Recent political initiatives to add hundreds of millions in fixed costs
Since 2020, various political initiatives have added new fixed costs, with salary fund growth requiring €237 million, average pension tax exemption €104 million and additional national defense spending €510 million next year.
The fixed expenditures of the state budget have been growing at a brisk pace in recent years.
In 2020, Jüri Ratas' government (Center, EKRE, Isamaa) passed the 2021-2024 state budget strategy to introduce additional pension hikes. This hiked Estonia's fixed expenses by €50 million in 2021, €66 million last year and €72 million this year. This sum will grow to €85 million by the year 2026.
The 2021 strategy prescribed an additional pensions hike of €20 for 2023 and rendered the average old-age pension free of tax. The latter decision was made by the Reform-Center government of Kaja Kallas.
The effect of that decision on the 2023 state budget is €133 million, which is set to grow to €169 million next year and €225 million by 2026.
The 2023-2026 state budget strategy was put together last fall by the previous coalition government of the Reform Party, Isamaa and the Social Democratic Party. Another spike in fixed costs was delivered.
Growth of the public sector salary fund will add €237 million in expenses.
The strategy also prescribed hiking child benefits for the first and second child, the single parent benefit, large family benefit and the latter's indexation.
The 2023-2026 strategy would also have extended the large family benefit until children turned 24 and introduced a social welfare reform, hiked the basic exemption to €654, brought additional higher education spending from 2022 and 15 percent annual growth, as well as maintaining research and development spending at 1 percent of GDP.
All of those changes would have added €647 million in 2023, €687 million next year and €736 million in 2025, reaching €812 million by the year after that.
However, the current Reform-Eesti 200-SDE coalition aims to reverse some of the previous government's decisions. For example, there are plans to reduce maintenance allowance and slash the large family benefit. Therefore, it remains unclear how much state spending will grow.
Estonia's decision to considerably hike defense spending will add €510 million in additional expenses next year, €312 million in 2025 and €200 million in 2026.
Executing the previous governments' decisions in full would add €1.442 billion in fixed public costs compared to 2020, which comes to 3.6 percent of the Estonian GDP.
The Reform Party's main election promise of abolishing Estonia's gradual income tax exemption (dubbed the "tax hump") and introducing a universal basic exemption of €700 per month or €8,400 annually is also set to cost hundreds of millions in the 2025 budget. The Ministry of Finance has said that while the basic exemption reform costs €500 million, decisions to hike the income tax rate and abolish certain tax incentives will reduce the impact by €300 million.
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Editor: Marcus Turovski