Coalition agreement: VAT, income tax to rise by 2 percentage points

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Coalition negotiations between Reform, SDE and Eesti 200 started at Stenbock House (photo taken March 8, 2023, exactly one month before the final agreement and ministerial posts were set to be announced).
Coalition negotiations between Reform, SDE and Eesti 200 started at Stenbock House (photo taken March 8, 2023, exactly one month before the final agreement and ministerial posts were set to be announced). Source: Ken Mürk/ERR

Ministerial positions have been allocated among the incoming Reform-Eesti 200-SDE coalition, reports have it. The Reform Party has seven ministers, Eesti 200 three, along with the post of Riigikogu speaker, and the Social Democrats (SDE) will hold three ministerial posts also.

The coalition agreement due to be unveiled later on Saturday provides for an increase in both VAT and income tax of 2 percentage points each, it is reported. These changes will be put in place in 2024 and 2025 and are likely a trade-off for other policies, including the income tax-free threshold being raised to €700 per month, according to initial reports.

There will be 14 government members (including the prime minister), one down on the previous administration, while ministerial portfolios are being divided roughly proportionately to the number of seats won on March 5 (Reform took 37 seats, Eesti 200 took their first 14 seats and SDE took nine).


The unconfirmed ministerial positions will see Kaja Kallas (Reform) returning as prime minister, while former Minister of Defense Kalle Laanet will be the new minister of justice

Other returnees who were a part of the outgoing Reform-Isamaa-SDE administration are Signe Riisalo (Reform), who continues as minister of social protection, Hanno Pevkur (Reform) as minister of defense and Lauri Läänemets (SDE) as minister of the interior.

Returning to office but to a different portfolio are reportedly Riina Sikkut (SDE), who will be health minister, a post which she has held in the past, and Madis Kallas (SDE), who will be minister of regional and rural affairs – a new position created as an amalgam of the formerly separate rural affairs and public administration ministerial posts.

Margus Tsahkna (Eesti 200) will reportedly be the new minister of foreign affairs, while Kristen Michal (Reform) will take on a new portfolio, minister of climate.

Tsahkna was defense minister in 2016-2017, while Michal was last a government minister 2015-2016, when he held the economic affairs and communications portfolio.


Meanwhile Mart Võrklaev (Reform, minister of finance) and Tiit Riisalo (Eesti 200, minister of IT and economic affairs) are newcomers to government office, as is Kristiina Kallas (Eesti 200, minister of education and research).

Heidy Purga is to be minister of culture.

Võrklaev was Reform's chief whip at the XIV Riigikogu. Tiit Riisalo is a former secretary general of Isamaa, then known as IRL, and is the husband of returning social protection minister, Signe Riisalo.

Eesti 200 leader Lauri Hussar is to be nominated Riigikogu speaker, properly speaking president of the Riigikogu, unconfirmed reports state.

All appointees will need to pass a Riigikogu vote before entering office. The XV Riigikogu convenes for the first time on Monday.

Please note that the newly-created ministerial posts' official titles in English may be subject to some tweaking.

VAT and income tax to rise by 2 percentage points

The coalition agreement signed by the three parties is set to be unveiled later on on Saturday, while the parties' boards are meeting individually, at the time of writing, ahead of this.

Reports state that, under the terms of the agreement, from January 1, 2024, VAT will rise by 2 percentage points, while from January 1, 2025 (a year later), the personal income tax rate will rise by 2 percentage points for all.

At the same time, a Reform Party desired policy of raising the income tax-free minimum threshold to €700 per month looks set to have made it on to the agreement document.

Mart Võrklaev, the Reform Party's candidate for the post of finance minister, said that abolishing Estonia's so-called tax hump or gradual basic exemption system will exempt people making €1,200-€2,100 a month from an effective 34-percent income tax rate.

Estonia will also be laying down a car tax in 2024, while what exactly will be taxed and how much will be determined in the course of analyses.

"The main criteria will be CO2 emissions, with smaller and more economical cars running the owner less in tax, while larger vehicles that put out more emissions will be more expensive to own," Võrklaev said, adding that owners of more luxurious EVs will be charged based on vehicle value.

"A green reform is among this government's priorities, meaning that tax hikes and efforts to discourage polluting need to be made," Võrklaev said.

The incoming finance minister also said that the coalition will aim for a 3-percent nominal deficit in next year's budget, which should improve the fiscal position by around €500 million.

The lower VAT rate of accommodation providers will be abolished from 2025, while excise duties on tobacco and alcohol will rise. "The hike will be 5 percent annually based on initial estimates, while we will also be looking to Latvia to try and synchronize these efforts," Võrklaev offered.


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Editor: Andrew Whyte, Mari Peegel, Marcus Turovski

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