Estonia unveiled a sharp package of tax hikes and spending cuts to keep next year’s budget deficit at 3% of GDP and make room for a large planned increase in defence spending, according to bne IntelliNews.
Estonia’s VAT rate would increase by 2 percentage points from 1 July 2025, Estonian media reported on 18 September. A special additional tax of 2% on corporate profits and personal income will also be introduced from 2026 to support the country’s growing defence spending.
Prime Minister Kristen Michal pledged that no new taxes would be introduced until after the 2027 general election. To tackle austerity, the government plans to cut public sector spending by around €1bn, exceeding previous targets.
Each ministry, as well as public funds and state-owned companies, will cut spending by 10% over three years: 5% in the first year, 3% in 2026 and 2% in 2027. The total public sector cuts now totalled €1.3bn.
From 2026, sickness and parental allowances will be restricted to two national average salaries, with the state ceasing to pay social tax for stay-at-home parents. Besides, from next year, pensioners in nursing homes will lose their eligibility for the single pensioner allowance.
New budget policy
The government’s goal is to reduce the budget deficit next year from a projected 4.4% to 3% of GDP.
Finance Minister Jürgen Ligi also highlighted the challenges of balancing national defence with the current financial situation. Defence Minister Hanno Pevkur recently stated that expenditures could reach 5% of GDP in the future.
The government allocated €1.6 billion over several years for ammunition. The Ministry of Defence plans to buy over €4 billion worth of them over the next decade. In 2026, a new investment initiative will aim to attract high-tech manufacturing, boost exports, and create high-paying jobs.
Estonia expects to approve the draft state budget on 25 September, with Michal presenting it to the Riigikogu (parliament) on 26 September, according to local media.
