Global Insight Perspective

Significance

The new government should be stable, considering the government's majority, Prime Minister Andrus Ansip has been convincingly elected, and will continue in the post he has held since 2005.

Implications

Little is expected in the way of policy change, but there are inherent instabilities in the coalition, with previous form of members having resulted in a government collapse. Although they share similar policy outlook, medium-term troubles should be borne in mind, with local elections in 2009 seen as a flashpoint.

Outlook

The short-term work will focus on approval of further reductions to the tax rate and meeting convergence criteria for euro adoption, although this will not be possible before 2010 on current performance.

The new government of Andrus Ansip has been sworn in by President Toomas Hendrik Ilves, with the three-party coalition led by Ansip's Reform Party, with 31 parliamentary seats. The government controls 60 seats in the 101-seat house, and in the approval vote, 62 deputies present voted in favour of the coalition.

The 14-member cabinet comprises six ministers from Reform, including incumbent Foreign Minister Urmas Paet, and Justice Minister Rein Lang. The remainder are new faces.

Governing with Reform are the Social Democrats, with three posts and 10 parliamentary seats, and the Union of Pro Patria and Res Publica (IRL), with five ministries and 19 deputies. IRL's ministers include former Prime Minister Juhan Parts, who takes on the economy portfolio. The former central banker won power in the 2003 elections but resigned in 2005 amid a coalition row. His Res Publica were at the time in a coalition including Reform, leaving some scope for troubles to resurface. However, euro adoption will bring the respected former banker a big project to concentrate on. The adoption of the single currency remains a target for the government, but it has signalled that this would not be at the expense of the impressive growth that has been seen in recent years. Inflation, a bugbear of other euro-targeting Baltic neighbours, prevented adoption before now. Ansip has shied away from giving a firm target for adoption, but it Global Insight currently forecasts 2010 as the earliest date for compliance with convergence criteria.

Outlook and Implications

Nominally centre-right, Ansip repeats the trick of a left-wing party to create a balance across the spectrum, which will also allow for some of the social spending that has been promised by most parties. According to Agence France-Presse (AFP), Ansip has promised increased defence spending to 2.0% of GDP, to meet commitments of NATO membership, which Estonia joined in 2004, and from which it benefits in the form of air patrols across its airspace that have helped to cut back accidental incursions by Russian aircraft. In addition the much lauded cuts to tax rates are on the programme. This will see the rate fall to 18% by 2011 through incremental reductions to the flat income tax programme adopted in 1996. The rate has been cut by one percentage point annually for some years. Centre Party (Kesk), the coalition partners of Reform between 2005-1007 had not backed the continued reductions.

Ansip himself proved to be the single most popular politician in the elections, and is likely to use this to cement his position in government. There are some other known faces that have returned to the cabinet, including Aaviksoo, who stood down as rector of Tartu university to compete in presidential elections in 2006. Lukas is co-leader of IRL and a former education minister, and Padar leader of the Social Democrats. The main difficulty will be uniting the personalities of Parts and Ansip, but the short-term outlook remains largely unchanged.

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