Kallas said that a redistribution of the local government's revenue base is necessary to ensure basic levels of primary health care, security and education in less affluent municipalities.

"We are not imagining services comparable to those in Tallinn or Tartu. A good life does not require all the things, such as the presence ministries or a ballet theater, which only two Estonian municipalities can maintain," he said.

"People who choose to live in the countryside have taken this into consideration already, but we cannot close 200 more schools as we have done for the past two decades. In many municipalities there are none left to close," the minister said.

Kallas disagrees with the notion that life is becoming increasingly concentrated in larger communities such as Tallinn and Tartu. "Who wants to endure traffic jams, poor air quality, and a lack of nursery spaces? Due to working remotely, there is a reinvigorated trend to move to the countryside," he said. "We have reached a threshold below which we should not go. Estonia is not that poor that we all have to live in four or five cities, while the rest of the country is a summer resort for people go once a year to mow the lawn."

Kallas said that all coalition parties recognize the gravity of the situation and see the need to redistribute the revenues of higher-income municipalities. "Regional inequality is one of the most important issues for SDE, second only to the issue of the minimum wage increase. The coalition partners also see that we cannot go on in this way," Kallas said.

Poorer municipalities will get €11 million in reallocated money as part of the revenue base redistribution.

According to the minister, this was not a significant sum. "My preference would be to put an additional €10 million into the equalization fund but, as regional minister, I am trying to work out solutions in a climate where everyone asks for more money," he said.

Kallas added that municipalities in dire circumstances will also benefit from rising income tax receipts.

"My wish would have been to redistribute on a much larger scale, but in order to do so we should also offer additional measures to those municipalities whose growth we are supporting. Whether the issue is land taxes or local taxes, we cannot do so at this time, so the amount to be redistributed is substantially less than what is required for the regional policy," he said.

Additional funding for local authorities to be discussed in August

According to the minister, he wanted to introduce this bill with as little fuss as possible, although other measures, such as transferring a portion of the corporate income tax to the revenue base of local governments to encourage them to create more employment for individuals, are also considered.

Kallas said that in August, a package of financial possibilities will be discussed with local governments, which will include the land tax reform, the transfer of corporate income tax to local governments and the reform of the equalisation fund.

The issue of merging of municipalities based on conurbations, for which no funds are yet available, will also be tacked. "We plan to engage in this four-month project to find out which changes we can implement beginning in 2025. These talks will take place between August and November," Kallas said.

Regarding the elimination of the VAT differential for hotels, Kallas said that he was awaiting additional analysis, as the tax reform could have varying effects on businesses in different regions. Kallas did not specify how to reach a compromise with coalition partners on this.

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