The main policy challenges are now to: avoid cyclical unemployment becoming structural; strengthen the fiscal framework; improve the framework of bankruptcy procedures to deal with non performing loans; reap efficiency gains in government operations; and make more out of globalisation as a sustainable driver of growth.

The large increase in unemployment generates additional workload for the recently reformed public employment service. It is important that adequate, appropriately skilled resources are available for this task. In terms of active labour market policies, greater emphasis on training measures is necessary to support the reallocation of workers.
Current procedures to deal with bad loans are too costly and cumbersome. Personal bankruptcy procedures should allow more flexible and out of court restructuring plans. Corporate bankruptcy procedures require very specific expertise, which could be provided by a specialised court.

Owing to government policies, the fiscal deficit and public debt have remained low. However, the pro cyclical bias of fiscal policy should be addressed by introducing multi year public expenditure ceilings. An independent fiscal institution should provide expert input for fiscal policy decisions and assess outcomes. The sustainability of old age income replacement relies on low replacement rates, which risk providing insufficient protection against poverty.

Estonia has a large network of very small municipalities, making the provision of government services inefficient and of variable quality. Therefore it should follow the example of other countries in the region and establish a more efficient municipal network through mergers and joint provision of services.

Relatively high out of pocket payments for healthcare, especially for pharmaceuticals and dental care, risk excluding low-income households from appropriate healthcare. Additional spending will become necessary because remuneration in the healthcare sector is relatively low. Fiscal room for dealing with these spending pressures could be created by further rationalising the hospital network and improving its cost efficiency. Strengthening incentives for wider use of cheaper pharmaceuticals would reduce the burden of private health care expenditures.

Estonia is an open economy with a business friendly regulatory environment. Nevertheless it has not fully reaped the benefits of globalisation. Enterprise support should therefore focus more on making firms more productive and overcoming size constraints. Furthermore, an active approach to better market the advantages of Estonia as a location for export-oriented foreign investors appears warranted.