everyone’s value, involvement in and contribution to the community’s security combine to make Estonia one of the most secure countries in Europe. Smart, optimal and effective solutions improve the living environment, reduce risks to life, health, property and the constitutional order, and ensure quick and professional help. Important activities in 2015 and 2016 to achieve the target levels under the Internal Security Development Plan Programme “Turvalisemad kogukonnad” (“Securer communities”):  In 2015, the Ministry of the Interior together with partners developed the concept of community-centred security, which determines problems and finds solutions to those, together with the most involved communities. Also, the concept of county-level and local security was prepared in co-operation with partners, which will be used in future case management or to agree wider goals, joint activities and expected results.  The Offence Prevention Council established a local sub-task group under the Council, to co-ordinate the risk behaviour prevention activities of ministries and state agencies at the local level.  The Police and Border Guard Board developed a resource model for district police officers, enabling to plan the police’s spatial locations.  To manage public expectations, the Rescue Board published an interactive map on its website in 2015, displaying the reaction capability and arrival speed of its units. The Police and Border Guard Board will prepare an overview of the reaction capability and arrival speed of its units in 2016.  In the start of 2016, an analysis of procedural and penalty practices was prepared as a joint task of the Ministry of the Interior and the Ministry of Justice. Additionally, the Ministry of the Interior ordered the Offence Prevention Foundation to prepare the analysis “Alaealiste õigusrikkumistele reageerimise mittekaristuslikest ja taastava õiguse praktikatest politseis: 5 Euroopa riigi näidete ülevaade ja võimalikud arenguvisioonid Eestis” (“About the police practices of non-punishing and restorative justice when reacting to offences committed by minors: an overview of 5 European countries, and visions of possible development in Estonia”). Both analyses will be used in 2016 as input for changing the system of reacting to offences committed by minors. The programme “Päästevõimekuse eelduste loomine” (“Creating the prerequisites for rescue capability”)  In co-operation between Estonian Academy of Security Sciences and the Rescue Board, a project involving the rescue squad network (the locations of squads) was implemented in Tallinn in 2015, being related to the preparation of a risk assessment model. The model enables better assessment of regional risks and thus better planning of the provision of rescue services.  In 2015, public procurements were conducted to acquire main trucks (43), tanker trucks (26), tanker containers (14) and container trucks (8) (using the money of EU Structural Funds). The new equipment will be taken into use by the end of 2018 at the latest.

53  In 2015, round table meetings took place in the field of SAR (Search and Rescue); as a result, the SAR Council will be established under the lead of the Ministry of the Interior in 2016, in order to develop, manage and conduct supervision of the field of SAR, incl. assessing the legal aspects of the field of flight rescue and marine rescue. The programme “Kindlam ja kiirem abi korraldamine” (“More certain and faster arrangement of help”)  In the start of 2015, Estonia transitioned to a single unified emergency telephone number 112.  With the development of the software of receiving and processing the Alarm Centre’s data, the positioning of the caller in mobile communications networks improved. The programme “Kriiside ennetamine ja hädaolukordadeks valmisoleku suurendamine” (“Preventing crises and increasing emergency readiness”)  In March 2016, the Government approved the new Draft Emergencies Act, which tidies the sector of vital services. The Draft Act introduces the definition of wide-scale evacuation to Estonian legal space, which it lacked in that form until now. A new regulation pertains to risk communication, setting out the obligations of agencies dealing with emergencies to inform people about hazards. It is also guided by the principle that every ministry, state agency and local government is responsible for crisis regulation and crisis solving in its field, incl. that the crisis solving must take place at the lowest level possible.  In 2015, the Ministry of the Environment, the Ministry of the Interior, the Ministry of Social Affairs and the Ministry of Justice established in their areas of government the requirements for sustainability of vital services in their areas of responsibility, which improved the service quality (clarity, standards, etc.). The main purpose of establishing those requirements is to regulate when the service shall be considered interrupted for a consumer and when the parties must be informed, and what measures shall be taken to increase the sustainability of the services.  In 2015, a civil defence task group was launched in co-operation between the Government Office and the Ministry of the Interior, which has the tasks of preparing Estonian civil defence concept, developing a communication strategy, increasing crisis awareness and conducting the information activities needed to assess the suitability of the concept and the communication strategy. Also, the methodology for future assessment of the population’s crisis awareness and readiness will be developed, based on which the relevant proposals to amend the legislation will be made if necessary.  Several exercises were organised to test the emergency readiness; the largest among them in the area of government of the Ministry of the Interior was CONVEX 2015, which also involved other areas of government. Most of the follow-ups of those exercises will take place in 2016. The programme “Julgeoleku suurendamine” (“Increasing security”)  The plan to increase the effectiveness of solving cyber-crimes and gathering digital evidence as well as the action plan of the Police and Border Guard Board was completed. At the start of 2016, the Cyber-Crime Office of the Central Criminal Police Division of the Police and Border Guard Board started its activities. Additionally, the rooms of a high- security data centre were completed, where data related to the field of internal security will be stored.  In order to increase the effectiveness of anti-terrorism activities, the international co- operation exercise of special forces (ATHOS) was organised.

54  In July 2015, the Information System Authority started around-the-clock monitoring of Estonian cyberspace, which improved the ability to detect and manage information security incidents (in 2015, about twice the number of incidents compared with those of 2014 were detected).  The Minister of the Interior regulation “Establishing the booking information system; statutes of keeping the system” entered into force in March 2016; it is the basis for taking the booking information system into use starting with autumn 2016.  Based on the Explosives Removal Centre unit of the Rescue Board, around-the-clock response capability to chemical and radiation hazards was established. The programme “Tasakaalustatud kodakondsus- ja rändepoliitika” (“Balanced citizenship and migration policy”)  In the start of 2015, the Riigikogu adopted an amendment to the Citizenship Act, which entered into force on 1 January 2016. Among the rest, the amendment set out that a minor being less than 15 years old and being born in Estonia or starting living permanently in Estonia together with his or her parents immediately after birth will obtain Estonian citizenship by naturalisation from the moment of birth.  On 1 January 2016, amendments to the Aliens Act entered into force, which set out inter alia the opportunity for Estonian employers to employ aliens through personnel rental enterprises, the opportunity for aliens holding a residential permit for work purposes to work for several employers simultaneously, and that the Unemployment Insurance Fund’s permit is not person-specific anymore and the Unemployment Insurance Fund may grant an enterprise the permission to fill one or several positions. Also, the target group allowed to apply for a residential permit while being in Estonia was expanded.  In order to house the applicants for international protection, preparations were started in 2015 to open a branch of the Vao housing centre in Vägeva Village, providing about 50 additional places.  In order to ensure the implementation of the Relocation and Resettlement Action Plan approved on 6 August 2015, the Minister of the Interior established a Refugee Policy Co- ordination Committee in 2015, being responsible for the preparation of the Action Plan. The Committee will also analyse the issues and challenges related to the preparations and implementation of the entire Action Plan, makes proposals for solving those, ensures monitoring of the Action Plan’s implementation, and gathers and mediates information in the field of international protection.  The Action Plan is also accompanied by a Financial Plan reflecting the needs of the areas of government in relation to the implementation of the Action Plan. The programme “Usaldusväärne ja turvaline identiteedihaldus” (“Reliable and secure identity management”)  In July 2015, the Office of the Government of the Republic discussed in its session the future of the wholesome development and versioning of the ID-card’s chip software and application software. As a result, it was decided that the area of administration of the Ministry of Economic Affairs and Communications shall gather the tasks related to the certificates and software on the electronic chip of Estonian ID-card and digital identity document.  Starting with May 2015, e-residency can be applied for online and also in all foreign representations of Estonia. Sub-field: more efficient border administration  One of the most important activities of 2015 was the documenting of the co-ordinates of the temporary control line between Estonia and Russia. In November 2016, the first

55 border post was placed on the eastern border and the land border’s line will be marked with border posts by the end of the year. Works were started for the construction of the land part of the eastern border, for covering it with technical surveillance and for marking it (the budget for 2015-2016: 24 million euros).  In summer 2015, the reconstructed Narva border point was opened. Target level Target Base Actual Indicator level 2016 2017 2018 2019 2020 level 2015 2015 The assessment of Indicator residents to Estonia’s 89 improv improv improv being 91 >91 92% internal security, % ng ng ng (2014) updated Source: Eurobarometer The sense of danger of Estonia’s residents, % decreasin not decreasi decreas decreasi below 33% 30% Source: Police and g measured ng ing ng 31% Border Guard Board The trust of residents towards the Police and PPA: PPA: Border Guard Board 84%; PPA: PPA: PPA: PPA: PPA: > 85% PPA: (PPA), the Alarm Centre ≥85% ≥85% ≥85% ≥85% ≥85% PÄA: 87%; (HK) and the Rescue PÄA: 95% PÄA: PÄA: PÄA: PÄA: PÄA: Board (PÄA) PÄA: > 95% ≥95% ≥95% ≥95% ≥95% ≥95% HK: 95%; Source: Police and HK: HK: HK: HK: HK: 89% HK: HK: 90% Border Guard Board, ≥90% ≥90% ≥90% ≥90% ≥90% Rescue Board, Alarm (2014) > 90% Centre. Coverage of Estonia’s eastern border with electronic and technical 50% improvin improvi improvi improvi surveillance, % 52% 100% 100% (2014) g ng ng ng Source: Police and Border Guard Board

Important activities to fulfil the targets of 2017-2020  The goal is to build up the national border by 2019 with full coverage by technical surveillance (planned budget for 2017-2019: 50 million euros).  In order to improve the security environment, the consistent development of security agencies will be ensured through systematic planning and capacity development.  The capacity of first response units, public order ensuring units and communications will be strengthened in order to hinder actions against Estonia’s security, to protect the democratic order and people’s fundamental rights, and to ensure the country’s economic security.  Rescue equipment, alarm vehicles, weaponry and other equipment vitally needed for the internal security professionals to work will be renewed. Additionally, nearly 1,000 vehicles will be replaced in the period of 2017–2020.  A community-centred security model will be implemented in the internal security agencies and local governments; on its basis, problems will be identified and activities will be

56 planned to prevent, alleviate and reduce hazards. Community-based conciliation possibilities will be developed.  Country-wide and local volunteer organisations in the field of internal security will be supported, both to increase their reaction ability and to expand the prevention work, and opportunities will be created for wider involvement of security enterprises in the securing of public order.  The concept of issuing digit-IDs to e-residents will be implemented, including that their issuance will be made more client-friendly.  Digital identity documents will be developed, including expanding their usage area and increasing the number of their users.  The specifications of identity documents will be continually updated, taking into account the latest technological developments. The e-application environment and self-service kiosks will be taken into use, in order to improve customer service.  The capability of identity management will be ensured and the processing of biometric data between various agencies in the country will be arranged under a unified identity management policy. Additionally, the issuance of 10-year passports will start, which will reduce the issuance costs and the density of transactions. More information about the Internal Security Development Plan is available here: https://www.siseministeerium.ee/et/stak. The total cost of “Internal Security Development Plan 2015-2020” programmes for the period of 2017-2020 is 1,293,545,161 euros.

2.10. Research and education policy

2.10.1. Research

Sector’s objective and indicators: Creating favourable conditions for an increase of productivity and quality of life, for good education and culture, and for Estonia’s sustainability and development. Important activities in 2015 and 2016 to achieve the target levels of the objective’s indicators The objective will be implemented through the Operational Programme and the research, development and innovation programme of Estonia’s Research, Development and Innovation Strategy 2014–2020 “Knowledge-Based Estonia”. An analysis of the current situation of research is available in the annual analysis 2015 of the Ministry of Education and Research. A quality competition based, functional and developing research, development and innovation (RDI) system as well as the support structure for the entrepreneurship sector have been formed in Estonia. In the research field, the international activity of researchers will grow, as will their publication activity and their success in the EU R&D framework programme Horizon indicating the high level of research. The proportion of high-tech products and services is on an upwards trend (it was 16.3% in 2014; the target for 2020 is 15%). The developments have been facilitated by the following:  supporting the internationalisation of research and higher education, incl. mobility and upcoming generations (2016: 10 million euros),  supporting top-level research centres (2016: 7 million euros),  developing the research infrastructure based on a roadmap, and participating in the ESFRI roadmap and other international research infrastructures (2016: 5.3 million euros),

57  ensuring access for scientific libraries to electronic databases of research information and supporting scientific libraries in obtaining publications (2016: 4 million euros),  implementing the main instruments of research and development (institutional and personal research grants, base financing, etc.) (total budget for 2016: 59 million euros). The volume of base financing of research institutions has increased by 10% (in 2015: 9.3 million euros and 2016: 13.9 million euros),  preparing the implementation of the new period’s development measures in 2015. The grant conditions for the use and implementation of 9 measures of external funds were prepared. Estonia’s R&D expenditure has dropped from 2.31% of GDP in 2011 to 1.44% in 2014. At the same time, the enterprise sector’s expenditure has dropped from 1.48% to 0.64%. The decline is related to one-off investments in the oil sector (launching plants with new technology). The decline of the share of R&D expenditure (in percent) is also affected by the GDP growth. If the declining trend continues, the achievement of the target levels set will not be realistically possible. Although we have held our position (13.) in the results list of the European Association for Creativity and Innovation (Innovation Union Scoreboard) and thereby remained among the average in EU, Estonia was removed from the earlier class of “innovation followers” and placed into the class of one lower i.e. “moderate innovators” in 2015. The enterprise sector’s orders for the public sector make up only 3.8% of the public sector’s R&D volume in Estonia. Estonia remains behind the average of OECD and European Union by approximately 2−3 times. Another feature specific to Estonia is that its R&D is highly project-based and there is a high proportion of foreign sources in funding research − especially concerning R&D performed in the public sector. Estonia has low results of doctoral studies. The number of people graduating from doctoral studies has fluctuated between 175−250 in the past five years (208 graduating in 2015). Target level Target Actu Base Indicator level al 2016 2017 2018 2019 2020 level 2015 2015 Investments into research and development activities (% of GDP), incl. the private 1.44/ sector’s R&D expenditure 0.64 2/1 - 2.2/1.2 2.4/1.4 2.6/1.6 2.8/1.8 3/2 (% of GDP) (2014) Source: Eurostat, Statistics Estonia. Ranking in the Innovation Union Scoreboard 13. 13. 13. 12. 12. 11. 11. 10. Source: Innovation Union (2014) Scoreboard

Important activities to fulfil the targets of 2017-2020:  Reviewing and consolidating the network of universities, research institutions and institutions of professional higher education (the ASTRA measure – 88.0 million euros);  Changing the proportions of research funding for universities, by increasing the base funding and its share;

58  Supporting the research and education directions important for Estonia, incl. supporting the conducting of studies based on the state’s needs and increasing the R&D capability of state agencies (the RITA measure – 19.6 million euros);  Activities to increase the results of doctoral studies;  Supporting the co-operation of research institutions and enterprises, and creating motivators to involve private capital in funding research and development activities, incl. supporting the applied research of smart specialisation growth areas (26.0 million euros). Estonian Research, Development and Innovation Strategy 2014-2020: https://www.hm.ee/sites/default/files/59705_teadmistepohine_eesti_est.pdf

2.10.2. Education

Sector’s objective and indicators All people in Estonia are provided with learning opportunities corresponding to their needs and abilities throughout their lifecycle, to ensure that they have dignified opportunities for self-expression in the society, work life and family life. The objective will be implemented through nine Estonian lifelong learning programmes and a youth programme. An analysis of the current situation of education is available in the annual analysis 2015 of the Ministry of Education and Research. Important activities in 2015 and 2016 to achieve the target levels of the objective’s indicators There is a shortage of young teachers in general education schools (2015: 10.6%) and there is also little competition for the curricula of teacher’s studies. One of the important prerequisites for increasing the attractiveness of the teacher’s profession is dignified salary. The Action Plan of the Government of the Republic foresees growth of the average salary of teachers to 120 percent of Estonian average i.e. to the same level as the average salary of a specialist with higher education. In 2015, the average gross salary of teachers in municipal general education schools was 7% higher than Estonian average salary. The average salary of vocational teachers in institutions of vocational education grew by 10% in 2015, compared with the previous year. Adults without professional education have a weaker position in Estonian labour market; their proportion was 29.2% in 2015. But the most vulnerable group among them is people without secondary education, as they are more frequently unemployed, inactive or employed for low wages. Adults with lower education also participate several times less in lifelong learning. In 2015-2016, several measures were launched in the field of education, which will result in improved qualification of labour force and improved correspondence of skills to the labour market’s needs, incl.  The skills co-ordination system OSKA (the budget for 2016: 0.7 million euros), which provides information about key professions and skills needed in the labour market. An analysis of the demand for skills and the supply of studies in the labour market will be completed in 10 sectors in 2017;  Increasing the awareness of lifelong learning and opportunities to learn, as well as measures to return adults to formal education after they have dropped out of education (the budget for 2016: 0.9 million euros);  In-service training and requalification courses for adults (the budget for 2016: 6 million euros). A total of ca 18 000 people participate in the courses per year;

59  Extending work-based learning (the budget for 2016: 3.9 million euros). As a result of implementing that measure, 1,600 learners and 150 enterprises will be involved in apprenticeship studies by the end of 2016;  Study and career counselling services for children and young people (the budget for 2016: 8.4 million euros). About 27,400 people per year will receive individual study counselling and career services, including 11,600 students of the third stage of basic school. The target is to have all basic school graduates go through career counselling in order to help the young people make informed decisions of their choice of studies and profession and to support them in continuing their education;  The measure to improve the inclusion of young people in risk of exclusion and to improve the employment readiness of young people, helping intensify the contact of young people with work life and developing a wholesome package of support services for about 8,600 young people not studying or working anywhere. By the end of 2016, 45,000 young people, incl. 3,000 young people not studying or working anywhere will be participating in youth work services. More than 90% of children aged 4–6 years participate in preschool education; this is a little below the EU average. In 2015, the preschool education and childcare concept was completed, setting out the principles of implementing and developing the national curriculum of a preschool children’s institution. Childcare services must be available to all children of age 1.5 – 3 years and preschool education opportunities to all children of age 3 – 6 years in local government regions. There are about 30,000 students with a non-Estonian native language, studying in basic education. The share of basic school graduates with a non-Estonian native language who have a command of Estonian at a level of at least B1 has grown year by year, now reaching 67.5%. Good results are provided by participation in a language immersion programme and an Estonian-speaking environment. In 2016, the student exchange programme within Estonia will be continued, works will continue to develop the digital learning materials for Estonian as a second language, the concept of a multicultural school will be prepared and its piloting will start in the academic year of 2016/17. The rate of dropping out has decreased in both professional and higher education in 2015. This has been facilitated by focussing on the reasons for dropping out. In vocational education, the base grant was raised to 60 euros per month, starting with 1 January 2015. Also, the doctoral study grant was raised by 10% in 2015 and a law amendment entered into force on 1 September 2015, setting out that social tax is now being paid for a person receiving a doctoral study grant. Youth work is very important in preventing dropping off the education path. Participation in non-formal activities offers opportunities to acquire competences valuable for entire life and helps reduce the risk of exclusion as well as develop the children's talents and interests. A young person must have the opportunity to grow up in a safe family and community, to obtain a good education and to see jobs providing for self-realisation opportunities and good living quality in their future. In Estonia, a big challenge is the effectiveness of resource use in education, one of its indicators being the low proportion of labour expenditure in the general government’s total expenditure on education. The approximately 40% reduction in the number of school-age children over the past 16 years, the urbanisation and the school network’s failure to adapt to that have brought about a situation where the capability of schools to ensure the quality of education varies. Schools with small numbers of students struggle to provide their teachers with full work load and it is not possible to offer enough study choices and the necessary level of studies to students in upper secondary education. In 2016, works will continue to tidy the school network. Since 2013, the activities of the school network programme (the budget for 2016: 15.5 million euros) have significantly reduced the number of schools with upper

60 secondary level and the number of schools for students with educational special needs (in 2013: 202 and 36, respectively; in 2015: 171 and 31, respectively). In 2015, four new state upper secondary schools were opened; the establishing of three state upper secondary schools has started (Hiiumaa, Põlva, Valga). In 2016, the first application round will take place for the tidying of the network of local government basic schools. Target level Target Base Actual Indicator level 2016 2017 2018 2019 2020 level 2015 2015 Average wage level of teachers in municipal to be to be schools, compared with 107 - 107 105 clarified clarified 120 120 the country’s average in 2016 in 2017 wage Proportion of adults (25- 64 years) without 29.7 professional and 29 29.2 28 27 26 <25.5 25 vocational education (%) (2014) Source: Statistics Estonia Participation in preschool education (from 4 years 90.418 to be old to school age) (%) 91 clarified 92 94 95 95 95 (2013) in 2017 Source: Eurostat Proportion of 18−24- year-olds with low 11.619 education level and not in further education or (2014) 11 11 10.5 <10 <10 <9.5 <9 training (%). Source: Eurostat

Proportion of 30-year-old and younger teachers, % (%) 10.3 11 10.6 11.5 12 12.5 12.5 12.5 Source: EHIS (2014) Proportion of people with tertiary education in the 42.5 age group of 30−34 years 40 45.2 40 40 40 40 40 (%) (2013) Source: Eurostat Participation of adults (25–64 years) in lifelong 11.520 learning (%) 13.5 12.2 15 16.5 18 19 20 (2014) Source: Eurostat

Proportion of graduates 6721 - 67.5 70 74 78 82 90 with non-Estonian native

18 The base level was adjusted by Eurostat.

19 The indicator for 2014 is that of Statistics Estonia, as Eurostat’s data for 2014 will be recalculated. 20 The indicator for 2014 is that of Statistics Estonia, as Eurostat’s data for 2014 will be recalculated. 21 The methodology and the target levels of the indicator were changed.

61 Target level Target Base Actual Indicator level 2016 2017 2018 2019 2020 level 2015 2015 language from Russian (2014) speaking basic schools having at least a B1 level of command of Estonian (%) Source: Ministry of Education and Research Average examination results of Estonian as a second language, basic school’s final examination 67/72 and upper secondary - 67/73 70/72 70/73 71/74 73/74 75/75 (2014) school’s state examination Source: Ministry of Education and Research

Important activities to fulfil the targets of 2017-2020  Tööjõuvajaduse seire- ja prognoosisüsteemi rakendamine;  Koolivõrgu korrastamine, tagamaks valikuterohket, kvaliteetset ja kättesaadavat üldkeskharidust;  Facilitating the co-operation of vocational education and upper secondary schools for the purpose of increasing the awareness about educational choices and reducing the rate of dropout from studies;  Measures to reduce the rate of doubts from vocational and higher education;  Extending work-based learning;  Providing adults with high-quality and relevant in-service training and requalification to increase their vocational and professional qualification and to improve their key competences of lifelong learning.  Returning adults with low level of education to formal education acquired within the adult education system and supporting their participation in studies;  Creating better opportunities for acquiring Estonian language skills at the level of independent language user in basic schools with Russian study language, incl. piloting the multicultural school concept and the digital learning materials of Estonian as a second language. Estonian Lifelong Learning Strategy 2020: https://www.hm.ee/et/elukestva-oppe-strateegia-2020

Annual analysis 2015 of the Ministry of Education and Research: https://www.hm.ee/sites/default/files/aastaanalyys2015.pdf Estonian Research, Development and Innovation Strategy 2014–2020: https://www.hm.ee/sites/default/files/59705_teadmistepohine_eesti_est.pdf

62 2.11. Culture and sports

2.11.1. Culture

Sector’s objective and indicators The objective of cultural policy is to shape a society valuing creativity, by maintaining and promoting Estonia’s national identity, researching, storing and carrying on cultural heritage, and creating favourable conditions to develop a viable, open and varied cultural space and to participate in culture. Important activities in 2015 to achieve the target levels  In 2015, the Ministry of Culture launched the pilot project of an artist’s salary and a writer’s salary, in order to contribute to the development of Estonian culture (in 2016: 161,362 euros).  On 8 December 2015, an agreement of joint intent was signed with Estonian Employees’ Unions’ Confederation (TALO), pursuant to which the minimum rate of a cultural worker’s gross salary will increase to at least 830 euros per month starting with the year 2016.  Starting with 1 January 2016, health insurance is guaranteed to all employees working under contracts regulated by the law of obligations, if social tax on their total remuneration has been received in the extent of at least the minimum monthly rate.  In 2015, the funding opportunities from the creative economy development measure of the 2014-2020 financial period of European Union opened for the cultural and creative sector, with the total support volume of 20 million euros.  The basis for the implementation of the financial incentive for producing films was developed, intended to support the production of audiovisual works based on foreign capital in Estonian territory (starting with 2016: 0.5 million euros per year).  The Musical Instruments Fund was established in co-operation between the public and the private sector, for the purpose of supporting sound art through the acquisition of musical instruments. The activities of the Musical Instruments Fund will start with the year 2016 and the Ministry of Culture is planned to support it with the amount of 20 thousand euros starting with 2016 as well.  With the lead of Estonian Children’s Literature Centre, the tradition was restored that all children being born in Estonia are given a book as a present.  A contract was signed, pursuant to which Estonia together with Latvia and Lithuania will be the main guests at the 2018 London Book Fair – this will open doors for the international spread of Estonian literature, increasing the extent to which Estonian literature will be known in the world.  In 2015, Estonia had a national pavilion at Venice Art Biennale. Participation there expands the international attention towards Estonian art. The expenditure of the Ministry of Culture for 2015 were 79,000 euros.  The Government presented the Riigikogu with the Draft Preservation Deposit Act, the main purpose of which is to modernise the waiving, collecting and preserving of publications important to Estonian culture.  Works continued to reorganise the museums in the area of administration of the Ministry of Culture, with the goal of having the museum network in the area of administration of the Ministry of Culture tidied in 2018. Most important activities in culture in 2016:

63  Preparing the action plan to develop Kalev Stadium as the place for Dance Festivals.  Preparing the Draft Act Amending the Performing Arts Institutions Act.  Analysing the basic principles of funding culture. Conducting an analysis of the interaction of various sources of funding culture.  Processing the new Heritage Protection Act and preparing the heritage protection reform to facilitate the preservation of cultural heritage, incl. the sector’s strategic planning and more flexible and effective use of common resources.  Opening Estonian National Museum.  Completing the large hall of the NUKU Foundation.  Tidying the museum network in order to enable museums to contribute more to content- related activities.  The Draft Preservation Deposit Act encompasses future digital developments and publications regardless of their form and manner of distribution.  Supporting the activities of sectoral organisations of arts and cultural values.  Preparing the concept of a support system for the hobby activities of young people. Target level Targe Base Actual Indicator t level 2016 2017 2018 2019 2020 level 2015 2015 Number of theatre visits (millions) and the number of 1,047 productions in Estonia th - 1,450 1,465 1,465 1,465 1,465 1,450 Source: Estonian Theatre (2014) Agency Number of new stage plays* 196 Source: Estonian Theatre - 180 180 180 (2014) - - 180 Agency Share of Estonian films in cinemas (%)* 11 6 11 7 7 8 8 8 Source: Estonian Film (2015) Institute*

Translations from Estonian to other languages (fiction 70 titles) * 48 70 71 74 77 77 80 (2015) Source: Estonian Literature Centre

2,100 Number of concert visits in 1,433 2,025 2,025 2,025 Estonia* th - th (2013) - - th th th Source: Statistics Estonia

Progress on the “design ladder”: proportion of 45% - 51% 55% 58% 60% enterprises using design on (2013) the 2., 3. and 4. rung of the - - “design ladder”*

64 Target level Targe Base Actual Indicator t level 2016 2017 2018 2019 2020 level 2015 2015 Source: TNS Emor/ Estonian Design Center Number of museum visits 3.84 (millions) - 3.6 3.6 3.6 3.6 3.6 (2014) 2.9 Source: Statistics Estonia Number of lendings from 10.3 public libraries (millions) 10 10 10 10 (2015) 12.3 10.3 10 Source: Statistics Estonia

Number of people practicing folk culture 88,730 Source: database of the Folk 85,000 88,730 85,000 85,000 85,000 85,000 85,000 (2015) Culture Centre Proportion of architectural monuments in good and 72.8 satisfactory state (%) 73 72.8 73 75 75 75 75 (2015) Source: National Heritage Board * These indicators were developed and added as suggested by the Ministry of Culture for more varied measurement of arts

Important activities to fulfil the targets of 2017-2020  Increasing the minimum wage of cultural workers to the average wage pursuant to the Basics of Cultural Policy until 2020.  Co-ordinated mass digitisation of cultural heritage and making it available in digital form pursuant to the strategic plan “Operational Programme for Digitisation of Cultural Heritage 2016-2022”.  Developing the creative economy in order to connect the potential in the cultural and creative sectors to entrepreneurship.  Implementing the cultural heritage reform in order to make the National Heritage Board into a competition centre and to ensure the long-term preservation of objects of cultural heritage in public interest.  Continuing the reorganisation of the network of museums and the development of the information systems in the area of administration of the Ministry of Culture.  Continuing the tradition of National Song and Dance Festivals and supporting the organisation of Youth’s Song and Dance Festivals. Helping renovate Kalev Stadium in co- operation with Estonian Song and Dance Festival Foundation and the City of Tallinn.  Developing the e-book lending system under the lead by Estonian National Library.  Continuing the work to establish and develop the Research and Visitation Centre of Arvo Pärt. The Centre will open in 2018.  Estonia’s participation at Venice Architectural Biennale in 2018 and at Art Biennale in 2017 and 2019.  Implementing the artist’s salary and the writer’s salary as a pilot project.

65  Estonia together with Latvia and Lithuania will be the main guests of London International Book Fair 2018.  Supporting the activities of sectoral organisations of arts and cultural heritage.  Promoting the financial incentives of the audiovisual field.  Ensuring the protection of the rights of small producers upon renewing the Audiovisual Media Services Directive at the level of European Union.  In 2017, the renovated Ugala Theatre’s building will be opened and Vanemuine Theatre will be updated by modernising its big building’s audience area, stage technology and theatre hall technology. Documents pertaining to the area of government’s development plan are available here: http://www.kul.ee/et/organisatsioon/arengukava-ja-tooplaan

2.11.2. Sports

Sector’s objective and indicators: Physical exercise and sports have an important and growing role in promoting the viability of Estonia’s residents, creating a rich living environment and shaping a good reputation of Estonia as a country. Most important activities in sports in 2015  The strategic document “Basics of Estonian Sports Policy until 2030” was prepared.  For the first time, the newly-developed system of supporting the labour expenditure of coaches was implemented (3.5 million euros of support was allocated to 1,032 coaches at professional level 5-7 in a total of 322 different sports organisations).  As an important initiative, the principles of supporting large teams entered into the finals of title competitions were prepared. Most important activities in sports in 2016  Preparing the new basics of national funding for sports.  Employers will be provided with an opportunity to promote the health of their employees without the additional tax obligation to support the hobby exercise and sports, and companies will be provided with an opportunity for tax-free funding of the development of public sports infrastructure.  Implementing and consistent development of the system to support the labour expenditure of coaches (in 2016: 3.96 million euros).  Reorganising the basic course in swimming, in co-operation between the Ministry of Social Affairs, the Ministry of Education and Research, the Ministry of Finance, the Ministry of the Interior, the Rescue Board and Estonian Swimming Federation.  Developing Tehvandi Competition and Training Centre and Kääriku Training Centre.  Supporting the activity of the most important sports organisations (Sports Medicine Foundation, Estonian Anti-Doping Agency, etc.) with the amount of 3.2 million euros.  Supporting the youth sports clubs oriented towards achievement sports and supporting international top sports competitions and regional hobby exercise events (0.5 million euros).  Developing the concept of the support system for youth hobby activities.

66 Target level Target Base Actual Indicator level 2016 2017 2018 2019 2020 level 2015 2015

The proportion of people regularly engaged in sports in the 16–64 age group, % No data No data Source: National Institute 36.7 45 - 45 publish 46 publish 53 for Health Development ed ed (survey of health (2014) behaviour among Estonia’s adult population)

The proportion of young people (up to 19 years of age) going to sports clubs 30.3 in the entire age group, % 26.5 30 30.5 31 31.5 32 (2014) - Source: Estonian Sports Register

Important activities to fulfil the targets of 2017-2020, if possible then with volumes (millions)  Implementing and improving the new basic principles of state funding for sports.  Ensuring the consistency of the support system for the labour expenditure of coaches working with children and young people, primarily at professional level 5-7.  Developing SA Tehvandi Spordikeskus (Tehvandi Sports Centre Foundation) (incl. Kääriku Sports Centre) as a development centre for top-level sports.

2.12. Estonian language and identity

Sector’s objective and indicators To ensure the preservation and development of Estonian language in all aspects of life. The objective will be implemented through the language programme. An analysis of the current situation of education is available in the annual analysis 2015 of the Ministry of Education and Research. Important activities in 2015 and 2016 to achieve the target levels of the objective’s indicators Assigning importance to Estonian language is important throughout the curriculum of general education and vocational schools. It is important in higher education to preserve and develop Estonian as a scientific language and to publish research results in Estonian. In order to ensure the sustainability of Estonian language:  Estonian is being studied, language databases are being developed and reputation building is being conducted (the budget for 2016: – 2.2 million euros),  Conditions are established for having a command of, using and valuing Estonian in the education system, incl. the issuing of higher educating textbooks in Estonian,

67  The repayment of language learning costs to those who have successfully passed the Estonian language proficiency exam, every year from the state budget’s funds,  Offering opportunities to learn Estonian for public sector employees with insufficient command of the language and weak competitiveness,  In 2015, the language studies of Ida-Viru County were supported,  Supporting the teaching of Estonian language and culture in higher education institutions of more than 30 different countries (about 100 teachers and 50 lecturers are teaching Estonian outside Estonia). In addition to academic studies, the language learning in Estonian communities will be supported, in general education and Sunday schools, associations, kindergartens, nurseries and language courses in several countries (in 2016: about 1 million euros). As the number of people speaking Estonian as their native language is decreasing and the number of people speaking Estonian as a foreign language is increasing, it is important to ensure the quality of teaching Estonian to both groups. Having no command of Estonian is a significant factor in being excluded from education and labour market. According to the labour force survey, the number of non-Estonians aged 15–74 years having a command of Estonian as not their home language has increased by 26,400 persons in the period of 1999– 2014, and their proportion in all non-Estonians has increased to 64.5%.

Target level

Target Base Actual Indicator level 2016 2017 2018 2019 2020 level 2015 2015

Estonian as native language skill of young people who have completed upper secondary education (average result of 62 63.2 - >58 >58 >64[1] >64 >64 the final examination), points (2014) (maximum 100) Source: Ministry of Education and Research

Number of foreign Estonians participating in learning Estonian and in Estonian days 3,350 held in Estonia and abroad - 3,670 3,700 4,300 4,500 >5,250 >5,250 (2014) Source: Ministry of Education and Research

Proportion of examinees who have passed the Estonian language proficiency examination (levels A2-C1), % 51.5 54 52.5 54 54 54 55 55 Source: Ministry of Education (2014) and Research

Self-assessment of active skills of Estonian among residents 36 - 37 - 38 - 38 - with non-Estonian native (2011) language (%)

[1] The SBS target level unified with the Language Programme’s target level.

68 Target level

Target Base Actual Indicator level 2016 2017 2018 2019 2020 level 2015 2015 Source: Estonian Integration Monitoring (EIM)[2]

Important activities to fulfil the targets of 2017-2020:  Preparing the Estonian Language Development Plan 2018-2024;  Developing and supplementing databases of Estonian terminology;  Developing language learning opportunities for adults with non-Estonian native or home language.

2.13. Citizenship policy and integration Sector’s objective and indicators The Estonian society is integrated and socially coherent; people from different language and cultural backgrounds participate actively in the society and share democratic values. Important activities in 2015 to fulfil the target levels  In 2015, the state supported the opening of a new Russian-language TV channel of Estonian National Broadcasting, which enables the Russian-speaking group of the population to participate more in Estonian information space and therefore facilitates their integration in the society. Cost: 2.53 million euros.  With the 2015 amendment to the Act Amending the Citizenship Act and the State Fees Act, the children born in Estonia to parents with undetermined citizenship will automatically receive Estonian citizenship. Children below 15 years of age, being eligible for Estonian citizenship and having both parents with undetermined citizenship will receive Estonian citizenship if the parents do not renounce it within one year. Also, the amendment simplifies the conditions of Estonian language proficiency examination for applicants of Estonian citizenship who are older than 65 years.  In September 2015, the provision of free Estonian language courses at the levels of A2, B1 and B2 to poorly integrated residents started, and they will be continued in 2017-2020. Also, the activity of language clubs providing non-formal language practice and cultural knowledge is organised, as well as counselling the target group in Narva, Tallinn and other local government regions. Cost: 87,971 euros.  Support was provided to Estonian multiculturality and to the sustainable functioning and systematic development of organisations representing various ethnic cultures, as well as practical contacts between people with different linguistic and cultural backgrounds (cost 929,421 euros). In 2015, the Ministry of the Interior started providing the Adaptation Programme’s training courses to new immigrants (aliens having lived less than five years in Estonia), with the purpose of supporting the migration process and later integration of new immigrants and teaching them basic Estonian.

[2] The integration monitoring is conducted every three years.

69 Important activities of 2016 in the field of integration:  Estonian National Broadcasting will continue to develop the ETV+ programme. As a special project, ETV+ will develop new TV formats, incl. broadcasts of grand sports events with Russian commentaries. The planned budget for 2016 is 4.39 million euros.  In 2016, free Estonian courses at the level of A2-B2 will be organised, as well as learning opportunities at the level of A1 to poorly integrated permanent residents, incl. the opportunity to start learning the language in the e-learning environment “Keeleklikk” (“Language Click”) (www.keeleklikk.ee). 60 clubs introducing Estonian language and culture will start their activities, offering also supported learning. The planned budget for 2016: 1,108,498 euros.  Training courses for familiarity with the Constitution of the Republic of Estonia and the Citizenship Act are being provided to 1,160 poorly integrated permanent residents and new immigrants. The planned budget for 2016: 124,614 euros.  In 2016, preparatory activities will start for informing people with non-Estonian native language about career opportunities in the public sector. The planned budget for 2016: 50,000 euros.  Activities will be supported that facilitate active participation in the society, the emergence of everyday contacts and conversations in the society and the strengthening of the joint communication space. The planned budget for 2016: 70,000 euros.  Preparations to establish co-operation activities, student exchange and contacts between people living in various regions of Estonia and having different linguistic and cultural backgrounds, incl. young people with Estonian native language and with some other native language. Cost: 226,569 euros.  Consultation and information system services will be developed and implemented to better inform poorly integrated people, incl. new immigrants. Cost: 213,869 euros.

Target level

Target Base Actual Indicator level 2016 2017 2018 2019 2020 level 2015 2015

Number of residents with undefined citizenship 85,264 89,700 85,264 87,000 86,000 - 83,000 82,000 Source: Police and Border Guard Board (PPA) (2015)

The proportion of people with a strong or rather strong citizen identity 36% among all people of non- - 36% 37% 38% - - - Estonian nationalities 47% 47% 49% 51% Source: Estonian (2015)

Integration Monitoring (EIM)* * Resulting from the process of preparing the sectoral development plan Integrated Estonia 2020 and the plans set for 2014, the indicator of the development plan’s overall objective was clarified in 2015 on the basis of the results of Estonian integration monitoring conducted in 2014 and 2015, respectively. Important activities to fulfil the targets of 2017-2020

70  Developing the special formats of Estonian National Broadcasting’s Russian-language TV channel and ensuring its high-quality activity. Implementing activities supporting integration, incl. the integration programme’s co-operation and communication activities. Planned budget: 3.77 million euros.  An information campaign will be conducted to inform people with non-Estonian native language about career opportunities in the public sector; employers will be informed about the importance of equal treatment in personnel policy. Planned budget: 50,000 euros.  Various co-operation activities are offered, incl. co-operation activities, student exchange and contacts between young people with Estonian native language and other native languages, for the purpose of involving them in active social life. Planned budget: 200,665 euros.  Reducing the number of persons with undetermined citizenship in Estonian society and facilitating the relevant information activities. Planned budget: 75,000 euros.  Involving the citizen associations of Ida-Viru County in policymaking and decision- making processes. Counselling and information system services will be implemented to better inform poorly integrated people, incl. new immigrants; also, co-operation platforms will be developed in Ida-Viru County. The co-operation activities, student exchange and contacts between people living in different regions of Estonia and having different linguistic and cultural backgrounds will be implemented, incl. between young people with Estonian as their native language and with other native languages, in order to involve them in active social life. Planned budget: 710,975 euros.  Supporting organisations with various linguistic and cultural backgrounds, being active in Estonia. Planned budget: 2.57 million euros.  Developing and providing counselling and information system services to better inform poorly integrated people, incl. new immigrants. Planned budget: 905,029 euros.  Works will continue to implement the Adaptation Programme intended for new immigrants, incl. conducting analyses needed for the adaptation and preparing impact assessments to identify adaptation difficulties, incl. the society’s attitudes and how the activities being implemented improve the situation of new immigrants. Also, a support network concept and an information platform will be developed, to ensure relevant service provision, as well as the opportunity to register for the Adaptation Programme’s training courses. The documents pertaining to the sectoral development programme are available here: http://www.kul.ee/et/eesmargid-tegevused/kultuuriline-mitmekesisus/valdkondlik- arengukava-loimuv-eesti-2020

2.14. Environment

Sector’s objective and indicators Shaping a responsible attitude towards nature and preserving a clean and biodiverse living environment for the people of Estonia. Important activities to fulfil the target levels for 2015 and 2016  In 2015, the species protection action plans were prepared to ensure the favourable state of important species or to manage those states (e.g. large white-faced darter, northern goshawk, lady’s-slipper orchid, ringed seal, grove sandwort, greater spotted eagle, common spadefoot, western capercaillie, black grouse).

71  The National Development Plan for Oil Shale Use 2016-2030 and its Operational Programme were prepared to ensure as environment-conserving and economically effective use of oil shale as possible.  Within the framework of the Cohesion Fund measure “Preservation and restoration of protected species and habitats”, several new regulations and decrees were adopted to restore habitats and to make investments in nature protection.  In 2015, the preparation of the Development Plan of Adapting to the Effect of Climate Changes until 2030 and the Basics of Climate Policy was started in order to better direct the fields of adapting to and alleviating the climate change.  The water management plans of river basins, the measure programmes of water management plans and the flood risk hedging plan were prepared and updated to improve the state of rivers, lakes, coastal waters and the sea, to combat floods and to retain the sediments and nutrients being carried away from arable fields and forest areas.  Regulations were adopted to set the charge rates for the water special use right and the earth deposit extraction right for 2016–2025. The study “Analysis of monetary assessment of the external impacts of Estonian use of environmental resources” is being conducted, which will result in providing monetary assessments to the negative impacts of the charged activities in Estonia by the end of 2017.  In order to secure the residents with high-quality potable water and compliant collection of waste water, public water supply and sewerage projects were funded from the measure “Water economy infrastructure development” for a total of 470 million euros in the period of 2007 –2013, and there are plans to support such projects for a total of 144 million euros in the period of 2014–2020.  To prevent waste generation and to facilitate reuse, the Minister of the Environment regulation “Grant conditions for the activities ‘Supporting the recycling of wastes’ and ‘Supporting the preparation of wastes for recycling’ of the measure ‘Energy and resource efficiency of enterprises’ in open application” was prepared on 27 March 2015. Target level Target Base Actual Indicator level 2016 2017 2018 2019 2020 level 2015 2015 Response capacity to a marine pollution incident within 24 hours, km² 2.4 2.4 2.4 2.4 2.4 2.4 Source: Ministry of the (2014) Interior Protection of biodiversity and natural resources

(proportion of protected areas in total land area), % 18.4 At least 18.5 18.4 18.5 (2014) Source: Ministry of the Environment

Proportion of wastewater agglomerations with a pollution load of more than 82 2,000 human equivalents, (2014) 85 87 89 91 93 97 100 compliant with waste water

72 Target level Target Base Actual Indicator level 2016 2017 2018 2019 2020 level 2015 2015 collection and treatment requirements, % 22 Source: Ministry of the Environment Total greenhouse gas emissions in sectors outside the trading system, m tonnes of CO2 equivalent 6.07 Source: Ministry of the 5.62 5.62 6.37 6.39 6.42 6.44 6.47 (2014) Environment Proportion of consumers who receive potable water complying with requirements from the 97 98 98 99 99 100 100 100 public water supply (2014) network, % Source: Ministry of the Environment Proportion of municipal waste recycling in total 23 35 municipal waste % 37 37 39 42 45 48 50 (2014) Source: Ministry of the Environment Resource productivity: ratio of GDP to domestic raw 0.41 0.42 0.42 0.43 0.44 0.45 0.46 0.47 material use, (EUR/kg) (2014) Source: Eurostat

Important activities to fulfil the targets of 2017-2020  For endangered fish species, a quarantine block will be constructed in RMK Põlula Fish Farming Centre.  Works will continue with projects to improve the migration opportunities of salmonidae.  The pollutant emission quantities reduction programme will be prepared in order to reduce the ambient air pollution (starting with 2018).  In order to increase radiation safety, not only natural but also artificial radiation will be regulated, incl. radon as a radioactive gas.

22 The indicator was replaced. The earlier indicator “Proportion of wastewater treatment systems operating pursuant to requirements in wastewater agglomerations with a pollution load of more than 2,000 human equivalents” characterised only the functioning of waste water treatment plants. The new indicator also encompasses the aspect of collecting waste water and this is a wholesome direct obligation of the state, stemming from EU Accession Treaty and the Urban Waste Water Treatment Directive. 23 The indicator was replaced. The indicator “Proportion of municipal waste recovery in total waste” was replaced by the indicator “Proportion of municipal waste recycling in total municipal waste”. Pursuant to the Waste Act, the proportion of municipal waste recycling in total municipal waste must be at least 50% by the year 2020.

73  In 2017, large-scale residual pollution elimination works will be started (Purtse River, Kroodi Stream).  Structural Fund money will be used to support the increasing of energy and resource efficiency of enterprises.  The Earth’s Crust Strategy will be prepared, with the purpose of using the earth’s crust and the mineral deposits therein in a manner creating the highest value for Estonian society, accounting for the socioeconomical, security-related, geological and environmental aspects.  Works will continue to implement the water economy projects, in order to ensure clean potable water and compliant treatment of waste water being led back to the environment.  The external impacts of environment use charges will be assessed, in order to make the environmental charges system fairer and simpler.  The waste management of local governments will be developed further, in order to promote the recycling and recovery of wastes.  Documents pertaining to the development plan of the Ministry of the Environment’s area of government are available here: http://www.envir.ee/et/ministeerium- kontakt/ministeeriumi-tutvustus-ja-struktuur/keskkonnaministeeriumi-arengukava-2015 .

2.15. Agriculture and fishing

Sector’s objective and indicators Estonia has viable and competitive rural regions with agricultural and fishing economy, ensuring safe food and consumer satisfaction. Important activities in 2015 and 2016 to achieve the target levels of the objective’s indicators  The participation of agricultural producers in the quality plans of foodstuffs with high quality and special characteristics, and the promotion of products produced under such plans (in 2016: 0.3 million euros; RDP*).  Pasturing bovine, better growth conditions for calves, a more natural environment for keeping pigs, the implementation of alternative systems in bird farming (roost hens, free range hens), and environment-friendly development of sheep, goat and horse farming (allocated support: 9.8 million euros; the budget for 2016: 6.1 million euros; RDP*).  Investments of agricultural producers in modernising their production processes – the measure promotes economic activities and environment-conserving production practices in the agricultural sector and also increases the supply security of environment-friendly energy (allocated support: 51.4 million euros; the budget for 2016: 22.5 million euros; RDP*).  Land improvement activities on agricultural and private forest land as well as construction, reconstruction and renewal of the roads servicing the land improvement system, also construction and reconstruction of access roads for production buildings on agricultural and private forest land (allocated support: 6.8 million euros; the budget for 2016: 8.9 million euros; RDP*).  Enlivening the entrepreneurship of small agricultural enterprises (allocated support: 9.4 million euros; the budget for 2016: 5 million euros; RDP*).  Activities related to the establishment and development of a producers’ group or producers’ organisation in the sectors of agriculture and forestry (allocated support: 0.5 million euros; the budget for 2016: 0.9 million euros; RDP*).

74  Increasing sustainability and hastening innovation in the sectors of agriculture, food production and processing, and forestry (support for innovation clusters; support for developing new products, practices, processes and technologies; support for activities related to: transport, investments in equipment and constructions, information technology solutions, management and administration of co-operation projects (allocated support: 4.6 million euros; the budget for 2016: 2.2 million euros; RDP *).  Investments in equipment needed for the processing and marketing of products; investments in constructions and in the establishment of new processing units (major projects) (allocated support: 14.4 million euros; the budget for 2016: 32.5 million euros; RDP*).  Supporting young agricultural producers below the age of 40, starting as a manager for the first time – the support will be used for implementing the agricultural enterprise’s business plan (the budget for 2016: 4 million euros; RDP*).  In 2015, the first stage of developing a scientific system for risk assessment was launched as a 2-year pilot project – it includes the development of risk assessment competence and the provision of ongoing expertise service. The cost: 0.2 million euros. If the pilot project will turn out to be feasible, the projects will continue in 2017 as well.  In 2015, a country-wide diet study ended, having been organised in co-operation between the Ministry of Social Affairs and European Food Safety Authority – the results will become clear within the year 2016. It is expected to provide an important input for the assessment of food-related risks and thereby an effective planning and implementation of Estonia’s food safety policy.  In 2015, the Action Plan to Reduce Microbe Resistance (AMR) was prepared (incl. determining the activities needed to reduce the resistance to antibiotics resulting from veterinary medicine). In 2016, information activity will be started through the long-term programme of animal farming, based on the AMR Action Plan. The funding will come from the RITA research activity programme.  In 2015, an analysis of the unit rates of development support was ordered from Estonian University of Life Sciences; its results will be used for developing the payout principles of new development grants.  In the field of plant health, an ongoing expertise agreement was signed with Estonian University of Life Sciences to obtain sectoral knowledge-based input.  Preparatory works will be performed to amend the Plant Propagation and Plant Variety Rights Act and the Plant Protection Act.  In 2016, market development aid will be used in the extent of 0.9 million euros to support various information and sales promotion projects of the food sector, as well as product campaigns and other activities to promote the food sector’s marketing activities (incl. 0.2 million euros allocated to the participation in foreign trade fairs for the purpose of supporting export and entry into foreign markets). The funding source will be the domestic budget.  The objective of the Estonian Food Action Plan is to introduce and promote Estonian food to both Estonian consumers and visiting tourists, as well as to promote the export of Estonian food products (the foreign markets in focus in 2016 are Finland, Germany, China and Japan). Out of the 0.25 million euros, about 180,000 euros will be used for activities to be implemented in Estonian market and more than 70,000 euros will be used for foreign market projects.  Concerning the surpassing of food safety related trade obstacles, there are plans to sign treaties with the relevant authorities of China in near future, creating opportunities to export Estonian milk and fish products to the market there.

75  Works will be continued to implement the common agricultural policy of European Union (EU CAP) – analysing the sector’s situation and if necessary then adapting the support measures, informing European Commission thereof. In 2015, direct aid was paid to agricultural producers in the total amount of 106.2 million euros (incl. common area support of 69.6 million euros and climate and environment support of 31.4 million euros). The budget of direct aid in 2016: 114.6 million euros).  The “School Milk Plan” and the “School Fruit and Vegetable Plan” will continue, to shape healthy consumption habits in children.  The last year’s activities of the Apiculture Programme 2013–2016 will be implemented and the new Apiculture Programme for the next three years will be prepared.  Pursuant to the Action Plan of the Government of the Republic 2015–2019, the Ministry of Rural Affairs in co-operation with other responsible ministries is preparing a strategic document of bioeconomy for the purpose of increasing the added value of renewable resources.  European Maritime and Fisheries Fund (EMFF) has been established to support the common fisheries policy of EU. The EMFF Operational Programme for 2014–2020 has been prepared to use the Fund’s money, under which nearly 130 million euros will be directed into the fisheries sector and the development of the coastal regions with Estonian co-funding. About 26 million euros are planned for developing sustainable fishing, about 17 million euros for developing aquaculture, about 14 million euros for collecting fishery data and to make supervision more effective, 28 million euros for developing coastal regions, about 32 million euros for promoting the processing and marketing of fish products, and about 3 million euros for maritime policy.  Compared with 2014, the export of fish products declined less than feared (20%), because the export of frozen sprat and herring to Belarus and Ukraine while the Russian market was closed to the Estonian production.  147 projects to support microenterprises have been funded with the money of European Fisheries Fund (OFF) for 2007–2013 (+2 years) in the extent of 2.1 million euros (processing and direct marketing), as a result of which the development of coastal regions has diversified (e.g. thanks to the acquisition of various equipment, fish valuation has increased in addition to fishing).  For the first time in Europe, we started electronic collecting of fishing data, enabling operative monitoring of the fishing quota. About 0.5 million euros together with the state budget’s funds were contributed to the development of the fishery information system.  Research-based agricultural applied studies and development activities were started, to be performed until 2021, for the purpose of more effective legislative drafting, state supervision and policymaking (a total of 32 applied studies were funded in 2015; 18 projects have been initiated in 2016 and the funding of 5 more projects is planned).  In 2016, Estonia will participate in the programme “Supporting sectoral research and development activity” (RITA), under which three cross-sectoral theme suggestions were proposed: “Opportunities to reduce the use of antibiotics and plant protection means in the food supply chain”, “Model studies of environmental load and the impact of climate changes in forestry and agriculture” and “Increased added value and more efficient use of raw materials in bioeconomy sectors”. The projects will be implemented in co-operation with the Ministry of Social Affairs, the Ministry of the Environment and the Ministry of Economic Affairs and Communications.  The national plant variety programme was continued, supporting 20 plant variety breeding projects (the budget for 2016: 0.6 million euros).

76  Works were continued to collect and preserve the genetic resource of agricultural crops, to last until 2020 (the budget for 2015: 0.2 million euros; the budget for 2016: 0.3 million euros).  In 2015, the preparation of a report of the innovation system of the agricultural sector and Estonian innovation policy was initiated in co-operation with OECD. Target level Target Base Actual Indicator level 2016 2017 2018 2019 2020 level 2015 2015 Average annual increase of net added value per unit of labour force (compared with previous year) in agriculture, % -7.1% 2.8 - 2.8 3.0 3.0 3.0 3.0 Source: FADN (2015 data in Q4 (2014) 2016) Added value per employee in fishery1 (EUR) 18,248 21 000 - 21,000 21,100 21,100 21,150 21,200 Source: ESA (2015 data in Q2 (2014) 2016) 1 – The target level has been decreased; the net added value is formed as a difference between revenue and expenditure. In 2015, the producer price index of agricultural produce dropped by 16% more than the purchase price index if the means for producing agricultural produce. Therefore, the revenue received from the market was more modest but the level of expenditure remained at the 2014 level. Based on the data of Q1 f 2016, the trend of price indices in 2016 was similar to that of 2015, therefore we cannot forecast a higher growth of net added value.

Important activities to fulfil the targets of 2017–2020  Works will continue to implement the activities started in 2015–2016 under the RDP 2014–2020.  The value of catch volumes in coastal fisheries will be increased through the financial means of European Maritime and Fisheries Fund.  Support for pillar I of EU CAP will be continued. Based on sectoral analyses, the grant for agricultural production will be implemented and if necessary then amended (for the gardening, dairy, beef animal as well as sheep and goat sector), starting with the beginning of 2017.  Bioeconomy strategy will be developed and implemented for the purpose of making the use of biomass more effective.  Measures needed for the transposing and implementing of the standards of the new EU Fertilisers Directive will be implemented.  Works will continue to implement research programmes and to participate in international research co-operation.  The new Apiculture Programme 2016–2019 will be implemented, with the main objective to develop the apiculture sector, improving the conditions of producing and marketing apicultural produce.  Works will continue to implement the Estonian food marketing and sales promotion plan “Estonian Food 2015–2020”.  Works will continue to implement the “School Milk Plan” and the “School Fruit and Vegetable Plan”, in order to shape healthy consumption habits in children. Development plans of the area of government of the Ministry of Rural Affairs are available

77 here: http://agri.ee/et/eesmargid-tegevused/valdkondlikud-arengukavad-ja-strateegiad European Maritime and Fisheries Fund (EMFF) 2014–2020: http://www.agri.ee/et/eesmargid-tegevused/euroopa-merendus-ja-kalandusfond-emkf-2014- 2020 Development Plan of the area of government of the Ministry of Rural Affairs: http://www.agri.ee/et/ministeerium-kontakt/arengukava

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2.16. Development of civil society

Sector’s objective and indicators Action-capable citizen associations and socially active residents. Important activities in 2015 and 2016 to fulfil the target levels Under the sub-goal “The participation of citizen associations in policymaking is natural and valued in the society” of the performance area  In 2015, the analysis of the user experience of e-participation environments and the vision of developments of such environments were completed. The goal is to reduce or prevent the provision of similar services in different channels, by integrating them into a unified whole that is understandable and convenient for users and also provides policymakers with better overview of the parties’ contributions.  In spring 2016, the non-governmental online discussion platform rahvaalgatus.ee was completed in co-operation between Estonian Cooperation Assembly and the Riigikogu, enabling every citizen to raise problematic issues and make suggestions in an electronic environment. The sub-objective “Effect of citizen associations on the prevention and solution of social problems as well as on the improvement of the people’s welfare has grown due to social innovation, social entrepreneurship and the provision of public services” has the goal of making citizens associations into capable and effective preventers and solvers of the society’s problems. For that, social innovation, social entrepreneurship and/or the provision of public services will be used.  At the start of 2015, a competition was organised to find a strategic partner; the competition was won by the Network of Social Enterprises (MTÜ Sotsiaalsete Ettevõtete Võrgustik).  With the support of the National Foundation of Civil Society, the Network of Social Enterprises implemented a development programme to involve volunteers for the purpose of increasing the capability of NGOs providing public services in the social field, involving volunteers for that. As a result of the programme, the development need analysis reports for 11 NGOs were prepared together with recommendations, and the results of organisational assessment of eight NGOs became clear. Also, the profiles of NGOs, the business sector’s possible partners, the NGOs’ volunteer involvement and management plans, and the relevant programmes were mapped.  A development plan of social entrepreneurship was carried out, founding ten new social enterprises in ten counties in the strategic sectors of the Ministry of Social Affairs. The founded enterprises help solve social problems and increase employment. Under the sub-objective “Capable citizen associations having sufficient resources for development and effective activity”, Estonian Village Movement “Home Region” (MTÜ Eesti Külaliikumine Kodukant) developed the concept of Volunteer Friend’s badge in 2015. The badge is intended to increase the quality of the voluntary activities of associations. Also, Estonia’s participation in the activities of the Centre of European Volunteers (CEV) was restored, which provides an overview of the experience and practices of volunteer activities in Europe, as well as an opportunity to establish new co-operation contacts and to protect interests if necessary.

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Target level Target Base Actual Indicator level 2016 2017 2018 2019 2020 level 2015 2015 Overall sustainability of Estonian civil society 2.0 2.0 2.0 2.0 2.0 1.9 1.9 1.9 Source: NGO Sustainability Index (2013) (2014) (USAID) (results published about the previous year)

Proportion of citizen No No No associations receiving aid from surve survey survey three or more funding sources 38% y will will be will be 40% 41% 43% 45% (2014) be Source: survey conduc conduc condu Institutionalisation of citizen ted ted initiatives in Estonia cted

Rate of participation and Results average volume of voluntary 31% / will 32%/ 33%/ 35%/ 36% / 36% / activities 63 32%/68 become 68 70 80 90 90 hours hours Source: survey clear in hours hours hours hours hours (2013) Institutionalisation of citizen 2017 initiatives in Estonia

Important activities to fulfil the targets of 2017–2020  More detailed statistical information will be collected about NGOs through the network of funders, facilitating co-operation between them and organising the funding processes;  Works will continue to develop the e-participation channels, in order to ensure e- democracy;  Works will continue to inform the target groups about social innovation and social entrepreneurship, through the task group;  Works will continue to involve more volunteers than before in NGOs. More information about the fulfilment of the Civil Society Development Plan and its Operational Programme is available here: https://www.siseministeerium.ee/et/tegevusvaldkonnad/kodanikuuhiskond.

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3. FISCAL FRAMEWORK The budget strategy and its fiscal framework are based on the economic forecast of the Ministry of Finance from spring 2016; this forecast is available on the web page of the Ministry of Finance24. The main indicators of the economic forecast are presented in Appendix 1. The new State Budget Base Act entered into force in March 2014, with the aim to establish legal bases and basic requirements for guaranteeing Estonia’s economic and budgetary sustainability in the long term. It also transposed the Council Directive 2011/85/EU on the requirements for budgetary frameworks of the Member States into the national law. The Act establishes budgetary position rules, pursuant to which the state budget must be prepared so as to ensure that the general government’s structural budgetary position is at least in balance. Requirements concerning principal activity’s results and net debt burden are established for the central government’s legal persons, with the objective to aid in achieving the general government’s25 structural balance. Pursuant to the State Budget Strategy, conservative fiscal policy compliant with the provisions of the Base Act will be continued in the next four years, and the budget expenditure will be planned according to possibilities.

3.1. Fiscal policy objectives of the Government of the Republic The main objective of the Government’s fiscal policy is to support macroeconomic stability via the flexibility and efficiency of markets and to manage the risks that threaten the balanced development of the economy. The medium-term budgetary objective of the Government is at least the general government structural balance that meets the requirements of the State Budget Base Act, the Maastricht Treaty and the Stability and Growth Pact. The Government’s objective is to guarantee a sustainable fiscal policy that ensures macroeconomic balance. The goal is to make fiscal policy decisions that support maximum macroeconomic stability, manage the risks that threaten the balanced development of the economy, and improve the economy’s growth potential and increase employment. The existence of adequate reserves and flexibility in the budget for making changes in the structure of revenue and expenditure must be guaranteed in order to cope with future economic downturns. Fiscal policy decisions are made simultaneously (i.e. only in the budget (strategy) process), decisions are sustainable (the long-term impact of decisions is considered) and take maximum account of sector policies and the activities of other levels of the general government; and all funding sources (European Union grants, proceeds from sales of greenhouse gas emission allocations, etc., in addition to tax revenue) are uniformly regarded. The challenge before Estonian Government is to adopt better decisions when directing limited resources to solve difficult challenges. Estonia currently uses a presentational results-based budget. A long-term objective is to move towards budgeting using more information on

24 http://www.fin.ee/majandusprognoosid 25 The general government covers public sector entities that are not considered market producers and are financed mainly via payments made by entities belonging to other sectors. The general government in Estonia consists of three sectors: 1) central government – institutions on state budget, as well as foundations, legal persons governed by public law and companies founded by the state; 2) local governments – institutions at the level of local governments; 3) social security funds – the Health Insurance Fund and the Unemployment Insurance Fund.

81 results. To increase results-based decisions in budgeting and to make the budget more transparent, activity-based budgeting is taken into use. As a prerequisite for implementing activity-based budgeting and to unify the accounting principles used in budgeting and accountancy, accrual- based budgeting will be taken into use. Estonia plans to transition to an accrual-based budget in 2017 and to activity-based state budget by 2020.

3.1.1. Budgetary position objective of the general government The Government will continue with a countercyclical or neutral fiscal policy and its medium- term objective is a structural balance or surplus of the general government’s budget. This objective is in line with the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union and the new State Budget Base Act entered into force in March 2014. Planning a balanced budget position helps stimulate the economy while the economic growth is slow. In 2009-2011, Estonian general government was in structural surplus. In the years 2012-2013, it turned to structural deficit caused by nominal deficit amplified by the GDP volume increasing beyond capacity (i.e. a positive output gap). In 2014-2015, a structural surplus was achieved again with the help of a nominal surplus. The structural surplus is forecasted to be retained in 2016 as well, albeit in smaller extent. The next year’s target is set to be the retaining of a 0.2% structural surplus and then structural budgetary balance until 2020. If the objectives are achieved, the general government’s nominal budget will be nearly balanced (a deficit of 0.1% of GDP) in 2019 and in surplus (0.1% of GDP) in 2020, which will make it possible to restore the reserves that had decreased during the recession. No positive supplementary budgets will be prepared during the fiscal year and any extra tax revenue received in the budget will be placed into the reserves.

3.1.2. Tax burden objective The Government’s objective is to retain the tax burden at the level of 2015 (about 33.5% of GDP) and to reduce labour-related taxes. The tax burden in 2016 will be 34.2% of GDP. In the period of 2016-2020, the tax burden will be reduced by the increase of basic tax-free allowance and additional tax-free allowance of pensions and the decrease of social tax rate to 32%, the tax benefit of expenses related to health and sports, the increase of the value added tax payer’s registration threshold to 40,000 euros, as well as the implementation of the tax returns of low-income persons. Technically, in the period of 2016–2017, the increased state contributions into the mandatory funded pension for those who continued their own contributions will have an alleviating effect on the tax burden. First of all, an increase of excise duties (alcohol, tobacco and fuels) and the increase of value added tax rate from 9% to 14% for accommodation services, as well as the establishment of road use tax for heavy vehicles, planned changes in package excise, and changes in the taxation principles of foreign business travel pay will increase the tax burden. In summary, the tax burden will remain at a level comparable to 2015, dropping to 33.4% of GDP by 2020. The future developments are discussed in detail in the chapter on tax policy, tax burden and tax expenditure.

3.2. Budgetary position of the general government In 2015, the general government’s budget remained in surplus, making up 0.4% of GDP i.e. 91 million euros according to the initial data of Statistics Estonia. All government levels were in surplus – the central government and social security funds by 0.1% of GDP and local

82 governments by 0.2% of GDP. The surplus of both the central government and local governments was achieved due to better than forecasted tax receipts, primarily in the part of corporate income tax and personal income tax, social tax, and lower than expected investments. The central government’s surplus was also increased by lower than planned pension expenses. The result of social security funds was better than expected mainly due to less than forecasted funds being spent on active labour market measures. The general government’s structural budgetary position of last year was in surplus by 1% of GDP. The nominal deficit of 2016 is forecasted to be 0.4% of GDP. The main sector causing that deficit is general government, but local governments are also forecasted to remain in deficit for the entire forecast period. The nominal deficit of the central government is caused by lower dividend revenue and environmental charges due to difficulties in the oil shale sector. The deficit is reduced by the lowering of the forecast of pension expenditure and by a higher growth of tax revenue due to better receipt of direct taxes. Thanks to the Unemployment Insurance Fund, the social security funds continue to be in surplus (0.1% of GDP in 2016). In 2017, the general government’s budgetary position will improve somewhat compared with the spring forecast, due to the revenue and expenditure measures approved in the Government of the Republic, but the deficit will still remain at the level of 0.5% of GDP. Those measures will have a positive effect on the position of the state budget; the rest of the government levels will remain at the spring forecast’s level. The measures are described in more detail in the chapter on state budget revenue and expenditure and taxation changes. In 2018, the general government’s budgetary deficit is expected to decrease to 0.2% of GDP and the improvement of the nominal budgetary position will continue in 2019 and 2020. Table 1. Budgetary position objective of the general government for 2015–2020 2015 2016 2017 2018 2019 2020 Structurally adjusted budgetary position of 1.0 0.3 0.2 0.0 0.0 0.0 general government (% of GDP) Nominal budgetary position of general 0.4 -0.4 -0.5 -0.2 -0.1 0.1 government (% of GDP) State budget 0.1* -0.2 0.1 -0.4 0.0 0.1 incl. state pension insurance -1.9 -1.6 -1.0 -0.8 -0.7 Other central government -0.1 -0.3 0.3 0.0 0.1 Social security funds 0.1 0.1 0.1 0.1 0.1 0.1 Local governments 0.2 -0.2 -0.3 -0.2 -0.2 -0.2 Nominal budgetary position of general 91 -83 -105 -51 -19 18 government (m EUR) State budget 21* -44 22 -103 1 16 incl. state pension insurance -412 -371 -241 -204 -197 Other central government -29 -73 69 -4 18 Social security funds 24 29 23 22 25 27 Local governments 46 -38 -77 -40 -41 -42 * The central government’s position. Statistics Estonia publishes data by the central government’s, social security funds’ and local governments’ level. Source: Statistics Estonia, Ministry of Finance.

83 Figure 1. Budgetary position of the general government

m euros % of GDP 600 4 3 400 2 200 1 0 0 -1 -200 -2 -400 -3 -600 -4 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016* 2018* 2020* Central government Social security funds Local governments General government (right axis)

Source: Statistics Estonia, Ministry of Finance.

3.2.1. Cyclically adjusted position of the general government’s budget The methodology used by the Ministry of Finance to estimate the maximum recommended gross domestic product (or the potential GDP26) the production function method. Due to the development of methodologies to assess the potential growth and output gap27, we adopted the so called commonly agreed methodology between European Commission and EU Member States28, starting with this forecast. Compared with the previous method, additional information about capacity utilisation is used when assessing the cyclical component of total factor productivity; this enables to provide more reliable assessments to the economic cycle’s developments that took place in the last couple of years. According to assessments, before the economic crisis the GDP of Estonia increased considerably faster than it should have, considering the resources existing in economy at the time, which created imbalances. The economic growth that could be considered manageable for the economy of Estonia before the crisis was about 6%, but it actually reached 10% at times. The growth was based on the rapid inflow of foreign funds as well as the overall optimism of local economic agents, which made domestic demand considerably bigger than total production and income. This excessive demand resulted in a scale of the economy that was up to 15% larger than usual (i.e. a positive output gap) in 2007, which was accompanied by accelerating inflation, a strong deterioration of the trade balance and tension from the excessively intense and inefficient use of resources in the economy, which brought along an increase in their prices. Demand for consumer and investment goods decreased sharply as the uncertainty that started to appear at the height of the boom continued to increase. The global financial crisis that started in autumn 2008 magnified the economic downturn caused by the cyclical behaviour of the economy even further. Global demand also decreased considerably as a result of the financial crisis and caused the scale of foreign trade to decrease by up to one third. The negative output gap of Estonia increased to 9% of GDP in 2009 as a result of this. When the cycle turned and economy started rapidly recovering from the crisis, the negative output gap

26 Potential GDP –maximum GDP using the existing production input (workforce, capital, productivity/skills) without causing excess pressure for price increase. Potential economic growth –change in potential GDP over time. Depends on changes in production inputs. 27 Output gap –the difference between actual and potential GDP. 28 European Commission, 2014. The Production Function Methodology for Calculating Potential Growth Rates & Output Gaps, Economic Papers 535, November 2014.

84 started to decrease and closed at the end of 2011. In 2015, Estonian output gap was close to zero, meaning that the economy was functioning at a level near the potential GDP. As this year’s forecasted economic growth has slowed down due to poor foreign demand, the GDP level will remain about 1% below the potential GDP, but will start to close again as the economic growth accelerates. The output gap will be near zero again in 2018-2020. As the global financial crisis and its aftermaths have been considerably more serious than the usual cyclical volatility of the economy and the overall demand environment has not recovered, countries lost some of their production potential in the course of the crisis. The growth potential of the Estonian economy in the next few years will also be nearly two times lower than before the crisis due to the same reasons, remaining near 2.8% in the forecast period. The estimates29 of the cyclically adjusted position of Estonia’s general government budget found on the basis of the output gap indicate that the fiscal policy of Estonia will be countercyclical in 2015-2017. The fiscal policy of Estonia became stricter in 2015 in the conditions of a GDP level above the potential level and will become more lenient in 2016-2017 when the GDP level will be below the potential level. In the period of 2018-2020, the fiscal policy will be neutral. It should be kept in mind that the impact of a change in the use of external funds must also be assessed in addition to the change in the budgetary position when a final assessment is given to the fiscal policy. Since external funds are neutral with regard to the budgetary position – revenue always equals expenditure –, an increase in the use of funds, for example, is not reflected in changes that occur in the budgetary position. It does, however, provide extra stimulation to economic activities during an economic recess and is a countercyclical political measure in its nature. Table 2. Cyclically adjusted budgetary position (% of GDP) 2003– 2015 2016* 2017* 2018* 2019* 2020* 2014

1. Real GDP growth (%) 3. 4 1. 1 2. 0 3. 0 3. 3 3. 0 2. 8 2. Budgetary position of the general - 0.4 -0.4 -0.5 -0.2 -0.1 0.1 government 3. Interest payments - 0.1 0.1 0.1 0.1 0.1 0.1 4. Potential real GDP growth (%) 3.2 2.8 3.0 2.7 2.9 2.7 2.7 4.a Contribution of capital to potential 2.2 1.0 1.0 1.0 1.1 1.1 1.2 growth (%) 4.b Contribution of labour to potential -0.3 0.6 0.6 0.2 0.2 -0.1 -0.2 growth (%) 4.c Contribution of productivity to 1.3 1.2 1.4 1.5 1.6 1.7 1.7 potential growth (%) 5. Output gap 2.9 0.1 -0.9 -0.6 -0.2 0.0 0.2 6. Cyclical budget component - 0.0 -0.4 -0.3 -0.1 0.0 0.1 7. Cyclically adjusted budgetary position - 0.4 0.0 -0.2 -0.1 -0.1 0.0 (7)=(2)-(6) 8. Cyclically adjusted primary position - 0.5 0.0 -0.1 0.0 0.0 0.1 (8)=(7)+(3)

29 According to the methodology renewed by the European Commission in 2014, the semi-elasticity applied to compute the cyclical component of the budget balance was 0.44 in the case of Estonia (see also http://ec.europa.eu/economy_finance/publications/economic_paper/2014/ecp536_en.htm).

85 2003– 2015 2016* 2017* 2018* 2019* 2020* 2014 9. Fiscal policy position - Coun- Coun- Coun- Neutr. Neutr. Neutr. tercyc. tercyc. tercyc. * - forecast.. Source: Ministry of Finance, Statistics Estonia.

Figure 2 Development of potential GDP and output gap (%)

15 12 9 6 3 0 -3 -6 -9 -12 -15 2001 2003 2005 2007 2009 2011 2013 2015 2017* 2019* GDP gap (% of potential GDP) Real growth of Estonian economy Growth of potential GDP

* - forecast. Source: Ministry of Finance, Statistics Estonia.

3.2.2. Structural position of the general government’s budget The structural budgetary position of general government is calculated by removing not only the impact of the economic cycle but also one-off and temporary measures, which may distort the budgetary position, from the nominal position. Measures that have a significant impact on the budget but only a temporary and non-recurring significant impact on the cyclically adjusted budgetary position (on the scale of at least about 0.1% of GDP) are called one-off and temporary measures. Although general principles have been defined for classifying the impact of a measure as temporary, the consideration of each specific case is decided separately. The Government's objective is to achieve a structural surplus of 0.2% of GDP in 2017 and structural balance 0.0% of GDP in 2018-2020.  Suspension of funded pension payments in 2009–2011 and a higher contribution rate in 2014–2017 From 1 June 2009 to 31 December 2010, the state contributions to funded pension were suspended. Those who wished could file a petition to continue with their own contributions in 2010. As an exception, people born in 1954 and earlier retained the possibility to continue the contributions from 2010 pursuant to the 2%+4% system in

86 force until then. Starting with 1 January 2012, the contributions to funded pension were restored in full. Those who continued with voluntary contributions in 2010 are automatically subject to the contribution rates of 2%+6% in 2014–2017, where the person pays 2% and the state adds 6%. Such persons are also entitled to file a petition to increase their own contribution from 2% to 3% (in that case the scheme used will be 3%+6%). Those who did not continue with voluntary contributions in 2010 had also an opportunity to file a petition to make contributions according to the 3%+6% system in 2014–2017. The expenditure related to restoration of funded pension contributions and a higher contribution rate in comparison with the previous year are stated in Table 14. Table 3. Percentages of funded pension contributions, 2010–2018 1942-1954 1942-1954 1955-... 1955-...

do not continue do not continue continue continue 2010 2+4 0 2+0 0

2011 2+4 1+2 2+2 1+2

2012-2013 2+4 2+4 2+4 2+4 2014-2017 2+4 2+4 2+6 2+4 2014-2017 if so wished - 3+6 3+6 3+6 2018 2+4 2+4 2+4 2+4 Source: www.pensionikeskus.ee  Revenue from sales of AAUs and investment expenditure related to the revenue. The AAUs are accounted only as those assigned under the Kyoto Climate Treaty, the trading period of which lasted until the end of 2012. Revenue from sales of those AAUs was received in the period of 2010–2013 and investments will be in the period of 2011–2015.  Merger support for local governments The merging of local governments will be supported by a forecasted total of 65 m EUR in 2017-2019. The expenditure of that administrative reform is temporary, larger-scale and profitable in long term. Table 4. One-off measures and their impact, 2015–2020 (m EUR) 2015 2016* 2017* 2018* 2019* 2020* Revenue from sales of AAUs -63 -3 -1 Second pension pillar contributions, 2+6 and -55 -59 -63 3+6 Merger support for local governments -14 -28 -23 Total, m EUR -119 -63 -77 -28 -23 0 Total, % of GDP -0.6 -0.3 -0.3 -0.1 -0.1 0.0 * - forecast. Source: Ministry of Finance. Table 5 Structurally adjusted budgetary position, 2015–2020 (% of GDP) 2015 2016* 2017* 2018* 2019* 2020* 1. Cyclically adjusted budgetary position 0.4 0.0 -0.2 -0.1 -0.1 0.0

87 2015 2016* 2017* 2018* 2019* 2020* 2. One-off measures -0.6 -0.3 -0.3 -0.1 -0.1 0.0 3. Structurally adjusted budgetary position 1.0 0.3 0.2 0.0 0.0 0.0 (3)=(1)-(2) * - forecast. Source: Ministry of Finance, Statistics Estonia.

3.2.3. Budgetary position of the central government The biggest part of the central government, which comprises about three-fourths of the general government, is agencies financed from the state budget (constitutional agencies and ministries with their areas of government). The central government also includes foundations established by the state (hospitals and the Environmental Investment Centre have the biggest impact), companies that mainly provide services to the state (e.g. AS Riigi Kinnisvara) and agencies governed by the public law (e.g. universities, Estonian Public Broadcasting).

Figure 3. Revenue, expenditure and budgetary position of the central government

m euros % of GDP 8000 3 6000 2 4000 1 2000 0 0 -2000 -1 -4000 -6000 -2 -8000 -3 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 Expenditure Series3 Budgetary position (right axis)

Series3 = Revenue Source: Statistics Estonia. The tax revenue of the state budget, which is the most sensitive to economic development, comprises the biggest part of the central government's revenue. This is why the biggest part of the budget deficit is coming from the state budget when the economic cycle is in a phase of decline. Therefore, the state budget contributed the most to the budgetary surplus during the pre-crisis years. Non-tax revenue, which mainly consists of external support received from the European Union, also comprises a large part of the central government’s revenue in addition to tax revenue. The majority of the central government’s expenditure consists of state budget expenditure, about one-third30 of which are social security expenses (incl. state pension insurance). These expenses are followed by expenditure on economy (incl. agriculture and road construction) and health (allocation to the Estonian Health Insurance Fund). The budgetary position of other central government is the aggregate amount of foundations, commercial undertakings and agencies governed by the public law. Large investments that

30 Based on the state budget for 2016.

88 exceed the revenue of the current year are one of the main factors that influence the budgetary position. The impact on the budgetary position is negative irrespective of whether they are financed from the reserves collected in previous years or with loans. Table 6. Position of the central government 2016* 2017* 2018* 2019* 2020* Central government revenue (m euros) 7,417 7,820 8,351 8,889 9,014 Central government expenditure (m euros) 7,491 7,871 8,385 8,892 8,980 Position (m euros) -73 -51 -33 -3 34 Position (% of GDP) -0.3% -0.2% -0.1% 0.0% 0.1% * - forecast. Source: Ministry of Finance, Statistics Estonia.

3.3. State budget’s position

3.3.1. State budget revenue The state budget’s revenue together with transferable revenue will increase on average by 5.1% per year in 2017–2020. By 2020, the revenue will increase by about 1.92 billion euros compared with 2016, i.e. to 10.7 billion euros. The proportion of tax revenues in total revenues will remain at a similar level throughout the forecast period. The proportion of non- tax revenue will be affected most by the revenue of external funds, which will grow at the start of the forecast period but will decrease at the end due to the end of the current budgetary period of Structural Funds. Figure 4. Volume and growth of state budget revenue (m euros, %)

12 000 12% 11 000 10 000 10% 9 000 8 000 8% 7 000 6 000 6% 5 000 4 000 4% 3 000 2 000 2% 1 000 0 0% 2008 2009 2010 2011 2012 2013 2014 2015 2016* 2017* 2018* 2019* 2020* Tax revenue Transferable revenue Non-tax revenue Growth compared to previous year

* - forecast. Source: Ministry of Finance, Statistics Estonia During the budget strategy period (2017–2020), the tax revenue (without transferable taxes) will show average annual growth of grow 5.7%. Social tax, value added tax and excise duties will constitute the largest part of tax revenues. During 2017–2020, social tax receipts will annually increase by 4.9% on average; the forecasted receipt in 2020 is 3,060 million euros. Tax revenues are influenced mainly by increasing average wage because employment is expected to start declining. For the aforementioned period, the receipt of value added tax will increase on average by 6.1% a year and the forecasted receipt in 2020 is 2,550 million euros. The value added tax forecast is based on a model, according to which the receipt of value added tax for the following periods depends on the growth of the main components of the value added tax base,

89 which make up more than 80% of the total value added tax base (private consumption, general government investments, general government intermediate consumption and residential household investments) and on changes in the value added tax gap. The receipt of value added tax in the budget strategy period will be increased by an increase of the value added tax rate on accommodation services from 9% to 14% in 2017 and also by annual increases in excise duties. In 2017–2020, the receipt of excise duties will annually increase by 6.8% on average; the forecasted receipt in 2020 is 1,220 million euros. The forecasted receipts will also be increased by growing excise duties on fuel, alcohol and tobacco. Figure 5. Comparison of revenue planned in State Budget Strategy 2016-2019 and in the previous state budget strategy (million euros)

12000 10000 8000 6000 4000 2000 0 2016* 2017* 2018* 2019* 2020*

SBS 2016-2019 SBS 2017-2020

* - forecast. Source: Ministry of Finance. Compared with the previous State Budget Strategy, the forecasted state budget revenue is expected to increase in 2016, 2018 and 2019 and be lower in 2017. The forecast of tax receipt has been adjusted upwards regardless of the deteriorating macroeconomic indicators; the predicted receipt of external funds has decreased. Changes in tax policies that influence tax receipt and tax incentives that have a negative impact on the receipt of revenues into state budget are described in the chapter on tax policy, tax burden and tax expenditure. The volume of non-tax revenues depends most on external funds; on average, these constitute nearly 3/4 of all non-tax revenue in 2017–2020. The volume of external funds will be the largest in 2019 (1,210 million euros). Financial revenue depends primarily on proprietary income, which is expected to decrease due to the downward adjustment of the forecast of economic results of AS Eesti Energia as a result of low energy prices. The sales of goods and services will enjoy stable growth throughout the period, thanks to the AAU sales.

3.3.2. State budget expenditure According to the spring 2015 forecast prepared by the Ministry of Finance, Estonia’s annual nominal economic growth will be 4.1% this year and should remain at 6% in the period of 2017-2020. The forecasted overall economic progress will also affect state budget expenditure. It means that the economic growth in the period of 2017-2020 can be expected to bring about an increase of expenditure as well. According to the forecast, the volume of state budget expenses in 2016 and 2017 should grow by 4-5% and somewhat less i.e. by 3-4% in 2018-2020. The developments described i.e. the slower growth of state budget expenditure compared with the forecasted growth of GDP will lead to a reduction of the proportion of state budget expenditure in the total volume of Estonian economy. While the factual state budget expenditure of 2015 was 41.9% of GDP, that indicator is forecasted to drop as low as 39.1% by 2020 (Figure 6).

90 According to the forecast, the total expenditure of four years or the period of 2017-2020 will be 40.1 billion euros. Compared withthe previous State Budget Strategy (2016-2019, 37.8 billion euros), total expenditure will increase by 2.3 billion euros or 5.8%. Figure 6. State budget expenditure, 2009-2020 (m EUR)

Source: Ministry of Finance.

3.3.2.1. Expenditure from external funds As the state budget’s total expenditure and GDP will grow faster than the volume of external funds (nominally comparable to that of 2007-2013) and the programming period 2007-2013 ends, the proportion of external funds in financing the state budget’s total expenditure is forecasted to drop from 12% in 2015 to near 10% in 2017-2020. Although the proportion of external funds in the state budget’s total expenditure will decrease, the total volume of the new financing period’s external funds (2014-2020) available to Estonia is nearly 900 million euros higher than that of the previous period. Figure 7. Proportion of external funds in financing total expenditure in 2007-2020 (m EUR)

Source: Ministry of Finance.

3.3.2.2. Investments The general government’s investments involve the funds of the state budget, local government and RKAS budgets for the acquisition and renovation of tangible and intangible fixed assets.

91 The state’s (tax) revenue and external funds (incl. EU and other foreign aid and AAU sales revenue) are used to make investments from state budget. Unlike the calculations of Statistics Estonia, the investments do not account for value added tax. A more detailed overview of the planned use of the AAU sales revenue is provided in Appendix 3. Figure 8. General government’s investments

Source: Ministry of Finance The share of investments in GDP has been in a decline since 2011 and the trend is expected to continue in the forecast period, but the annual dynamics will depend on the capability of using external funds. A total of 4.5 billion euros will be invested in the State Budget Strategy’s period, on average 1 billion euros per year, whereas the state budget’s funds will make up 64% of the total volume of investments. Together with RKAS’s investments, the state’s average annual investment capability increases to 311 million euros, on average 70 million euros of which will be directed to investments in built properties.  A total of 1 billion euros or on average 241 million euros per year will be invested out of the state’s tax revenue; together with RKAS’s investments, the annual investment volume will grow to 311 million euros. The largest construction objects to be completed in the forecast period will be Tallinn Prison, Estonian National Museum, new Tallinn Court House, EU IT Agency’s building, the Health Board’s building and Estonian National Broadcasting’s news studio;  1.9 billion euros (on average 474 million euros per year) will be invested out of external funds, making up 49% of the general government’s investments. The largest investments made with external sounds will be related to the tidying of the upper secondary school and basic school network, the water economy’s infrastructure, and the development of railway traffic;  Local governments are forecasted to invest 0.9 billion euros in the period of 2017-2020. Additionally, the local governments’ companies, non-profit associations and foundations belonging to the general government will invest on average 30 million euros per year from their own funds. The majority of those funds will be used for repairing local roads. The largest projects are Haabersti cross, Reidi road in Tallinn, but also Tartu ring road.

3.3.2.2.1. State’s property investments The state’s investments into buildings will be made mainly through RKAS’s budget, partly also from state revenue and external funds. The volume of investments through RKAS’s

92 budget will be about 70 million euros per year and its share in will be 7% of the general government’s total investments. The estimated annual volume of property investments decided per site is 70 million euros per year. In 2016-2017, the volume of investments decided by the Government has been significantly higher than estimated, which is why the investment volume in 2018-2020 will be lower. The forecast of investments in built properties is provided in Figure. Figure 9. Forecast of investments in built properties, 2016-2020

Decided investments include mainly buildings used and owned by state agencies, but not only that. The largest projects of other central government to be completed in the coming years are EU IT Agency’s building (8.3 million euros), Ugala Theatre (12.3 million euros), Estonian National Broadcasting’s building (5.3 million euros), Arvo Pärt Centre (6.5 million euros), Lilleküla Stadium (5.0 million euros), and the courtyard building of NUKU Theatre (4.6 million euros). The largest decided investments of state agencies are Tallinn Prison (82.8 million euros), Estonian National Museum (40.6 million euros), the new court house in Tallinn on Lubja street (35.4 million euros), the joint building of the Police and the Rescue Board in Pärnu (13.5 million euros), the new building of the Health Board in Tallinn on Paldiski street (7.8 million euros), Maarjamäe complex of the History Museum (9.9 million euros), the representative building of the President’s Office (5.4 million euros), Piusa cordon (4.5 million euros), the office building of the National Audit Office at Toompea (3.3 million euros), and EU representation in Brussels (1.3 million euros). In spring 2016, five sites received a construction decision and are ready to enter construction procurements: the renovation of the embassy in Moscow, Vändra rescue base, Vastseliina rescue base, the reconstruction of Estonian Knighthood House to be the state’s representative building, and the administrative building of the Seaplane Harbour with its access roads and utility networks. In spring 2016, a design decision as made for three sites: the School of Fine Arts, bringing G. Ots Music School, Tallinn Music Upper Secondary School and Tallinn Ballet School into the

93 new study building to be completed in Tallinn, Pärnu mnt 59; the designing of the Memorial of Communism Victims at Tallinn, Maarjamäe; the renovation of the Supreme Court’s building. The design cost of those three sites is stated in the investment amount in Figure 7; forecasted costs of the construction design to be made upon completion of the design are in the amount booked for long-term decisions. Guided by the estimated average investment volume of 70 million euros per year, the free volume for decisions will be 0 million euros in 2017, 1.6 million euros in 2018, 25.0 million euros in 2019 and 42.7 million euros in 2020. Taking into account that one of the priorities of the Government is to implement the state reform and the entailed relocation of state agencies, the volume of reconstruction of office buildings in county centres could be estimated as about 3-10 million per year in the next few years; this would enable to tidy the state’s use of premises in two to four county centres per year. For office buildings, co-operation opportunities with the private sector need to be sought. In the budgeting process of 2017, new decisions can be made only about extremely critical investments and only in projects related to the reduction of premises used and costs made. The share of external funds in funding property will be marginal in the coming period. No investments into built properties of state agencies are planned from EU Structural Funds (except municipal upper secondary schools and a few exceptions). The estimated investment volume needs to be reassessed. Until now, the assessment of the estimated volume has been guided by only the investment needs of state agencies, as there is a better overview of those due to funding through RKAS and additional funding from the repair fond is accounted for. The current volume is not sufficient for the investments of all the central government’s buildings (i.e. funding the property of not only state agencies but also the state’s foundations, persons in public law and others). Different volumes and investment rulers must be established for the state agencies, the property portfolio of which is planned to be funded through RKAS’s lease model and for the rest of the central government's buildings. Concerning the buildings of other central government, an overview of the properties and the investment needs has to be prepared before. In the course of reassessing the investment need, better clarity needs to be established about the means available for property investments and about the use of those means. In addition to the investments decided in the Government and the investments funded from external funds, the volume of money to be used for property investments as yet undecided by the Government in the budgets of the areas of government31 for the years 2016-2020 is 29.2 million euros; the volume of money for other investments (not detailed, may also involve property investments) is 47.4 million euros. There largest amounts allocated from the state budget go to the Ministry of Culture (39.4 million euros), the Ministry of the Interior (11.6 million euros) and the Ministry of Economic Affairs and Communications (10.3 million euros). 31.9 million euros are planned for additional investment allocations in the Riigikogu. The decision and monitoring processes of funds to be directed into property need to be tidied, in order to ensure sustainable use of money and optimal investment decisions, as well as feedback about the impact of the costs incurred. A regulation of planning and optimising the state’s property use needs to be established (all activities are in the works in 2016-2017).

3.3.2.3. Expenditure on labour and management

31 Not including the acquisitions for the Ministry of Defence, the acquisitions of land in nature preserves, the investments made in national roads, and external funds and their self-funded contributions.

94 The expenditure on labour and management of state agencies32 for 2017-2020 are planned as 15.5% of the state budget’s total expenditure or 1.6 billion euros per year on average, incl. 1.54 billion euros in 2017, which will include 0.11 billion euros of expenditure depending on revenue (mainly external funds). In 2016, the largest contributors to the increase of expenditure on labour and management of state agencies were funds allocated for the target groups’ wage increase, healthcare and social services, rental payments and repair funds of Riigi Kinnisvara AS, special equipment related to national defence, and funds allocated for the preparations of the 100th anniversary of the Republic of Estonia as well as Estonia’s presidency in European Council. In 2017 – 2020, management costs are forecasted to decrease by 3% and the specific target groups’ wages to increase by 2% (teachers, cultural workers, internal security workers, and social and welfare workers). Figure 10. Expenditure on labour and management in the state budget, 2013-2020 (m EUR).

3.3.2.3.1. Labour expenditure 118,393 employees work in the general government33, divided mainly between the central government and local governments. The largest proportion of employees or 62,338 people work in local governments; this makes up about 53% of the total number of general government employees. There are 55,303 employees at the central government level, making up approximately 47% of the total number of general government employees. The remaining 752 employees work in social security funds (the Health Insurance Fund, the Unemployment Insurance Fund). The number of general government employees has decreased by 663 or by 0.6% in 2015. The decrease was the largest in the central government where the number of employees dropped by 510 or by 0.9%. The number of employees in local governments has dropped by 165 or by 0.3%.34 The number of employees in social security funds increased by 12

32 State agencies are the state’s agencies and their subordinate agencies as well as constitutional agencies and agencies in the latter’s area of administration. 33 For the purpose of this chapter, the number of employees is considered to be the annual average number of full-time equivalent employees. 34 The sectoral changes of institutions have been deducted when calculating the net change in the number of employees: 1) Rapla County Hospital networked with North-Estonian Regional Hospital and moved from local governments to the central government (212 employees). 2) Narva Orphanage and Tilsi Orphanage were transferred from the county governments to the local government and moved from the central government to local governments (53 employees).

95 employees or by 1.6%. Comparing the number of the general government employees in 2008 (as the top of the economic boom) and in 2015, the number of employees has decreased by 2.4% over that period or on average by 0.3% per year over the course of seven years. The largest decrease of the number of employees happened in 2010, after which it remained stable until 2013. The number of employees started to increase again in 2014, but then turned to a declining trend again last year.

Figure 11. The number of general government employees has decreased by 2.4% or on average 0.3% per year. In 2008-2015.

Source: balance data information system of the Ministry of Finance. Looking more specifically at the central government level (55,303 employees), little over half of the employees there (31,435) work in agencies operating on the state budget. 12,967 employees work in foundations and 9,272 in legal persons governed by the public law, making up 23% and 17% of the central government’s employees, respectively. The remaining 1,630 employees or 3% are employed in companies and non-profit associations. At the central government’s level, the biggest decrease of the number of employees in 2015 occurred in companies and non-profit associations, i.e. by 6.7% (by 116 employees). The largest reduction took placed in Riigi Kinnisvara AS (by 113 employees) and in AS Hoolekandeteenused (by 51 employees). The number of employees grew the most in AS Eesti Liinirongid (by 22 employees). The number of employees in legal persons governed by the public law decreased by 3.4% (by 314 employees) and the biggest decrease took place in Tartu University (by 153 employees), in Estonian National Library (by 34 employees) and in Estonian University of Life Sciences (by 33 employees).

96 In state agencies, the number of employees decreased by 1.5% (by 486 employees).35 The biggest decrease took place in the area of government of the Ministry of Education and Research where the number of employees decreased mainly on account of institutions of professional higher education and vocational education institutions (by 223 employees) and in the area of government of the Ministry of the Environment (by 58 employees). The number of employees of foundations has increased by 5.7% or more than by 700 employees.36 The largest increase took place in North-Estonian Regional Hospital (by 268 employees), in Innove Foundation (by 123 employees), in Tartu University Hospitals (by 85 employees) and in Estonian Research Agency (by 61 employees). The decrease and aging of the population will lead to a situation where the employment-age population will decrease by an average of 0.7% per year in the next five years. The Government’s decision is to set a target to keep the ratio of the general government’s number of employees to the employment-age population at the level of 2014 (12%), meaning that the number of employees in the general government will need to be reduced by an average of 0.7% or by about 700 employees per year. In 2015, the number of employees in the general government decreased by 0.6% and this decrease has certainly been affected partly by the task of reducing the number of employees assigned to the areas of administration. In 2015, the ratio of the general government’s employment to the total employment-age population remained stable, meaning that the number of employees in the general government decreased in the same proportion with the reduction in the employment-age population. Figure 12. The ratio of the general government’s employment to the total employment-age population remained stable in 2015.

35 The sectoral changes and legal form changes of institutions have been deducted when calculating the net change in the number of employees: 1) ) Narva Orphanage and Tilsi Orphanage were transferred from the county governments to the local government and moved from the central government to local governments (53 employees). 2) Pärnu Museum and Estonian Philharmonic Chamber Choir were reorganised from administrated institutions into foundations (78 employees). 36 The sectoral changes and legal form changes of institutions have been deducted when calculating the net change in the number of employees: 1) Rapla County Hospital networked with North-Estonian Regional Hospital and moved from local governments to the central government (212 employees). 2) Pärnu Museum and Estonian Philharmonic Chamber Choir were reorganised from administrated institutions into foundations (78 employees).

97

Source: balance data information system of the Ministry of Finance In 2015, general government’s labour expenditure grew by 7% compared with 2014.37 The highest increase of labour expenditure i.e. by 12% took place in social security funds where the labour expenditure has shown a continual upwards trend in the recent years. The labour expenditure increased by 8% in local governments and by 7% in the central government. Figure 13. The general government’s labour expenditure grew by 7% in 2015.

Source: balance data information system of the Ministry of Finance Within the central government, labour expenditure increased the most in foundations (14%) and in companies and non-profit associations (15%). The labour expenditure of legal persons governed by the public law grew by 4% and that of state agencies grew by 5%. In 2015, the general government’s labour expenditure was 10.5% of GDP and this ratio has been in a slight increasing trend for the past 3 years. As a result, the general government has exited the decline phase and spends the same share of the society’s resources on the general government’s labour expenditure as in 2008. The increase of average wage in the general government, incl. the central government was somewhat faster than Estonian average wage in 2015 and the salary position improved by two percentage points. Estonian average wage increased by 6% and the general government’s average wage increased by 8% in 2015. In the recent years, the wage growth in the general government has been faster than in the salary market as a whole and it has been justified too, because we experienced a significant loss of our salary position in the crisis period but if the general government’s wage growth remains faster than that of the salary market then the general government will be the driver of wage growth, which may jeopardise the sustainable functioning of the economy. The general government’s average wage relative to Estonian average monthly wage has almost returned to the level of 2008, and the 2008 level of the central government is already being slightly exceeded.

37 Labour expenditure from all sources, to only the state budget.

98 Figure 14. In the recent years, the wage growth in the general government has been faster than in the labour market as a whole.

Source: balance data information system of the Ministry of Finance The average monthly wage relative to Estonian average monthly wage has improved the most in the sectors of social protection and healthcare, as well as recreation and culture, and education. All those sectors were allocated more funds for wage growth in 2015.38 National defence is the only sector where the average wage grew in a slower tempo than Estonian average wage in 2015.

38 In 2015, in addition to the central 3% increase of salary fund, 1,5% of added funds were allocated to physicians, ambulance workers, cultural workers, teachers, social welfare workers and workers of internal security.

99

Figure 15. The average wage has grown the fastest in the sectors of social protection and healthcare in 2015.

Source: balance data information system of the Ministry of Finance In 2016, no additional funds for general wage growth were allocated from the state budget; 4% added funds were allocated for teachers, cultural workers, social welfare workers and internal security workers. This means that in most agencies, wage increases can take place only on account of their internal resources. Considering the volume of personnel expenditure freed from the reduction of the volume of governance (i.e. the number of employees) as well as the efforts of agencies to direct additional funds into the personnel expenditure budget, this year’s wage growth can still be forecasted to have quite a similar speed to that of the market. The initial analysis of the wage changes implemented in agencies in 2016 will be completed under the public sector’s wage study by August this year; based on that, the speed of the actual wage growth can be assessed and suggestions for the wage growth of 2017 can be proposed.

3.3.2.3.2. Management expenditure The management expenditure of state institutions has increased by 39% in six years. The highest growths in that period were: 117% in the expenditure on defence and special equipment, 66% in the expenditure on social services and 43% in the expenditure on property. The largest share of management expenditure or 20% is made up by the expenditure on social services. The smallest growth or 8% took place in the administration, official travel and training expenditure of state agencies and while the proportion of that expenditure was 20% of all management expenditure in 2010, the share had decreased to 15% by 2015. The share of expenditure on information and communications technology has remained at 6% throughout six years and has grown by 28% in this period. A more detailed overview of the proportions and dynamics of management expenditure in the past six years is provided by the figure below.

100 Figure 16. Dynamics of management expenditure (m EUR) and proportions (%) in 2010-2015.

Management costs of the state’s property The management costs of the state’s immovables, buildings and premises make up 18% of all management expenditure; this proportion has remained stable in the range of 16-18% for years. In relation to the implementation of the state’s property reform, the property expenditure has grown by 43% in comparison with 2010. With the implementation of the state’s property reform and the transition to the lease model, the expenditure structure in the state budget will change: the share of lease expenditure to RKAS in the total management expenditure will significantly increase, while that of the investment expenditure made from the state budget as well as the personnel expenditure and other management expenditure related to the upkeep of the buildings will decrease. Investments will be reflected in the budgets of state agencies either as lease within management expenditure or as principal amounts of loans and interest payments within financial expenditure. In long term, funding through the lease model and making investments through RKAS means transitioning to stable funding of property through lease payments where the lease price includes all costs related to the property, incl. the effect of investments made and the repair costs to retain and restore the quality of the buildings. If the state’s needs were stable, the buildings were in good condition and the funding were sufficient then the state’s property expenditure would be funded by lease payments alone. The property expenditure of state agencies in 2015 were 129.2 million euros (management expenditure of immovables, buildings and premises as well as financial lease payments to RKAS, together with value added tax, without the principal amount of the financial lease and without investments). The forecast of property expenditure in 2016 when preparing the state budget for 2016 was 134.5 million euros. In the past six years, the state’s property expenditure has grown by 44% or by an average of 7% per year. The management expenditure forecasted for 2020 is 256.3 million euros, making the 4 year growth of the coming SBS period be 121.7 million euros or a total of 90% and an average of 23% per year. Accounting also for the effect of the completion of investments currently in the works and waiting for a continuation decision, the growth is 129.0 million euros (comparison of 2020 with 2016).

101 Figure 17. Property expenditure of state agencies, 2010-2020

Property expenditure of state agencies, 2010-2020 Mln euro – m EUR 300 000 000

200 000 000

100 000 000

0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Services bought from RKAS (contracts signed) Services bought from other service providers Additional municipal upper secondary schools Net effect of investments in the works and waiting for a continuation decision Cost increase after the transition period (200,000 m2 per year) Increase of the repair component in RKAS contracts Repair costs of the MFA, constitutional agencies and Government Office

The reasons for the cost increase are related mainly to the implementation of the state’s property reform and the transition to the new funding model characterised by a structural change in the funding – an increase in the proportion of management expenditure and a decrease of the proportion of investments:  Increase of repair costs (41%, green in the figure below) – the planned increase of the repair costs is the prerequisite for the transition to stable funding and will reduce the need for one-off investments in the future. In the contracts signed with RKAS, the repair cost increase in 2019 is a one-off cost of 37.3 million euros, and in representative buildings (foreign embassies, constitutional institutions and Government offices) it is 2.6 million euros. The growth of RKAS’s repair component accounts for the increase of the expenditure from the current level implemented after the transfer i.e. 24 euros/m²/year (1.5% of the construction cost per year) to the level of 47 euros/m²/year (3% of the construction cost per year) starting with 2019. There are plans to increase the repair costs of foreign embassies, constitutional institutions and Government offices to the same level as well, as those are not intended to transition to the RKAS lease model. The effect of increasing the repair component of RKAS will also continue in 2020 (49.2 million euros compared with 2016, 11.9 million euros per year compared with 2019) and in 2021-2022 due to the 2-year transition period to be applied upon handover of assets.  Investments (29%, red in the figure below) – the net effect of the decided investments made through RKAS (i.e. accounting also for the impact of the contracts being ended) is 26.5 million euros; the effect of projects in the works and waiting for a continuation decision is 7.3 million euros, plus municipal upper secondary schools with 2.6 million euros (all amounts in 2020 compared with 2016).  The effect of handover of buildings to RKAS (28%, yellow in the figure below) – the effect of buildings handed over in 2015-2016 is 2.7 million euros, the effect of handovers planned for the subsequent years as 200,000 m² per year is 25.4 million euros (all amounts in 2020 compared with 2016). The effect of the handover of buildings to RKAS will also continue in 2021-2022 as a result of the 2-year transition period applied upon handover of assets. After the implementation of the state property reform and the transition to the RKAS lease model, the management expenditure will be supplemented by lease (capital expenditure upon the transferring and leaseback of assets), the repair component (at the agreed level of 24 euros/m²/year; the increase to the level of 47 euros/m²/year is taken into account in the growth of repair expenditure), service costs (for

102 activities thus far performed with own labour like administration, cleaning and security services, the personnel costs will be replaced with management costs; the costs of activities thus far not performed or performed unsystematically will be added, like technical maintenance).  Other increases and decreases in the contracts signed, incl. the price change of services (3%, blue in the figure below) – 3.9 million euros. Figure 18. Factors of the planned property management expenditure growth of state agencies (2020 vs 2016).

3.3.2.4. Social and healthcare expenditure In 2017-2020, the share of social and healthcare expenditure in the state budget will be 47%- 50%, whereas social expenditure will make up 34%-36% of the state budget and healthcare expenditure will make up 12%-13%. In 2020, the amount of social and healthcare expenditure will reach 5,218 billion euros, which is an increase by 788 million euros (17.7%) compared with 2017.

103 Figure 19. Social and healthcare expenditure, 2009-2020

Source: Ministry of Finance. Social and healthcare expenditure, 2009-2020

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Social and healthcare expenditure (billion 2,791 2,748 3,002 3,274 3,514 3,682 3,965 4,190 4,430 4,773 5,103 5,218 euros)

% of state budget 44% 43% 42% 44% 46% 46% 46% 47% 48% 48% 49% 50%

Source: Ministry of Finance. The largest expense type is pensions (pillars I and II), making up on average 49% of social and healthcare expenditure. Compared with 2017, pension costs will grow by 144 million euros (8.3%), including state pension insurance costs by 133.9 million euros (8%), special pensions by 10.3 million euros (18.5%). Pensions will grow primarily due to an increase in the pension index and the number of recipients. National pensions and pension supplements will decrease by 0.8 million euros (4.2%) compared with 2017, due to incapacity for work pensioners moving to the work capacity support scheme. One of the most important activities in the period of 2015-2020 is implementation of the work capacity reform, in order to help people with damaged health enter the labour market and remain active there. Under the new work capacity support scheme raames, the old-age pensions on special conditions, the superannuated pension as well as the incapacity for work pensions and survivor’s pensions provided for in special Acts will be reformed. Work ability allowance will be paid pursuant to the Work Ability Allowance Act entering into force on 1 July 2016. Starting with 1 January 2017, the Unemployment Insurance Fund will start assessing the current incapacity for work pensioners reaching the end of their current registered period of permanent loss of work capacity, utilising the new assessment methods. Due to that, the budget of work ability allowance will increase to 339.9 million euros by

104 2020. On the other hand, the budget of state pension insurance will start to decrease as incapacity for work pensioners move to the work capacity support scheme. Those approximately 5,000 people whose permanent incapacity for work is registered indefinitely may choose whether they wish to remain in the old scheme (receiving incapacity for work pension) or join the new scheme. With the implementation of the work capacity reform, the following budgets will increase by 2020:  social tax paid by the state for registered unemployed people in special cases: 35.4 million euros, the budget for 2016: 10.9 million euros;  social tax paid by the state for incapacity for work pensioners and employed persons with partial or missing work capacity in special cases: 45.5 million euros, the budget for 2016: 13.9 million euros. As a result of the growth of receipt of the social tax, the budget for health insurance for the next four years will be 210.9 million euros; the budget for 2016: 1 billion euros. It was decided with the Coalition Programme to decrease the social tax rate by 0.5% starting with 1 January 2017 and to 1% starting with 1 January 2018. The share of the social tax reduction in health insurance will be compensated to the Health Insurance Fund from other revenue in the state budget. Additional funds will be directed to other social expenditure in the period of 2017-2020:  The budget for family benefits will increase to 266 million euros by 2020. It was decided with the Coalition Programme to increase child allowance from 45 euros to 60 euros. Child allowance will be changed as follows: the amount of child allowance will be 50 euros starting with 1 January 2016, 55 euros starting with 1. January 2018, and 60 euros starting with 1 January 2019. The amount of child allowance starting from the third child in the family will not change and will remain as 100 euros per child. Additionally, each family raising three or more children will be courted by additional 200 euros of allowance for families with many children. The amount of the allowance for families with many children depends on the number of children growing in the family – it is 200 euros for families raising three to six children and 370 euros for a family raising seven or more children, which ensures that the income of families with very many children will also increase. The budget for 2016: 194.9 million euros.  The budget for parental benefits will increase by 16.1 million euros (8.5%) over the coming four years, reaching The increase of expenditure is caused by an in creased forecast of average wage as well as an increase of minimum wage.  Monthly allowances for disable persons will increase by 6.4 million euros due to the 63.8 million euros). Moreover, care allowance for parents of children with a profound disability will enter into force on 1 January 2017.  It was decided to establish a maintenance support fund starting with 2017. 7.2 million euros of additional funds per year are allocated to that.  Starting with 2017, a support scheme will be implemented to improve the coping of pensioners living alone; 10 million euros of additional funds per year are allocated to that.  38.9 million euros per year are allocated for the provision of ambulance services. In addition to the foregoing amounts, local governments will also provide social and healthcare services to their residents on account of their own revenue base.

105 3.4. Position of other central government In regard to other units in the central government, the budgetary position of the general government is most of all influenced by large hospitals (SA Põhja-Eesti Regionaalhaigla ja SA Tartu Ülikooli Kliinikum, universities (University of Tartu, Tallinn University of Technology) and Riigi Kinnisvara AS, due to their investments. The total effect of other central government’s agencies will fluctuate from 0.3% of GDP in deficit to 0.3% of GDP in surplus.

3.4.1. Budgetary position of local governments Local governments (a total of 213) have an important role in the performance of public sector functions. They all perform the same functions irrespective of their size. General governance includes the upkeep costs of city governments and rural municipality governments and councils. Economic expenses (incl. housing and utilities) consist mainly of public transport within the rural municipality or city, road or street maintenance in the rural municipality or city, water supply organisation and street lighting. Social protection means upkeep of care homes, provision of social aid and welfare services and providing social protection for families. Upkeep of schools and kindergartens belongs to the area of education. Recreation, culture and religion include upkeep of hobby schools, cultural centres, libraries, museums and sports facilities and also youth work. Other areas make up a smaller part of a local government’s expenditure which includes such activities as e.g. cleaning and organisation of waste management and effluent treatment. The total volume of those expenses on cash basis was 1,670 million euros in 2015 (incl. 114 million euros of liabilities). 67% of this was comprised of personnel and management expenditure. Figure 20. Breakdown of expenses related to the main activities and investments of local governments in 2015, by sectors (m EUR) Other fields; 193

Social protection; 130

General Education; 719 governance; 133

Economy (incl. housing and Recreation, utilities); 290 culture and religion; 204 Source: Ministry of Finance The budgets of local governments are independent, which means that they are responsible for preparing their budgets. The common purpose of tax revenue carried forward from the state budget (income tax and land tax) as well as the equalisation fund and the support fund is to ensure that local governments have sufficient funds to make independent decisions on local matters on the basis of laws. The equalisation fund is intended to equalise their budgetary possibilities. The support fund consists of various types of supports for different fields, making it possible to make labour expenses for teachers, ensure school lunches, pay subsistence allowances and needs-based family allowances, and maintain local roads. Local governments can also apply for project based support from several measures. Other own

106 revenue of local governments include mainly receipts of land tax and environmental fees or revenue sales of goods and services. Figure 21. Breakdown of revenue of local governments in 2015 (m EUR)

Other revenue; 44 Sales of goods and services ; 168 Received support for acquisition of fixed assets; 60

Income tax; 846 Received support for current expenses; 399

Other tax revenue; 71

Source: Ministry of Finance. Local governments undertook an obligation to prepare a budget strategy for 2016–2019 by November 2015. The strategy has remained conservative when planning revenue and expenditure. For example, the assumed income tax receipt for the period is 95 million euros less than the Ministry of Finance’s forecast. Labour costs are planned to be increased by an average of 3% per annum, which is significantly below the forecasted growth of the country’s average wage growth (an average of 5% per annum). The estimated increase of management expenditure is on average 1% per annum. It can be expected that these expenses will be adjusted upwards on-the-go, due to wage increase and inflation pressure. Careful approach has also been used when planning investments for 2016–2019. On average, 160 million euros of own funds per year are planned to be used; this is 12 million euros per year more than in the period of 2012–2015 on average. Surplus is planned to be attained starting with 2018, as a result of conservative planning. This provides a reserve for increasing their expenditure in the relevant budget year. The breakdown of expenditure by areas of activity is mainly affected by changes in investments. Table 7. Breakdown of expenditure of local governments (except funding transactions), by areas of activity39, according to the budget strategies of local governments (m EUR) Area of activity 2014 2015 2016* 2017* 2018* 2019*

01 General public services 137 139 150 152 154 157 02 National defence 0 0 0 0 0 0 03 Public order and security 5 5 5 5 6 6 04 Economy 237 224 319 310 272 260 05 Environment protection 52 52 57 54 54 56 06 Housing and utilities 83 77 83 91 93 88 07 Health care 12 16 17 20 15 15

39 Classification approved by general regulation of state accountancy, based on COFOG.

107 Area of activity 2014 2015 2016* 2017* 2018* 2019*

08 Recreation, culture and religion 208 205 208 221 215 210 09 Education 664 721 755 771 766 772 10 Social protection 123 130 137 144 148 152 TOTAL 1,520 1,569 1,732 1,768 1,724 1,716 * - forecast. Source: Ministry of Finance According to Statistics Estonia, the surplus of local governments and their dependant entities on accrual basis reached 38 million euros in 2015. The surplus was mainly caused by being conservative in expectations concerning foreign aid measures. The Ministry of Finance forecasts that they will remain in deficit in the future, due to increased investment activity. Obligations will be increased to cover this. The budgets of local governments and their fulfilment of those budgets can be viewed in the public funds application40. Table 8. Aggregate indicators of local governments, Ministry of Finance’s forecast (m EUR) Revenue and balance 2015 2016* 2017* 2018* 2019* 2020*

Revenue 1,598 1,646 1,711 1,801 1,877 1,940 - Income tax 853 889 931 986 1,043 1,100 - Land tax 58 59 59 59 59 59 - Equalisation fund 75 76 76 76 76 76 Budgetary position 38 -38 -79 -41 -42 -43 Budgetary position 0.2% -0.2% -0.3% -0.2% -0.2% -0.2% (% of GDP) * - forecast. Source: Ministry of Finance

3.4.2. Budgetary position of social security funds Estonian Health Insurance Fund providing health insurance and the Unemployment Insurance Fund providing unemployment insurance belong to the sector of social security funds. In Estonia, the national pension insurance system belongs to the central government. Table 9. Budgetary position of social security funds in 2015–2020 Budget 2015 for 2016* 2017* 2018* 2019* 2020* 2016 Social security funds (m EUR) 24 31 29 23 22 25 27 Social security funds (% of GDP) 0.1 0.1 0.1 0.1 0.1 0.1 0.1 * forecast Source: Ministry of Finance. The health insurance part of social tax comprises about 99% of the revenue of Estonian Health Insurance Fund. Health services (prevention of diseases, primary and specialised medical care, nursing care and dental treatment) constitute the dominating part of the benefits guaranteed to insured persons. These services are followed by compensation for medicines

40 http://riigiraha.fin.ee

108 and benefits for temporary incapacity for work. Figure 22. Breakdown of expenditure of Estonian Health Insurance Fund in 2015

Source: Health Insurance Fund. In 2015, the budgetary position of Estonian Health Insurance Fund fared poorer than expected, due to expenditure (mainly expenditure on temporary incapacity for work) being higher than forecasted (deficit of 18 million euros). A surplus of 1 million euros is expected this year. The highest increase in 2016, yet slightly slower than the growth speed of total expenditure, will happen in expenditure on specialised medical care; this is also the largest type of expenditure. Expenses of all other healthcare services (prevention, general medical care, nursing care, dental care) will increase faster than total expenditure. Expenditure on temporary incapacity for work will increase slower than other expenses. A budgetary position with near balance is expected in 2017–2020, reaching a deficit of 5 million euros by 2020. The forecast is based on the budgetary position target set out in the State Budget Act. Additionally, reduction of the social tax rate to 32.5% starting with 1 January 2017 and to 32% starting with 1 January 2018 is taken into account; this will be fully compensated to the Health Insurance Fund from the state budget. Table 10. Aggregate indicators of Estonian Health Insurance Fund, 2012-2020 (m EUR)** 2012 2013 2014 2015 2016* 2017* 2018* 2019* 2020*

Total revenue 781.9 836.9 900.2 964.4 1,013.3 1,073.2 1,148.6 1,216.8 1,286.6 incl. social tax 776.9 829.7 893.8 958.6 1,007.1 1,024.1 1,052.1 1,114.3 1,177.8 incl. state budget allocation to 41.0 87.7 92.9 98.2 compensate for reduced social tax Total expenditure 780.9 838.4 916.7 982.9 1,012.5 1,074.4 1,149.2 1,217.0 1,291.1 Budgetary position 1.9 0.8 -16.5 -17.3 0.8 -1.2 -0.6 -0.2 -4.5 Budgetary position (% 0.0 0.0 -0.1 -0.1 0.0 -0.0 -0.0 -0.0 -0.0 of GDP) * forecast ** Budgetary position in 2012-2015 according to data from the Ministry of Finance. Expenditure in 2016-2019 according to the budgetary position target set out in the State Budget Act and the social tax receipt forecast of the Ministry of Finance. Expenditure in 2020 according to the forecast of the Ministry of Finance. Forecast of revenues in 2016-2020 according to the Ministry of Finance’s spring 2015 economic forecast.

109 Unemployment insurance benefits comprise the biggest part of the expenditure of the Unemployment Insurance Fund. In 2015, the number of persons receiving the benefit decreased almost threefold compared with 2009 when the number of such persons was the highest. Still, the declining trend of unemployment has stopped and both the number of persons receiving the benefit and the total number of unemployed persons will remain stable throughout the budget strategy period. Still, the volume of expenditure is expected to stabilise because the payout amounts are related to wages, which will increase during the forecast period. Figure 23. Breakdown of expenditure of Estonian Unemployment Insurance Fund, 2015

Source: Unemployment Insurance Fund. The surplus of the Unemployment Insurance Fund in 2015 was 44 million euros, which is significantly less than the surplus of 2014. The reason is the decrease of the unemployment insurance benefit rate from 3% to 2.4% and an increase of the costs on benefits. The expected surplus of 2016 is 29 million euros. Similar to the previous year, the expenditure on active labour market measures will also be covered from unemployment insurance premiums in this year and the coming years. Also, the work capacity reform is expected to entail additional costs. The expected surplus of the Unemployment Insurance Fund will remain stable near the current level. Table 11. Aggregate indicators of the Unemployment Insurance Fund, 2012-2020 (m EUR)*** 2016 2017 2018 2019 2020 2012 2013 2014 2015 * * * * *

Total revenue 249.3 184.8 197.2 173.3 205.3 323.7 455.3 548.1 608.4 - unemployment 211.0 167.2 174.6 149.8 159.0 168.2 179.2 188.2 199.2 insurance premiums Total expenditure 126.5 126.7 116.0 131.2 177.3 299.1 432.0 523.6 577.4 - benefits** 48.7 54.4 50.4 57.9 67.8 66.8 69.5 73.7 76.9 Budgetary position 118.6 63.2 81.2 43.9 28.0 24.8 23.5 24.8 31.2 Budgetary position (% 0.7 0.3 0.4 0.2 0.1 0.1 0.1 0.1 0.1 of GDP) * forecast ** Unemployment insurance benefit, insurance benefit in case of redundancy and employer’s insolvency benefit.

110 *** Budgetary position in 2012-2015 according to data from the Ministry of Finance; revenue and expenditure of the same years according to the annual accounts of the Unemployment Insurance Fund; forecast for 2016-2020 according to the Unemployment Insurance Fund’s forecast and he Ministry of Finance’s revenue forecast. As the Unemployment Insurance Fund’s reports are prepared on cash basis and the Ministry of Finance’s data are accrual-based, the difference between revenue and expenditure does not equal the budgetary position in 2012-2015.

3.5. Tax policy, tax burden and tax expenditure One of the tax policy goals of the Government is to shift the tax burden from the taxation of income to the taxation of consumption, use of natural resources and pollution of the environment, by partial reorientation of taxes. At the same time, the system will be kept stable, simple and transparent with as few exceptions and special cases as possible. According to Eurostat, the tax burden in Estonia in 2014 was 32.2% of GDP, which is one of the lowest among all EU Member States (see Figure 25). Of Central and East European countries, Czech Republic, Croatia, Slovenia and Hungary have a bigger tax burden than Estonia. Figure 24. Tax burden in the European Union, 2014 (% of GDP)

Source: Eurostat. The tax burden of 2015 turned out to be 33.5% of GDP (see Figure 26A). The tax burden was increased by the income tax paid on the financial sector’s extraordinary dividends, as well as the increase of excise duties on alcohol and natural gas (KMD INF) and the 50% restriction on the input value added tax of corporate passenger cars, which increased the tax receipt of 2015. The tax burden was decreased by the reduction of income tax rate to 20%, the increase of basic exemption to 1,848 euros per year, the increase of the additional basic exemption of pensions to 2,640 euros per year, and the reduction of the rate of unemployment insurance premiums to 2.4%. On recommendation by Eurostat, the AAU sales revenue, the reserve charge of liquid fuels, and the contributions of the Guarantee Fund were added to the tax burden accounting in 2015, increasing the tax burden by 0.2% of GDP. The Government’s goal is to maintain the tax burden at the 2015 level (about 33.5% of GDP), reducing labour related taxes. In 2016, the excise duties on alcohol, tobacco and fuel as well as the basic tax-free allowance and the additional tax-free allowance of pensions increased. Technically, higher contributions by the state to the mandatory funded pensions fund on behalf of those people who continued to make payments to the pension fund also have an effect of reducing the tax burden. Personal income tax will be reduced by the returns for persons with low income in 2017. The taxation changes of 2017 are shown in Table 13. In 2017–2020, an increase of the excise duties of alcohol, tobacco and fuels, the increase of value added tax rate from 9% to 14% for accommodation services, as well as the establishment of road use tax for heavy vehicles, planned changes in package excise, and changes in the taxation principles of foreign business travel pay will increase the tax burden. The tax burden will be reduced by the decrease of social tax rate to 32%, the increase of basic tax-free allowance to 205 euros per month, the

111 increase of the additional tax-free allowance of pensions to 271 euros per month by 2020, the tax benefit of expenses related to health and sports (2018), and the increase of the value added tax payer’s registration threshold to 40,000 euros (2018). The planned incentives are described in more detail below. In summary, the tax burden will remain at a level comparable with that of the year 2015, reaching 33.4% of GDP by 2020.

3.5.1. Tax differences Honest tax environment – equal competition and treatment To tidy the rental market, 80% taxation of rental revenue will be implemented starting with 1 January 2016, i.e. up to 20% of rental revenue will be left tax-exempt, accounted as repair and upkeep costs and not subject to the obligatory submission of cost documents. The change of taxation principles for foreign business trip pays, starting with 1 January 2017, will increase the social guarantees of employees on business trips abroad. The real-time control measure concerning fuel will reduce the tax gap and will improve honest competition in the fuel market. Increasing the value added tax payers’ registration threshold to 40,000 euros in 2018 will reduce the administrative burden of small enterprises. Fairer tax system – reducing differences in taxation The reduction of inefficient tax incentives is intended to ensure equal treatment of taxpayers and the neutrality of the tax system. The plan is to critically inspect and abandon tax incentives that have diverged from their original objective and have, therefore, become unjustified. Each tax incentive will be analysed to ascertain whether it is proportional to the goal to be achieved, whether it meets the expectations and needs of society, and whether trying to achieve this goal via the tax incentive is the most expedient approach. If necessary, the incentive will be implemented for a specific period of time, which makes it possible to analyse the effectiveness of the incentive in the achievement of the goal and to decide, on the basis of the analysis, whether the incentive should be extended. Starting with 1 January 2016, an additional tax-free allowance of 1,848 EUR per year will be established for children, deductible training expenses will be restricted and the upper limit of deduction will be reduced from 1,920 EUR to 1,200 EUR. Starting with 1 January 2017, the value added tax rate of accommodation services and of accommodation and breakfast services will be increased from 9% to 14%. More growth-friendly tax structure – reducing the tax on labour, increasing the tax on consumption and environment exploitation The tax burden on labour will be reduced by an increase of the basic tax-free allowance to 2,460 EUR (205 EUR per month) by 2019 and an increase of the tax-free allowance of pensioners so as to make the average pension untaxed. The tax burden on labour will also be significantly reduced by decreasing the social tax rate to 32.5% starting with 1 January 2017 and to 32% starting with 1 January 2018. The tax incentive on expenses related to health and sports will reduce the tax burden of employers. The tax burden on consumption will be raised by increasing the excise duty rates. The rates of alcohol excise duty will increase by 15% in the coming year and subsequently by 10% per annum until 2020 (incl. the alcohol excise duty on wines over 6% alcohol content increasing by 20% in 2019 and 2020). The alcohol excise duty will be increased in compliance with the price and tax policy measure of the Green Paper on alcohol policy which prescribes the development of a long-term framework for alcohol taxation. The rates of tobacco excise duty

112 will be increased by 8% per annum starting with 1 January 2016 and going until 2018, and then by 10% per annum until 2020. Pursuant to the tax policy measure, the price of tobacco products must increase with at least the same speed as the consumer price index, in order to avoid access to tobacco products becoming easier. The rates of both excise goods will increase more than the expected overall price growth, so as to increase tax revenue and restrict consumption. Starting with 1 February 2016, the rate of diesel fuel excise duty was increased by 14% and that of petrol by 10%, and both rates will be increased by 10% per annum in 2017-2018. Due to the intention of more equal taxation of the two most common motor fuels (diesel and petrol) and accounting for the energy content of those fuels, the rate of excise duty on diesel fuel increased more in 2016. Environmental taxes will be raised by increasing the excise duty on natural gas. The Government plans to increase the excise duty on natural gas as a fossil fuel in 2018 and 2019, by 60% and 39% respectively. The planned changes in package excise duty and the establishment of road use tax for heavy vehicles will also increase the receipt of environmental taxes. Figure 25. Development of tax burden in Estonia (% of GDP) A. Tax burden B. Tax revenue (%)

38 100% 36 80% 34 60% 40% 32 20% 30 0% 28

2000 2002 2004 2006 2008 2010 2012 2014 2016* 2018* 2020* 2000 2002 2004 2006 2008 2010 2012 2014 2016* 2018* 2020* Labour taxes Capital taxes Consumption taxes SBS 2017-2020 spring 2016

Sources: Ministry of Finance, Eurostat. Compared with 2016, the share of labour taxes41 in tax receipts is forecasted to decrease by 0.2% to 49.4% by 2020. The share of consumption taxes42 in tax receipts will increase by 0.8% to 43.8% by 2019 due to the increase of excise duties, the establishment of road use tax and the change in package excise duty and will decline to 43.2% in 2020. The share of capital taxes43 will decrease by 0.4% to 7.4% by 2020, mainly on account of a decrease of the dividends of state enterprises compared with 2016 (see Figure 26B). Environmental taxes44, being part of taxes on consumption, will make up 8.7% of all taxes in 2016, exceeding the European Union average (6.1% in 2012). The reduction of pollution charges will slow the growth of environmental taxes, while the change in package excise duty

41 Pursuant to the ESA2010 methodology, labour taxes include: social security payments, natural person income tax on wage income, natural person income tax on social transfers and pensions, natural person income tax on business activities. 42 Pursuant to the ESA2010 methodology, consumption taxes include: value-added tax, customs duties, excise duties, motor vehicle registration fee, sales tax, pollution fees, fee for fishing right, boat tax, AAU sales revenue, liquid fuel reserve charge and Guarantee Fund contributions. 43 Pursuant to the ESA2010 methodology, capital taxes include: corporate income tax, natural person income tax on capital income, tax on gambling, tax on advertising, tax on land, tax on heavy vehicles, state fees on activity permits and professional licenses, fee on special use of water, tax on closing of roads and streets, other taxes and fees. 44 Environmental taxes are those levied on energy (fuel and electricity excise duties, AAU sales revenue, liquid fuel reserve charge), transport (heavy vehicle tax, vehicle registration fee, boat tax) and pollution (pollution charge, fee for the special use of water, package excise duty, fee for the right of fishery).

113 and the establishment of road use tax will increase the tax receipt and the share of environmental taxes will remain at 8.7% in 2020. Table 12. Main changes in the tax policy in 201745 Changes in taxes Impact 2017 Entry into force m € % of GDP 1. Reverse taxation of metal used in 1 July 2017 1.8 0.0 construction 2. Changing the taxation principles of foreign business trip pay (the 1 January 2017 5.5 0.0 effect of labour taxes) Source: Ministry of Finance. Table 13. Impact of fiscal policy decisions on general government revenue 2015 2015 2016* 2017* 2018* 2019* 2020* % of % of % of % of % of % of m EUR GDP GDP GDP GDP GDP GDP General government 8179.7 40.0 40.4 39.7 39.2 39.4 38.8 revenue General government revenue with impact of 40.2 39.5 39.5 39.0 revenue policy measures * - forecast. Source: Statistics Estonia, Ministry of Finance.

3.5.2. Implicit tax rate and tax wedge In addition to the share of tax revenue in GDP, the level of tax burden is also characterised by the implicit tax rate46, being the ratio of received tax revenue to the tax base. Implicit tax rate on labour is calculated as the ratio of taxes on labour to labour expenditure. As the implicit tax rate includes factually received taxes, an international comparison must take into account the fact that the performance of tax administrators and the tax discipline of people varies across countries. The Government’s objective is to maintain the implicit tax rate on labour at the level of 2015 (about 34%). The implicit tax rate on labour (see Figure 27A) dropped sharply until 2005 and remained below 34% until 2008, due to reduction in personal income tax rate and increase of basic exemption. In the period of 2009-2010 the unemployment insurance rate was increased and the state’s contributions into the mandatory funded pension were suspended, therefore the implicit tax rate increased. In 2012 the implicit tax rate on labour was 35.0%, placing us at the 13th place in the European Union. Resuming the state’s contributions into funded pension (2012) and decreasing the unemployment insurance rate (2013, 2015), reducing the income tax rate (2015) and raising the basic exemption (2015, 2016) will reduce this indicator to 34.2% by 2016. Higher contributions to funded pension (2+6 and 3+6 contributions) will influence the indicator in the period of 2014–2017. Implicit tax rate on labour will be reduced by decreasing the social tax rate (2017, 2018), increasing the basic exemption (2017-2019),

45 Accrual-based impact compared with the situation where the rates/situation provided for in the law at the time of the Ministry of Finance’s spring forecast of 2016 still apply. 46 Sometimes also translated into Estonian as actual or average tax rate. The preferred definition is still implicit tax rate, as its meaning is more precise compared with other variants.

114 tax returns for low income persons (2017-2020) and on 2020 the indicator will remain at a level comparable to 2016 i.e. 34.3%. The implicit tax rate on consumption will increase in relation with increasing excise duties and establishing road use tax as well as changing the packaging excise duty to 27.2% simultaneously (see Figure 27B). Labour tax wedge is the difference between an employer’s labour expenditure and an employee’s net income, including monetary allowances (child allowance, needs-based family allowance, low-income allowance). Different family types may have significantly different tax wedges – e.g. for a married couple with two children where one parent earns 100% of the average wage, the tax wedge is much more dependent on basic exemption (additional for the stay-at-home spouse and the second child) than for someone living single. Pursuant to the OECD method, parental benefit is not accounted into this. An excessively high tax wedge may reduce the incentive to work and thus have a negative impact on the labour market’s developments. In 2015, the tax wedge of a single childless person earning 67% of the average wage was 38.0% and it will decrease to 37.4% by 2020 due to increasing the tax exemption and reducing the social tax rate (see Figure 27C). The repayment to low-income taxpayers is intended to those taxpayers earning lower income. The tax wedge of a married couple with two children where one parent earns 100% of the average wage (see Figure 27D) depends significantly more on the tax exemption (additionally for the non-working spouse and the second child). The tax wedge for families is reduced by child allowances, as well as needs-based family benefit (not applicable to this type of family, as it is intended for families with even lower income). Parental benefit is not taken into account pursuant to the OECD methodology. The tax changes of 2015 and the increase of child allowances to 45 EUR per month for the first and the second child reduced the tax wedge of such a family by 4.2% to 28.7% in 2015. As a result of the reduction of social tax rate and the increase of basic exemption and child allowances, the indicator will drop to 28.3% by 2020. Figure 26. Implicit tax rate (%of tax base) and tax wedge (% of labour expenditure) A. Implicit tax rate on labour B. Implicit tax rate on consumption

40% 30%

35% 25%

30% 20% 15%

25%

2002 2004 2006 2008 2010 2012 2014

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

2016* 2018* 2020*

2015* 2016* 2017* 2018* 2019* 2020* Estonia (SBS) Estonia (SBS) Latvia Latvia Lithuania Lithuania EU 28 EU 28 Estonia (spring 2016) Estonia (spring 2016)

115 C. Tax wedge, single person without children, earns D. Tax wedge, married couple, 2 children, one 67% of average worker wage* parent earns 100% average worker wage*

46% 45%

42% 40% 35% 38% 30% 34% 25%

30% 20%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

2015* 2016* 2017* 2018* 2019* 2020*

2015* 2016* 2017* 2018* 2019* 2020* Estonia (SBS 2017-2020) Latvia Estonia (SBS 2017-2010) Lithuania OECD OECD Finland EU 28

* According to the Ministry of Finance’s spring forecast, the gross average worker wage in 2020 will be 16,888 EUR per year. Sources: OECD Taxing Wages 2015, Tax Reforms in EU Member States 2015, Eurostat, Ministry of Finance.

3.5.3. Tax expenditure The tax expenditure contained in the state budget of Estonia for 2015–2016 are described below. The value of tax expenditure is calculated by using the revenue foregone method and cash basis accounting data and for each tax expenditure provision, the delay between the implementation of the provision and its actual application is taken into account. Only the so- called first round effects of the establishment of tax expenditure have been estimated. For example, in the event that an increased basic exemption is established, only the direct impact of the implementation of the provision has been assessed. However, the assessment does not include the fact that natural persons have more money in the case of increased basic exemption and more VAT is received if they use this money for consumption. The aggregate impact of the establishment of tax expenditure is regarded in the case of tax expenditure that is directly and clearly related to other taxes, e.g. the tax expenditure arising from the Alcohol, Tobacco, Fuel and Electricity Excise Duty Act influences the receipt of VAT to the extent of the final consumption rate. The different behavioural effects and budget restrictions have not been taken into account in the evaluation of tax expenditure due to the implementation of the method of revenue foregone. In assessing the value of tax expenditure, it is important to understand that each individual provision of tax expenditure has been evaluated separately without considering the confluence of different provisions, which means that whilst finding the aggregate amount of tax expenditure by adding up different provisions is incorrect, it does make it possible to assess the level and trends of the established tax expenditure. The tax expenditure that has a significant impact on the receipt of state budget revenue is regulated by three different legal acts –the Income Tax Act, the Value Added Tax Act and the Alcohol, Tobacco, Fuel and Electricity Excise Duty Act. In the case of the Value Added Tax Act47 (VATA) the provisions through which the consumption of certain goods or services is promoted with the implementation of a lower tax rate can be regarded as tax expenditure or significant deviations from the pursued tax system. In the case of the Income Tax Act48 (ITA), the provisions through which entrepreneurs operating in certain areas of activity, natural persons or families of certain type and natural persons that incur certain expenses or consume certain services are supported with increased basic exemptions can be regarded as tax

47 The Value Added Tax Act, https://www.riigiteataja.ee/en/eli/521012016004. 48 The Income Tax Act, https://www.riigiteataja.ee/en/eli/529022016001.

116 expenditure or significant deviations from the pursued tax system. In the case of the ITA it is assumed that the tax-exempt income to be subtracted from a resident natural person’s income earned in the taxation period that is established pursuant to Section 23 is a part of the pursued tax system (and not tax expenditure). In the case of the Alcohol, Tobacco, Fuel and Electricity Excise Duty Act49 (ATFEEDA), the provisions through which entrepreneurs operating in certain areas of activity or the production of certain goods are supported with lower excise duty rates or excise duty exemptions can be regarded as tax expenditure or significant deviations from the pursued tax system. Table 14. Tax expenditure in state budget, 2016–201750 (m EUIR) Tax expenditure Government Provision 2016 2017 function51

1. 9% value added tax on books, workbooks and VATA, § 15 (2) 9 9.6 10.1 periodicals 1) and 3) 2. 9% value added tax on medicines and medical devices VATA, § 15 (2) 7 48.8 51.3 2) 3. 9% value added tax on accommodation services VATA, § 15 (2) 8 22.9 13.2 4) 4. Tax exemption of deposit interest ITA, § 17 (2) 10 2.5 2.6 4. Additional tax-free allowance from the second child ITA, § 231 10 26.9 27.5 6. Additional tax-free allowance in the event of pension ITA, § 232 10 159.9 161.4 7. Additional tax-free allowance in case of benefit for ITA, § 233 10 0.2 0.2 accident at work or occupational disease 8. Deduction of housing loan interest ITA, § 25 6 10.9 10.9 9. Deduction of training expenses ITA, § 26 9 13.2 8.7 10. Deduction of gifts and donations ITA, § 27 (1) 8 0.9 0.9 11. Deduction of insurance payments and acquired ITA, § 28 10 3.9 4.1 pension fund shares 12. Increased basic tax-free allowance of self-employed ITA, § 32 (4) 4 2.4 2.4 persons upon sale of agricultural produce or timber 13. 50% excise duty rate for independent small ATFEEDA, § 46 4 0.3 0.3 breweries (1) 14. Lower excise duty rate on diesel fuel for specific ATFEEDA, § 66 4 36.0 42.0 purposes in agriculture (7) 15. Exemption of fishermen from fuel excise duty ATFEEDA, § 27 4 1.4 1.6 (1) 222) 16. Electricity used for chemical reduction and in ATFEEDA, § 27 4 0.5 0.5 electrolytic, metallurgic and mineralogical processes (1) 24), 284) 17. Electricity and fuel used to produce electricity and ATFEEDA, § 27 electricity used to maintain the ability to produce 4 6.1 6.2 (1) 282) electricity

49 The Alcohol, Tobacco, Fuel and Electricity Excise Duty Act, https://www.riigiteataja.ee/en/eli/529022016008. 50 Tax expenditure assessments have only been calculated for the provisions that are included in tax regulations as of 1 January 2016. 51 Government functions: 1. general public services; 2. defence; 3. public order and security; 4. economic affairs; 5. environmental protection; 6. housing and utilities; 7. healthcare; 8. recreation, culture and religion; 9. education; 10. social protection.

117 Tax expenditure Government Provision 2016 2017 function51 18. Fuel used for mineralogical processes ATFEEDA, § 27 4 0.5 0.5 (1) 282) 19. Natural gas used for the purpose of operating the ATFEEDA, § 27 4 0.09 0.08 natural gas network (1) 286) TOTAL 346.9 344.5 Source: Ministry of Finance. The receipt of the state budgets for 2016 and 2017 is influenced by 20 different tax expenditure provisions in the Value Added Tax Act, the Income Tax Act and the Alcohol, Tobacco, Fuel and Electricity Excise Duty Act. The total scope of the main tax expenditure in 2016 comprises 346.9 million euros or 1.6% of GDP. Additional basic exemption for pensions, lower value added tax rates for medicines and medical devices, and more favourable rate of excise duty on diesel fuel for specific purposes remain the largest types of tax expenditure. The volume of the three largest types of tax expenditure constitutes 71% of the total tax expenditure in 2016. In 2017, tax expenditure will decrease by 0.7% to 344.5 million euros. The next year’s volume of tax expenditure is reduced by the increase of the VAT rate for accommodation services from 9% to 14% and the restriction of the deduction of training expenses, but the effect of the aforementioned tax expenditure is reduced by the increase of the diesel fuel excise duty rate, which increases the benefit promised to agriculture. In order to analyse the dynamics of tax expenditure by government functions52, the government function with which each specific type of tax expenditure is associated is determined for each tax expenditure provision. Table 15 indicates that six of the ten government functions (economic affairs; housing and utilities; healthcare; recreation, culture and religion; education; social protection) are supported via tax expenditure in 2016–2017. The government functions that form the biggest share in 2016 are social protection (193.4 m EUR or about 55.7% of tax expenditure), healthcare (48.8 m EUR or 14.1%) and economy (47.3 m EUR or 13.6%). The tax expenditure that falls into the remaining government functions comprises 57.5 million EUR or 16.6% of total tax expenditure. Tax expenditure may also be analysed as a proportion of the receipt of the relevant tax. In the case of value added tax, tax expenditure (items 1–3 in the table) comprises 81 million EUR in 2016, which is 4% of the total VAT received. The relevant tax expenditure (items 4–12 in the table) comprises 218 million EUR or 65% of the personal income tax received into the state budget and the amount of excise duties (lines 12– 19 in the table) not received due to tax incentives is 37 million EUR or 5% of excise duties received.

3.6. The general government’s debt burden and reserves

3.6.1. General government debt The main goal of Estonia’s fiscal policy since the restoration of independence has been to keep the budgetary position of the general government over the medium term in balance or, if possible, in a surplus, which has become expressed in the low debt burden of the state. The general government debt of Estonia at the end of 2015 amounted to 9.7% of GDP, which is 0.7% of GDP less than in 2014. The main reasons for the government debt decreasing were mainly the decrease of the volume of loans issued by the European Financial Stability Facility

52 Statistics Estonia. (2008d). Classification of government functions. – [WWW] http://metaweb.stat.ee/view_xml.htm?id=1129771&siteLanguage=ee.

118 (EFSF)53 and the reduction in the debt burden of local governments. The central government debt (including the funds received from EFSF) comprised 1,264 million euros54 and the debt of local governments 729 million euros of the total general government debt of 1,993 million euros; the share of external debt in total debt was 66% (see table 16). Without the funds of EFSF, which amounted to 455 million euros in 2015, the central government debt was 810 million euros i.e. 4.0% of GDP. Table 15. Change in general government debt burden in 2014 and 2015 31 December 2014 31 December 2015 Change m EUR % of GDP m EUR % of GDP % of GDP

General government 2,070 .4 10 .4 1,992 .7 9. 7 -0 .6 Domestic debt 697.3 3.5 667.9 3.3 -0.2 External debt 1,373.1 6.9 1,324.8 6.5 -0.4 Central government55 1,420.3 7.1 1,362.4 6.7 -0.5 Domestic debt 230.6 1.2 201.0 1.0 -0.2 External debt 1,189.7 6.0 1,161.4 5.7 -0.3 Local governments 754.6 3.8 728.6 3.6 -0.2 Domestic debt 571.4 2.9 565.2 2.8 -0.1 External debt 183.2 0.9 163.4 0.8 -0.1 Social security funds 0.0 0.0 0.0 0.0 0.0 Domestic debt 0.0 0.0 0.0 0.0 0.0 External debt 0.0 0.0 0.0 0.0 0.0 Source: Ministry of Finance, Statistics Estonia. The general government debt can be expected to decrease to 9.6% of GDP in 2016, as a result of reduction in the central government’s share; the debt of local governments as percentage of GDP will remain at the level of 2015. According to the forecast, general government debt will increase in 2017 and 2018 and will start decreasing in coming years and will comprise 9.6% of GDP by the end of the forecast period (see Table 17). The central government’s negative cash flow will be funded from reserves and the State Treasury will incur a direct need for new loans, based on cash flow, in 2017. Without the EFSF’s impact, the central government’s share in the debt burden will decrease as a percentage of GDP starting with 2019 and nominally starting with 2020. The EFSF’s nominal contribution will increase at the same time, but as a percentage of GDP it will decrease. The deficit of local governments will be covered from external funds during the entire medium-term period and the nominal amount of their debt will increase, remaining near 3.6% as percentage of GDP. Table 16. General government debt burden, 2015–2020 (% of GDP)

2015 2016* 2017* 2018* 2019* 2020*

1. Total debt 9.7 9.6 10.4 10.6 10.2 9.6

2. Change in debt burden -0.6 -0.1 0.8 0.2 -0.3 -0.7

53 According to the methodology used to calculate the general government debt, the loans issued by the EFSF are partially reflected in the debt burden of Estonia since the state joined the EFSF. 54 Consolidated figure on the level of the general government. 55 Consolidated figure on the level of the central government.

119 2015 2016* 2017* 2018* 2019* 2020*

Contribution to change in debt burden: (2=3-4+5+6)56

3. Contribution of nominal GDP increase -0.3 -0.4 -0.5 -0.6 -0.6 -0.6

4. Primary budget balance 0.5 -0.3 -0.4 -0.1 0.0 0.1

5. Interest payments 0.1 0.1 0.1 0.1 0.1 0.1

6. Difference between the change of debt burden and the budgetary position (stock-flow adjustment, 0.0 -0.1 0.9 0.6 0.2 -0.1 SFA)

Estimated interest rate of general government debt 0.9 0.9 1.0 0.8 0.8 0.8 (%)

Other relevant indicators

7. Liquid financial assets 9.3 7.9 7.5 7.2 6.9 6.8

8. Debt amortisation since the end of last year57 0.1 0.1 0.2 0.3 0.2 0.2

9. Net debt (9=1-7) 0.5 1.8 3.,0 3.4 3.4 2.8

10. Share of debt nominated in foreign currency (%) 0.0 0.0 0.0 0.0 0.0 0.0

11. Average expiration limit 58 (in years) 5.2 4.3 3.6 3.1 2.7 2.2 * - forecast. Source: Ministry of Finance, Statistics Estonia. As the budgetary deficit increases, the general government debt could also be expected to increase in the extent of the deficit. In reality, the relationship between the debt burden and the deficit is more complex and there are other factors having a role in it. For example, debt burden can also increase if loan is taken for the purpose of providing funds for financing transactions instead of covering the deficit, but financing transactions are not reflected in the state’s revenue or expenditure. The amount of such other factors is measured by the difference between the change of debt burden and the budgetary position (in English also called stock- flow adjustment, SFA for short). In 2015, Estonia’s SFA was 6.4 m EUR or 0.03% of GDP (see Figure 27B), which means that the debt burden increased less (78 m EUR) than the budgetary surplus (84 m EUR), meaning that the surplus was used both for debt reduction and for an increase of reserves. According to the forecast, the SFA will be negative this year, meaning that the debt burden will increase less than by the amount of budgetary deficit, resulting from the fact that reserves will be used for covering the deficit. The SFA will be positive in 2017-2019 because of debt burden decreasing more than the by the general government deficit (incl. due to increase of loan repayments which are not reflected in the budget’s expenditure). The SFA will be negative in 2020 because of the debt burden decreasing less than the surplus.

56 In some years the equation does not work, due to rounding. 57 Central government without foundations and legal persons governed by the public law. 58 Central government without foundations and legal persons governed by the public law.

120 Figure 27. Development of debt burden, 2006–2020 (% of GDP) A. General government debt (% of GDP) B. Difference between the change of debt burden and the budgetary position (% of GDP)

5 12 4 10 3 2 8 1 6 0 4 -1 2 -2 0 -3 2006 2008 2010 2012 2014 2016* 2018* 2020* EFSF 2008 2010 2012 2014 2016* 2018* 2020* Local governments Difference between the change of debt burden Central government (except EFSF) and the budgetary deficit

C. Repayment of central government59 debt (m EUR) D. Average interest rate of central government60 debt (%)

120 6 5 80 4 3 40 2 1 0 0 2004 2006 2008 2010 2012 2014 2016* 2018* 2020* 2008 2010 2012 2014 2016* 2018* 2020*

Loan repayments Average interest per annum

Source: Ministry of Finance, Statistics Estonia, Eurostat.

59 Central government without foundations and legal persons governed by the public law. 60 Central government without foundations and legal persons governed by the public law.

121

3.6.2. General government reserves and net position The volume of general government’s liquid financial assets61 as of the end of 2015 were 1,900 million EUR or 9.3% of GDP. Compared with 2014, the reserves of the central government decreased, while the reserves of social security funds and local governments all increased. This year, the reserves are forecasted to decrease due to the need to fund the state budget’s deficit and financing transactions. The reserves are forecasted to gradually decrease until the end of 2020 because the reserves are planned for funding the state budget’s nominal deficit and financing transactions. Also, the growth of reserves will remain below the nominal GDP growth, so the general government’s liquid assets will decrease to 6.8% of GDP by the end of 2020. The general government debt burden in 2015 exceeded somewhat the volume of reserves and the net debt amount was 0.5% of GDP (see Figure 28). According to the forecast, both the debt burden and the reserves will decrease in the coming years, but reserves will initially decrease more. As the debt burden will grow in 2017-2018, the net debt amount will also increase to 3.4% of GDP by the end of 2019. Thereafter the net debt will start decreasing and is forecasted to amount to 2.8% of GDP at the end of 2020. Without the EFSF’s impact, the reserves will exceed the debt burden throughout 2016, but not in the years following the forecast period; by 2020, the net debt without the EFSF’s impact will be 1.0 % of GDP.

Figure 28. Liquid assets, debt burden and net position of the general government, 2006–2020 (% of GDP)

12 9,3% 6,8%

7 Reserves 2

-3 - 0,5 - 2,8

-8 Debt 9,7% 9,6% -13 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016*2017*2018*2019*2020* Central government (debt) Central government (reserves) Social security funds (reserves) Local governments (debt) Local governments (reserves) EFSF (debt) Net assets(+)/-debt(-)

Source: Ministry of Finance, Statistics Estonia.

61 Liquid financial assets are considered to be cash and deposits (ESA 2010 code F.2); securities (except shares and financial derivatives) (F.3); financial derivatives (F.71); shares noted on stock exchange (F.511) and investment fund shares (F.52).

122

SUMMARY The updated State Budget Strategy is based on the economic forecast of the Ministry of Finance from spring 2016, the Coalition Programme between the Estonian Reform Party, the Social Democratic Party and the Pro Patria and Res Publica Union, organisation-based development plans of Estonian ministries and implementation reports of sectoral development plans. Together with the State Budget Strategy, the Stability Programme 2016 was prepared. The Government’s objective is to guarantee a sustainable budget policy that ensures macroeconomic balance. The goal is to make budget policy decisions that support macroeconomic stability, manage the risks that threaten the balanced development of the economy, and improve the economy’s growth potential and increase employment. The existence of adequate reserves and flexibility in the budget for making changes in the structure of revenue and expenditure must be guaranteed in order to cope with future economic downturns. Fiscal policy decisions are made simultaneously and the decisions are sustainable, taking into account, as much as possible, sectoral policies and the activities of the other levels of the general government and treating uniformly all sources of financing. The Government will continue with a strict fiscal policy and its medium-term objective is the general government’s structural surplus. Planning the budgetary position with a surplus helps guarantee the long-term sustainability of the budget. Pursuant to the State Budget Act, the objective is to achieve at least a balanced structural budgetary position of the general government. In the current State Budget Strategy’s period, the minimum target is set as a structural surplus of 0.2% of GDP in 2017 and a structural balance in the subsequent years. If the objectives are achieved, the general government’s nominal budget surplus will be attained by 2018, which will make it possible to start restoring the reserves that had decreased during the recession. No positive supplementary budgets will be prepared during the fiscal year and any extra tax revenue received in the budget will be placed into the reserves.

123

APPENDICES

Appendix 1. Ministry of Finance, economic forecast of spring 2016 In the recent months, the recovery of the global economy has become uncertain again, mainly on developing markets. The economic growth of the eurozone quickened to 1.6% in 2015, which is the fastest in the past four years. Yet the indicators of economic activity (the PMI index) show a slight slowing down of the eurozone’s growth at the start of this year. The economic sentiment in Estonian business sector has improved somewhat in the recent months and there is a chance of faster growth of export orders in the coming quarters. Yet, the overall economic sentiment remains relatively weak in most of the sectors and growth outlooks have been adjusted down when compared with the previous forecast. In 2015, Estonian foreign demand was at a low point and the import of our trade partners did not increase. In 2016, the foreign demand will strengthen and its growth will quicken to 2.9%, mainly supported by the slowing of Russia’s import decline. In 2017, the growth of foreign demand will be 3.8%. In the recent years, the Estonian economic growth has been based on consumption, supported by the quick growth of wage income. The purchasing power of households has been increased by prices declining for the second year in a row, mainly due to the decrease of the prices for energy and foodstuffs. The employment indicators continue to improve, although part of that stems from the effect of the Employment Register implemented in July 2014, which has reduced undeclared work. The wage growth is slowing down, but less sharply than economic growth, so the profits in 2/3 of the sectors were falling. Due to low demand and free production capacities, the investment activity of enterprises remains low. The assumptions of this forecast are set as of the beginning of March 2016. According to the forecast’s base scenario, Estonian gross domestic product will grow by 2% in 2016 and by 3% in 2017. The Ministry of Finance has revised the economic growth forecast for the coming years downwards, mainly due to the deterioration of the growth outlooks of Finland and Russia as Estonia’s important trade partners. The export growth will be restored this year and will gradually quicken in the coming years, in line with the economic growth of export partners. The main driver of economic growth in 2016 will again be domestic demand, but the effect of export should increase in the future. In 2019–2020, Estonia’s economy should grow by an average of 3% per annum, on account of both export and domestic demand. The growth of domestic demand in 2016 will again be supported the most by private consumption, but its growth speed will decrease when compared to the previous year. In 2017, the real growth of private consumption should slow down even more, due to slower wage growth and inflation picking up, but a slight increase of the consumption’s growth speed can be expected further on. The slowing of the consumption’s growth is due to the slowing of the growth of disposable income. In 2015, the purchasing power of residents was supported by not only a quick growth of gross wages but also the increase of basic exemption, the reduction in income tax rate and the significant increase in family benefits. Additionally the decline of motor fuel prices continued, enabling people to spend more on other goods and services. The consumption courage of Estonian residents may have declined somewhat over the past year, apparently driven by the frightening news of the continued migration crisis and terror attacks that have become everyday occurrences. The real growth of private consumption is forecasted to slow down to 3.4% in 2016 and to 2.5% in 2017. The decrease of investments continued at a quickening pace in 2015. In the year 2015, the business sector contributed to the decline, while the investments of both the government

124 sector and households increased. The government sector’s investments turned to an increase last year, but their share in total investments is one third, so they were unable to reverse the overall trend. The last year’s declining investments of the business sector could be explained by the extraordinarily depressed external environment, which is clearly expected to improve starting with 2016. The continued increase of the government’s investments is supported by taking into use the funds of the EU programming period of 2014-2020. Housing investments should have plenty of growth space due to the wish to improve the quality of dwellings, which can be hindered mainly by significant deterioration of the overall economic sentiment and related setbacks in the labour market. In 2016, the growth of investments could exceed 2% and could also quicken to 5% in a few years, but a prerequisite for that is the fulfilment of the current growth forecasts of Estonia’s export partners. Together with the strengthening of foreign demand, the export of goods and services can be expected to turn to growth in 2016. A dominant part of the pick up of the foreign demand’s growth is made up by the slowing of the Russia’s import decline; the contribution of other export partners is increasing to a more modest extent. Export will grow by 1.6% this year, which will be less than the increase of foreign demand. These are unfavourable global factors, independent from Estonian economic environment, and they also had a significant effect on the export of goods in the previous year. Starting with 2017, the global economic activity will start to improve, leading to a quicker economic growth of trade partners and the strengthening of import demand. The export growth will increase at a similar rate as foreign demand, reaching 3.8% in 2017 and 4.5% in 2018. Import growth will turn out markedly faster than that of export this year, because investments, having declined for the past two years, should be restored with the support of enterprises and government sector. After the high level achieved last year, the current account surplus will start decreasing in the coming years. In 2016, the surplus will decrease to 0.6% of GDP, being mainly related to the recovery of investments of enterprises and government sector. Due to low commocity prices, the growth of consumer prices (CPI) will be modest in 2016, reaching 0.3%. Thereafter, the CPI growth will quicken to 2.7% in 2017 and 2.9% in 2018. While the price decline is driven by energy products in the first half of this year, the negative contribution of the energy component will start to recede in the second half of the year, leading to the consumer prices turning to an increase. The effect of tax measures will increase this year, as a result of increasing the excise duties on fuel, alcohol and tobacco. The price increase of services will remain modest hindered by the cheapening of transport services entailed in the lowered fuel prices, as well as free higher education. In 2017, inflation will pick up due to the gradual increase of the contribution of foreign factors (oil and foodstuffs), the quickening of the price increase of services, and additional excise duty increases. Starting with next year, the gradual receding of the oversupply of oil and the strengthening of the global economy can be expected, due to which the effect of external factors on inflation will grow in the future. The effect of indirect taxes on the CPI will be the highest in 2017, reaching 0.9%. The situation in the labour market will become ever tenser and wage pressures continue. In the second half of last year, employment grew faster than it was expected in the summer of that year, reaching 2.6% as the year’s total. Part of that was due to the implementation of the Employment Register, which increased the number of people working legally. As a result of more modest economic developments than expected, the number of employed people started to decline at the end of last year (according to the Tax and Customs Board’s data), which is why we are excepting unemployment to increase to 6.6% this year from 6.2% in 2015. Employment rate in Estonia is currently at its historical high (65.2%), that limits any further growth of the number of employed people. This is why we are expecting the number of employed people to decline due to the decrease of the population. This will be partly

125 compensated by the implementation of the work capacity reform, helping people with partial work ability to return to the labour market, by offering them various activation measures. The skills of the incapacity for work pensioners returning to the labour market will probably not correspond to the labour market’s needs and the capacity of enterprises to hire them will be low at first, so the reform will first and foremost lead to an increase of unemployment starting with 2017. The positive effect of the work ability reform through the additional number of employed persons will grow gradually. The growth speed of average wage has not yet changed significantly, regardless of the slowing of economic growth, and the growth remained at 6% in 2015. The wage growth is the quickest in sectors with below-average salaries, and differences between wage developments of various sectors have also increased during the year. Wage growth has clearly exceeded the productivity growth and had a negative effect on the price competitiveness of enterprises. Yet, no significant reduction in the wage pressure is to be expected, due to the declining population and the competition with neighbouring countries, mainly Finland. That is why we presume that the proportion of wage costs to GDP will remain at its current level this year but will start to decrease in longer term. The growth of real wage will slow down sharper than that of nominal wage this year, due to the restoration of inflation. The general government’s62 structural deficit of 2016 is forecasted to be 0.4% of GDP. The main sector causing that deficit is general government, but local governments are also forecasted to remain in deficit for the entire forecast period. The nominal deficit of the central government is caused by lower dividend revenue and environmental charges due to difficulties in the oil shale sector. The deficit is reduced by the lowering of the forecast of pension expenditure and by a higher growth of tax revenue due to better receipt of direct taxes. Thanks to the Unemployment Insurance Fund, the social security funds continue to be in surplus (0.1% of GDP in 2016). In 2017, the general government’s budgetary deficit will increase to 0.5% of GDP because the decline of environmental charges will become even deeper and the growth of tax revenue will slow down as well. Also, the forecasted deficit of local governments will double due to the increase of investment volumes accompanying local elections. The general government’s budgetary position is expected to continually improve in subsequent years and to reach a surplus of 0.8% of GDP by the end of the forecast period i.e. by 2020. The tax burden of 2015 will be 34.2% of GDP, being 0.7% higher than a year before. Compared with 2015, the revenue from excise duties will quickly grow due to an increase of the excise duty rates, and the growth of the receipts of value added tax and social tax will also exceed the GDP growth, which was adjusted downwards in comparison with the previous forecast. In an export-centred economy, the slowing nominal economic growth does not express itself directly in tax receipts. In 2017–2020, tax changes will decrease labour taxes and increase consumption taxes; in summary, the average tax burden for that period will be 33.4% of GDP, dropping to 33.3% of GDP by 2020. The general government’s debt burden decreased to 9.7% of GDP by the end of 2015; without the effect of the European Financial Stability Facility (hereinafter: EFSF), it dropped to 7.5% of GDP. In the next year, the general government’s debt as a percentage of GDP will increase, reaching the forecasted 10.3% by the end of 2017. Thereafter, the debt burden will start to decrease with the support of the surplus of the budgetary position, reaching 8.8% of GDP by the end of the forecast period i.e. by 2020.

62 The general government includes the following: the central government (reflected in the state budget); agencies governed by the public law; the state’s foundations (e.g. hospitals); the state’s companies (like RKAS); local governments; the Health Insurance Fund; the Unemployment Insurance Fund.

126 2004- 2016 2017 2018 2019 2020 2015 2014 * * * * * Main economic indicators (%) 1. Real GDP growth 3.0 1.1 2.0 3.0 3.3 3.0 2.8 2. Nominal GDP growth 8.3 2.5 4.1 5.9 6.3 6.0 5.7 2a. Nominal GDP (b euros) 20.5 21.3 22.6 24.0 25.4 26.9 2b. Nominal GNP (b euros) 20.0 20.8 22.0 23.4 24.8 26.2 3. GDP deflator 5.0 1.4 2.1 2.9 3.0 2.9 2.8 4. Consumer price index 3.9 -0.5 0.3 2.7 2.9 2.8 2.8 5. Harmonised index of consumer prices 4.1 0.1 0.9 2.9 3.0 2.9 2.9 6. Employment (15–74 age group, in 619.0 640.9 635.2 634.8 633.2 631.8 631.7 thousands) 7. Employment growth 0.4 2.6 -0.9 -0.1 -0.3 -0.2 0.0 8. Labour productivity growth (based on 2.5 -1.5 2.9 3.1 3.5 3.2 2.9 employment) 9. Unemployment rate 9.6 6.2 6.6 7.6 8.8 9.7 9.8 10. Average wage (euros) 1 065 1 117 1 170 1 234 1 305 1 376 11. Real wage growth 4.1 6.5 4.5 2.0 2.5 2.9 2.6 11a. Nominal wage growth 8.2 6.0 4.9 4.7 5.5 5.7 5.5

12. Investments and inventories (% of GDP) 29.8 24.6 25.6 26.0 26.2 26.5 26.9

13. Domestic savings (% of GDP) 24.8 26.5 26.2 26.5 26.8 26.8 26.8 14. Current account (% of GDP) -5.0 1.9 0.6 0.5 0.6 0.3 -0.1 Growth sources 15. Private consumption expenditure 2.9 4.8 3.4 2.5 2.8 3.2 3.0 16. General government’s final consumption 2.6 2.1 1.5 1.4 1.3 1.2 1.1 expenditure 17. Gross fixed capital formation 3.9 -4.5 2.4 4.4 4.7 5.0 5.0 18. Changes in inventories (% of GDP) 0.9 0.3 1.1 1.3 1.3 1.3 1.3 19. Domestic demand 2.9 -0.7 3.7 3.0 3.0 3.2 3.0 20. Export of goods and services 9.2 -1.1 1.6 3.8 4.5 4.8 4.7 21. Import of goods and services 8.7 -1.8 3.7 3.8 4.3 5.0 5.0 Contribution to GDP growth 22. Domestic demand (excluding inventories) 2.8 1.8 2.7 2.7 2.9 3.2 3.1 23. Changes in inventories 0.3 -2.5 0.8 0.1 0.0 -0.1 -0.1 24. Balance of goods and services 0.1 0.5 -1.6 0.1 0.3 -0.1 -0.1 Growth of added value 25. Primary sector 3.9 14.1 -6.3 5.2 2.3 1.8 1.8 26. Manufacturing 3.6 -0.5 2.9 4.1 4.5 4.4 4.2 27. Construction 3.4 -4.9 -0.2 4.3 4.5 4.3 3.7 28. Other services 2.9 0.6 1.6 2.3 2.8 2.6 2.5

127 * forecast Contribution to GDP growth indicates the proportions of specific sectors in economic growth. This is calculated by multiplying growth in the area by its proportion in GDP. The sum of the contributions of different sectors amounts to economic growth (the slight difference can be attributed to a statistical error – the part of GDP that cannot be divided between the sectors). Source: Ministry of Finance, Statistics Estonia, Eesti Pank. Forecast published by the Ministry of Finance on 5 April 2016.

128 Appendix 2. Financial plan of the State Budgetary Strategy 2017-2020 by areas of government

SBS 2017 SBS 2018 SBS 2019 SBS 2020

2% salary growth of cultural workers, internal security, social -9,000,000 -9,000,000 -9,000,000 -9,000,000 workers and teachers State’s co-funding -82,152,174 -85,008,001 -87,172,650 -73,527,083 National reserve of ICT expenditure -10,000,000 -10,000,000 -10,000,000 -10,000,000 Expenditure related to built property -1,766,825 -45,888,855 -138,440,218 -164,822,221 Part 1. RIIGIKOGU Cost ceilings -22,805,412 -22,823,479 -27,884,237 -23,099,411 Cost ceilings with limit rate -11,430,418 -11,223,162 -14,784,374 -11,164,870 Cost ceilings without limit rate (calculated and transferred costs) -11,374,994 -11,600,317 -13,099,863 -11,934,541 Part 2. OFFICE OF THE PRESIDENT OF THE REPUBLIC Cost ceilings -4,284,600 -4,284,730 -4,285,335 -4,285,872 Cost ceilings with limit rate -4,011,733 -4,011,733 -4,011,733 -4,011,733 Cost ceilings without limit rate (calculated and transferred costs) -272,867 -272,997 -273,602 -274,139 Part 3. NATIONAL AUDIT OFFICE Cost ceilings -5,581,873 -5,464,995 -5,473,655 -5,469,430 Cost ceilings with limit rate -4,992,914 -4,873,337 -4,873,196 -4,873,196 Cost ceilings without limit rate (calculated and transferred costs) -588,959 -591,658 -600,459 -596,234 Part 4. OFFICE OF THE CHANCELLOR OF JUSTICE Cost ceilings -2,223,282 -2,223,669 -2,223,884 -2,224,086 Cost ceilings with limit rate -2,086,804 -2,086,785 -2,086,644 -2,086,644 Cost ceilings without limit rate (calculated and transferred costs) -136,478 -136,884 -137,240 -137,442 Part 5. SUPREME COURT Cost ceilings -5,448,472 -5,434,922 -5,442,593 -5,508,639 Cost ceilings with limit rate -3,299,647 -3,283,619 -3,283,603 -3,308,603 Cost ceilings without limit rate (calculated and transferred costs) -2,148,825 -2,151,303 -2,158,990 -2,200,036 Section 1. GOVERNMENT OFFICE, area of administration Cost ceilings -44,323,280 -48,631,214 -8,818,002 -7,971,903 Cost ceilings with limit rate -44,275,135 -48,583,069 -8,769,857 -7,923,758 Cost ceilings without limit rate (calculated and transferred costs) -48,145 -48,145 -48,145 -48,145 Section 2. MINISTRY OF EDUCATION AND RESEARCH, area of government incl. the Government of the Republic’s support fund (for -236,695,669 -235,527,959 -233,154,217 -231,153,034 education expenditure) incl. the Government of the Republic’s support fund (for hobby -5,700,000 -14,250,000 -14,250,000 -14,250,000 activities) Cost ceilings -425,166,967 -426,919,075 -429,432,304 -431,538,214 Cost ceilings with limit rate -411,143,915 -418,785,242 -421,171,639 -423,172,822 Cost ceilings without limit rate (calculated and transferred costs) -14,023,052 -8,133,833 -8,260,665 -8,365,392 Section 3. MINISTRY OF JUSTICE, area of government Cost ceilings -126,558,385 -126,591,079 -126,772,031 -126,977,280

129 SBS 2017 SBS 2018 SBS 2019 SBS 2020

Cost ceilings with limit rate -123,006,223 -110,003,396 -109,967,755 -109,967,755 Cost ceilings without limit rate (calculated and transferred costs) -3,552,162 -16,587,683 -16,804,276 -17,009,525 Section 4. MINISTRY OF DEFENCE, area of government Cost ceilings -471,520,689 -492,292,938 -517,023,593 -543,260,094 Cost ceilings with limit rate -455,017,593 -474,588,203 -498,114,519 -523,104,778 Cost ceilings without limit rate (calculated and transferred costs) -16,503,096 -17,704,735 -18,909,074 -20,155,316 Section 5. MINISTRY OF THE ENVIRONMENT, area of government incl. the Government of the Republic’s support fund (waste -2,200,000 -2,200,000 -2,200,000 -2,200,000 storage) Cost ceilings -50,930,132 -50,923,932 -50,916,932 -50,909,932 Cost ceilings with limit rate -49,801,932 -49,801,932 -49,801,932 -49,801,932 Cost ceilings without limit rate (calculated and transferred costs) -1,128,200 -1,122,000 -1,115,000 -1,108,000 Section 6. MINISTRY OF CULTURE, area of government Cost ceilings -194,158,193 -188,472,646 -188,689,871 -190,711,032 Cost ceilings with limit rate -161,984,192 -154,567,833 -152,749,595 -152,749,595 Cost ceilings without limit rate (calculated and transferred costs) -32,174,001 -33,904,813 -35,940,276 -37,961,437 Section 7. MINISTRY OF ECONOMIC AFFAIRS AND COMMUNICATIONS, area of government incl. the Government of the Republic’s support fund (upkeep of -29,312,500 -29,312,500 -29,312,500 -29,312,500 local roads in public use) Cost ceilings -361,117,041 -371,565,170 -391,444,340 -391,383,626 Cost ceilings with limit rate -361,108,308 -371,559,979 -391,439,979 -391,379,979 Cost ceilings without limit rate (calculated and transferred costs) -8,733 -5,191 -4,361 -3,647 Section 8. MINISTRY OF AGRICULTURE, area of government Cost ceilings -46,979,602 -42,271,061 -42,131,089 -42,129,531 Cost ceilings with limit rate -46,212,772 -41,506,646 -41,359,531 -41,359,531 Cost ceilings without limit rate (calculated and transferred costs) -766,830 -764,415 -771,558 -770,000 Section 9. MINISTRY OF FINANCE, area of government Equalisation fund of local government budgets -76,409,187 -76,409,187 -76,409,187 -76,409,187 Addition to the revenue base of local governments 0 0 -15,000,000 -25,000,000 Support fund (compensating the expenditure of registering births -436,426 -436,426 -436,426 -436,426 and deaths and supporting the counties comprised of and including islands)

Support fund for expanding the land tax benefit of local 0 -1,200,000 -1,200,000 -1,200,000 governments Cost ceilings -713,971,201 -690,159,875 -708,973,977 -701,217,177 incl. merger support for local governments -14,000,000 -28,000,000 -23,000,000 0 Cost ceilings with limit rate -137,050,911 -136,036,880 -140,349,782 -140,399,782 Cost ceilings without limit rate (calculated and transferred costs) -576,920,290 -554,122,995 -568,624,195 -560,817,395 Section 10. MINISTRY OF THE INTERIOR, area of government Cost ceilings -334,675,211 -331,470,687 -333,584,669 -319,027,507

130 SBS 2017 SBS 2018 SBS 2019 SBS 2020

Cost ceilings with limit rate -316,863,687 -311,610,457 -312,214,521 -296,671,695 Cost ceilings without limit rate (calculated and transferred costs) -17,811,524 -19,860,230 -21,370,148 -22,355,812 Section 11. MINISTRY OF SOCIAL AFFAIRS, area of government incl. the Government of the Republic’s support fund (social -29,803,459 -33,102,417 -33,102,417 -33,102,417 expenditure) Cost ceilings - - - - 3,723,652,627 4,005,961,969 4,235,056,546 4,457,273,648 Cost ceilings with limit rate -187,916,244 -204,274,773 -204,263,273 -204,263,273 Cost ceilings without limit rate (calculated and transferred costs) - - - - 3,535,736,383 3,801,687,196 4,030,793,273 4,253,010,375 Section 13. MINISTRY OF FOREIGN AFFAIRS, area of government Cost ceilings -62,620,912 -62,593,209 -62,091,402 -62,090,991 Cost ceilings with limit rate -62,615,991 -62,590,991 -62,090,991 -62,090,991 Cost ceilings without limit rate (calculated and transferred costs) -4,921 -2,218 -411 0

131

Appendix 3. Use of revenues from EU scheme for greenhouse gas emission allowance trading in 2013-2020 In order to achieve the objectives of the international climate policy, the European Union has established a greenhouse gas emissions allowance (hereinafter “EUA”) trading scheme for the period 2013-2020. Within the scheme, Member States must auction63 all EUAs that are not allocated free of charge to stationary sources of pollution in accordance with Articles 3e, 10a and 10c of Directive 2003/87/EC. EUAs auctioned in Estonia in 2013-2020 and the expected revenue from EAU auctioning based on the basic scenario of the Ministry of Finance’s economic forecast of spring 2016 are as follows:

2013 2014 2015 2016 2017 2018 2019 2020 Total

Auctioned amount (data from MoE), 7.2378 43.246 excluding 4.091 1.2445 2.7675 4.4797 6.8442 8.7530 7.8279 free-of-charge electricity (m EUA)

Revenue 18.074 7.409 21.125 24.638 41.749 59.521 58.710 59.350 forecast (m €) 290.576

In accordance with Article 10 of Directive 2009/29/EC64 and the Ambient Air Protection Act65, at least 50% of the revenues generated from the auctioning should be used to achieve the following overall objectives: 1) to encourage a shift to low-emission and public forms of transport; 2) to develop renewable energies and to contribute to increasing energy efficiency; 3) to finance research and development in energy efficiency and clean technologies in the sectors covered by the European Parliament and Council Directive 2009/29/EC; 4) to improve energy efficiency and ensure energy savings; 5) to cover the administrative expenses of managing the EU emissions trading scheme; 6) to fund research and development as well as demonstration projects for reducing greenhouse gas emissions and for adaptation to climate change; to contribute to the Global Energy Efficiency and Renewable Energy Fund and to the Adaptation Fund; 7) to adapt to climate change;

63 The procedure for auctioning is defined in Commission Regulation (EU) No 1031/2010, which specifies the timing, administration and other aspects of EUA auctioning. 64 The directive can be found at: http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2009:140:0063:0087:et:PDF 65 The Act can be found at: https://www.riigiteataja.ee/akt/110032015013 ; see § 1194 (8).

132 8) to participate in Estonian and European initiatives within the framework of the European Strategic Energy Technology Plan and the European Technology Platforms; to participate in the planning of climate change mitigation and energy policies as well in the monitoring of the effectiveness of these policies; 9) measures to avoid deforestation and increase afforestation and reforestation in developing countries that have ratified the international agreement on climate change, including meeting Estonia’s climate-related international financing obligations; 10) carbon sequestration in forestry. Pursuant to § 1194 (5) of the Ambient Air Protection Act, the climate related measures designed to achieve these objectives form a part of the State Budget Strategy and their planning and implementation is guided by the principles described above. In that, the combined effect of the measures planned from the funds of European Union programming period 2014–2020 and other measures and activities funded from other domestic and foreign funds will be taken into account. These are expenses depending on revenues, i.e. the funds can be used depending on the actual receipt of revenues. The need for state aid is assessed separately for every measure and if necessary then the permit for state aid is applied for by the party responsible for the implementation of the measure. The forecast of revenues generated from EUA auctioning is updated at least twice a year when the Ministry of Finance is preparing its economic forecast. If necessary, the list of measures to be funded by the revenues from auctioning is also updated. The EU climate change objectives are implemented during the budget strategy period through energy and environmental protection policies, utilising the funds received from EUA auctioning. A list of measures planned to be funded from the auctioning revenues (based on the revenue forecast provided in the basic scenario of the Ministry of Finance’s economic forecast of spring 2016) is presented in the table below. Measures in the State Budget Strategy 2017-2020 performance areas to be funded by revenues from the EU greenhouse gas emissions allowance trading system in 2013-2020 (preliminary amount of funding, m €)

Total Responsibl Performance area, 2013 2014 2015 2016 2017 2018 2019 2020 2013- e measure 2020 authority

50% of the revenue forecast for climate policy 9.037 3.704 10.563 12.319 20.875 29.760 29.355 29.675 145.288 objectives (m €)

6. Energy 9.037 3.200 8.410 11.319 19.875 23.694 19.332 24.063 118.929

Minister of Economic Energy saving measures in 9.037 0.000 0.000 0.000 0.000 0.000 0.000 6.180 15.217 Affairs and apartment buildings Infrastructur e

Minister of Increasing the use of Economic alternative fuels in 0.000 0.000 0.000 3.466 8.772 7.866 4.720 3.146 27.971 Affairs and transport (biogas) Infrastructur e

Promoting energy Minister of efficiency and the use of Public 0.000 0.000 8.410 6.552 11.102 15.828 14.612 14.737 71.241 renewable energy in public Administrati sector buildings on

133 Total Responsibl Performance area, 2013 2014 2015 2016 2017 2018 2019 2020 2013- e measure 2020 authority

Supporting small Minister of residences in taking into Economic use renewable energy and 0.000 3.200 0.000 1.301 0.000 0.000 0.000 0.000 4.501 Affairs and updating their heating Infrastructur systems e

14. Environmental 0.000 0.423 1.000 1.000 1.000 6.066 10.023 6.765 26.277 protection

Minister of Estonia’s contribution to the international climate 0.000 0.423 1.000 1.000 1.000 1.000 1.000 1.000 6.423 Environmen change co-operation t

Minister of Managing the risk of the 0.000 0.000 0.000 0.000 0.000 1.000 1.000 2.553 4.553 flooding Environmen t

Minister of Pilot projects designed to the implement the climate 0.000 0.000 0.000 0.000 0.000 4.066 8.023 3.212 15.300 Environmen policy objectives t

Implementing the climate 9.037 3.704 9.410 12.319 20.875 29.760 29.355 30.828 145.288 policy objectives, total*: * The unplanned remaining balance of 2015 was added to the revenues of subsequent years. Starting from 2014, the so-called ordinary auctions described above are supplemented by auctions of aviation EAUs. In accordance with Article 3d of Directive 2009/29/EC66 and the Ambient Air Protection Act67, 100% of the revenues generated from the auctioning should be used to achieve the following overall objectives: 1) to encourage a shift to low-emission and public forms of transport; 2) to fund research and development as well as demonstration projects for reducing greenhouse gas emissions and for adaptation to climate change; 3) to contribute to the Global Energy Efficiency and Renewable Energy Fund and to the Adaptation Fund; 4) to adapt to climate change; 5) to participate in Estonian and European initiatives within the framework of the European Strategic Energy Technology Plan and the European Technology Platforms; to participate in the planning of climate change mitigation and energy policies as well in the monitoring of the effectiveness of these policies; 6) measures to avoid deforestation and increase afforestation and reforestation in developing countries that have ratified the international agreement on climate change, including meeting Estonia’s climate-related international financing obligations; 7) carbon sequestration in forestry;

66 The directive can be found at: http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CONSLEG:2003L0087:20090625:ET:PDF 67 The Act can be found at: https://www.riigiteataja.ee/akt/110032015013 ; see § 1194 (9).

134 8) research and development in climate change mitigation and adaptation, especially in aeronautics and air transport. The EAU amounts sold in Estonia and the forecasted revenue from trading with aviation EAUs in 2013-2020 based on the basic scenario of the Ministry of Finance’s economic forecast of spring 2016 are as follows:

2013- 2013 2014 2015 2016 2017 2018 2019 2020 2020

Auctioned amount 7,000 7,500 7,500 7,500 7,500 7500 7,000 7,000 58,500

Revenue forecast (m €) 0.0476 0.0510 0.0510 0.0510 0.0510 0.0.10 0.0476 0.0476 0.3978

Pursuant to the § 1194 (5) of the Ambient Air Protection Act, the climate related measures designed to achieve these objectives form a part of the State Budget Strategy and their planning and implementation is guided by the principles described above. The EU climate change objectives are implemented during the budget strategy period through energy and environmental protection policies, utilising the funds received from aviation EEA auctioning. The Ministry of the Environment has co-ordinated the use of the funds with the Government Office, the Ministry of Finance and the Ministry of Economic Affairs and Communications and, considering the low volume of the funds, has planned to direct those to pilot activities using ICT possibilities to achieve climate policy objectives (e.g. climate-themed development event Garage48 and supporting the best IT solutions developed at its follow-up event; Europe’s largest cleanses business idea competition i.e. a so-called startup business ignition programme Climate Launchpad). The party responsible for the use of aviation auction funds is the Ministry of the Environment. In addition to the EU system of EUA auctioning, the Decision No 406/2009/EC of the European Parliament and of the Council on the effort of Member States to reduce their greenhouse gas emissions sets an obligation for Estonia to limit the growth of its GHG emissions to +11% by 2020 (compared with the emissions of 2005) in sectors outside the EU system of EUA auctioning: transport, agriculture, wastes, use of solvents and other products, the part of industrial processes and energy processes excluded from the EU system of emissions trading. The activities needed to fulfil this objective are defined in sectoral development plans (for example, Energy Sector Development Plan, Transport Development Plan, etc.) and the State Budget Strategy based on them. The decision establishes a new trading unit – annual emissions allocation i.e. AEA, being equal to 1 tonne of CO2 equivalent (t CO2 equ). The annual amount of AEAs indicates the amount of emissions that the relevant EU Member State is allowed to emit into the atmosphere from the aforementioned sectors in that year. Estonia’s AEA amounts are calculated pursuant to unified methods and fixed for the period of 2013-2020 across the years with Appendix 2 to the European Commission’s decision dated 26 March 201368. Estonia’s growth of emission quantities will be restricted linearly until 2020 when the maximum emission quantity in sectors outside the trading system may be 6,467,256 t CO2 equ.

68Available at: http://eur-lex.europa.eu/legal-content/ET/TXT/PDF/?uri=OJ:JOL_2013_090_R_0106_01&from=FR

135 Actual emission quantities are compared with the annual emission allocations in each year during the period of 2013-2020. The state must ensure that the factual emission quantities do not exceed the annual emission allocations for that year. To fulfil the state’s obligations, the flexibilities provided by the so-called shared responsibility decision can be used: trading with units (AEAs), transferring the surplus of units to subsequent years (in unlimited extent) or borrowing from subsequent years (up to 5%), use of project-based units (up to 3% of the country’s 2005 emission quantity), trading with the right to use them or transferring it to subsequent years, cancelling of units. Member States, incl. Estonia prepared the first transactions of trading with AEAs at the earliest possible time when the European Commission has officially approved the GHG emission quantities submitted with the national greenhouse gas stocktaking. The stocktaking reports are always submitted for the year before the last (so-called x-2 rule). Pursuant to the European Parliament and Council Regulation69, all transactions of Member States needed for ensuring their compliance with the emission quantities based on European Commission’s shared responsibility decision must be performed within four months after the approval of those amounts. This requires that the transaction partners have previously agreed the transaction conditions (incl. the allowed purpose which the trading revenue can be used for), prepared the agreements and performed other possibly necessary administrative steps. In the system of bilateral trading estasblished with the so-called EU shared responsibility decision No. 406/2009/EÜ70, the Ministry of the Environment is preparing an agreement to trade in AEAs. As it is a new system internal to the EU, its launch has been centrally delayed and no relevant agreement has been signed. When communicating with interested buyers, Estonia has based the unifying of the proposals and the quota buyers’ interests on the possible volume of units71. The agreement volume depends on the trading market’s situation (where the supply of units significantly exceeds the demand) and on agreement with the buyer. The stocktaking reports and forecasts being the basis for AEA trading are adjusted at least once a year. Use of the revenue from AEA trading is planned on the basis of priorities declared in the State Budget Strategy, accounting for the transaction partner’s preferences and the joint effect of planned measures funded by the 2014–2020 European Union funds and measures and activities funded by other internal and external funds (similar to the procedures of the international trading system for 2008-2012). Forecasts of AEA quantities allocated to Estonia in terms of sectors included in the so-called shared responsibility decision as well as the emission quantities from those sectors, and also the forecasts of revenue received from possible trading with those (based on the Ministry of the Environment’s data and the GHG emission quantity forecast of Estonian Environmental Research Centre for 2012, assuming an average unit price of 1.7 euros/AEA) are presented in the table below.

69 Regulation (EU) No 525/2013 of the European Parliament and of the Council of 21 May 2013 on a mechanism for monitoring and reporting greenhouse gas emissions and for reporting other information at national and Union level relevant to climate change and repealing Decision No 280/2004/EC: http://faolex.fao.org/docs/pdf/eur125075.pdf 70 Pursuant to the shared responsibility decision, the GIG emission quantities must be restricted in sectors outside the EU system of EEA auctioning: transport, agriculture, wastes, use of solvents and other products, the part of industrial processes and energy processes excluded from the EU system of emissions trading. 71 Difference between the quota amounts allocated to Estonia in Annex 2 of the European Commission’s 26 March 2013 decision and the Ministry of the Environment’s forecast of the aforementioned sectors’ emission quantities.

136

2013-2020 Forecast of the surplus of 2013-2020 GHG emission allocations and the trading revenue in case of a scenario based on development plans in force

2013 2014 2015 2016 2017 2018 2019 2020 2013-2020

Remaining balance of GHG emission quantities in case of a 0 0 0 712,634 724,011 730,767 737,523 744,279 3,649,214 scenario based on the measures of current development plans

Forecasted revenue from sales of AEAs (m 0 1.2115 1.2308 1.2423 1.2538 1.2653 6.2037 €*) * As the sales of annual GHG emission quota (AEA) take place in the year after the next from the accounting year, the forecast of expected revenue is also indicated in the year after the next.

137