On top of the fact that taxes are set to rise in the coming years, Estonia's public sector is going to start seeking places to save as well, said Reform Party member and candidate for finance minister Mart Võrklaev in an appearance on ETV's "Ringvaade" on Tuesday night.

From 2024, the VAT rate in Estonia will be increasing by 2 percentage points to 22 percent; from 2025, the income tax rate will follow suit, likewise increasing by 2 percentage points to reach 22 percent.

"Eliminating the tax hump means that everyone will be subject to the general, uniform income tax — of 22 percent," Võrklaev explained. "And at the same time, the basic exemption will increase to €700 [per month], beyond which everyone will uniformly pay 22 percent income tax. The elimination of the tax hump plus the increase in the basic exemption will create a situation in which as the income tax is hiked, no one will actually end up receiving less money."

He noted that the change in income tax will start bringing money into the state budget in the longer term.

"Initially, as people will be receiving more money, that means that the state won't be getting more money from there at the moment," the prospective finance minister said.

"In the long term, wages will go up, the state will start getting more money — in other words, this is a deal with a positive sign," he continued. "Plus the fact that people earning more than €8,000 [a month] are going to start paying more [in taxes] than they currently do. And we still have a number of those folks, meaning this is likely to generate additional income too. But true, this will generate returns in the longer term."

The Reform member highlighted that the need to hike taxes stems largely from the need to increase defense spending.

"Due to Russia's full-scale invasion of Ukraine, we had to increase defense expenditures from 2 to 3 percent [GDP], which is in the order of magnitude of €400-450 million," he emphasized.

Võrklaev confirmed that there are plans to seek places for cuts in the public sector as well.

"We've nevertheless undertaken to review our services and activities in the public sector as well," he said, adding that the plan is to divide this into two stages.

"One is the one that will occur between coalition talks and the budget this fall, where each minister will go to their ministry and try to find possible savings there, or look over services and see whether there is anything that needs to be offered that can be done more efficiently," the minister-to-be explained.

"And the other is a long-term plan — a budget audit and the drawing up of a zero-based budget," he continued. "In other words, we have to review all services and activities offered by the state and ask whether they need to be done, and whether they can be done more efficiently. And then decide accordingly. But this is a lengthy process. It will be the Ministry of Finance's task to carry this out together with the other ministries."

Võrklaev said that this work would be done throughout the government's four years.

"But not like working for four years and then saying that it didn't work out," he continued. "Rather we'll take it — as it's a big job — bit by bit, ministry by ministry, and each year we still want to achieve some kind of result and actually make this state more efficient. In other words, while we're asking people for help in the form of taxes, we'll be tightening our own belt as well."

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