Experts: Boosting R&D Could Help Estonia Tackle Rising Public Debt

Estonia's economy, accustomed to sharp downturns followed by quick recoveries since independence, now faces a prolonged stagnation, according to Peeter Luikmel, an economist at the Bank of Estonia. Income levels have stalled at about 70–80% of the EU average, while prices continue to rise, converging with those of Finland and Scandinavia (around 125% of the EU average). This creates a situation where Estonia reaches its neighbors' price levels but not their prosperity.

The solution, Luikmel argues, is to increase spending on research and development (R&D). Estonia currently spends about 2% of GDP on R&D, compared with over 3% in Finland and Sweden. He believes an additional percentage point could move Estonia into the ranks of wealthier countries within 15–20 years. However, this must be done without increasing public debt, as countries with lower debt burdens tend to grow faster.

Estonia's public debt is rising rapidly. At the current trajectory, interest payments could reach around €600 million annually in four to five years—equivalent to the combined budgets of the country's three largest universities. Traditional measures like raising VAT are insufficient: covering the deficit would require increasing VAT from 24% to 34%, which is unrealistic.

Luikmel and entrepreneur Ruth Oltjer discussed alternative solutions at the Delta Economic Conference in Tartu. Ideas include progressive income taxation or other ways to tax the wealthy, as well as corporate income tax exemptions for R&D spending. Oltjer stressed that officials should not become barriers to innovation—her company faced bureaucratic hurdles when trying to register an antiviral spray during the pandemic.

To foster innovation, collaboration between businesses, researchers, and the state is essential. Oltjer suggests creating open laboratories where entrepreneurs can work alongside scientists, bridging the gap between academia and industry. A friendly environment that encourages connections between entrepreneurs and researchers is key, she added.