Estonia: A Lesson for the U.S. Government

May 23, 2013

The U.S. federal government has claimed that it is devoted to decreasing spending and creating a balanced budget so that America can start decreasing its national debt. While verbally U.S. politicians have promised changes, they have not acted on those promises. In regard to spending, there is an extreme lack of austerity in most Western nations, except for one that is often overlooked: Estonia. Estonia is outperforming all of its other European neighbors and likely will continue to do so in the future. Why? Because Estonia is one of the only countries in the Eurozone that has actually implemented spending cuts, tax reform and free market economic principles, says Matthew Melchiorre, a journalism fellow at the Competitive Enterprise Institute.

What benefits did Estonia reap from their tax reform, spending cuts and a hands-off approach to the economy? According to European Commission data:

  • In 2010, the country increased economic growth by 2.3 percent, while the rest of Europe was suffering economically.
  • In 2011, Estonia increased economic growth by 7.6 percent, which is an increase of 5.3 percent in economic growth in one year.

The United Kingdom (mirroring the Obama administration's proposed tax policies) is trying to increase taxes to gain more revenue when its economy is faltering. Estonia, by contrast, fixed its economy and then increased taxes slightly and decreased spending.

  • The Baltic state fixed its economy by adopting a hands off approach, and let the markets work out the inefficiencies that were causing economic decline.
  • It started to close the gap between labor productivity and wages by the second year after implementing its program.

U.S. policymakers could learn substantially from the actions of Estonia, as the country has been following a similar path as the United Kingdom of-late. This path includes engaging in massive monetary and fiscal stimulus with no sign of stopping and increased federal spending.

Instead of following the flawed example of the U.K.'s monetary and fiscal policies, the United States should embrace a new role model and follow Estonia's example.

Source: Matthew Melchiorre, "Separating European Austerity Fact from Fiction: A Lesson for the U.S. on Why Budget Cutting Works," Competitive Enterprise Institute, May 7, 2013.

 

Browse more articles on Economic Issues