VAT will increase by 2 percentage points from July 2025, and income tax by 2 percentage points from the beginning of 2026. This will raise them both to 24 percent. Estonia has a flat income tax system, meaning the hike will affect all taxpayers.

Additionally from the beginning of 2026, a 2 percent tax on corporate profits will be introduced as part of a package of tax increases called the defense tax. These taxes would be temporary until the end of 2028.

"The government taking office after the 2027 Riigikogu elections will decide whether the tax will be needed or changed," the coalition agreement states.

The new coalition promises to keep defense spending at 3 percent, at least, and cover the costs of hosting NATO allies.

With the money raised by the defense tax, the coalition wants to acquire long-range weapon systems and munitions to be able to destroy the threat to Estonian security on the enemy's territory, if necessary.

The government also wants to strengthen Estonia's information, media and digital space, and increase the digital defense capability and the cyber defense capability of the e-state against hybrid threats and the spread of false information.

It also promises to reduce the budget deficit from the projected 5.6 percent to 3 percent in 2025, keep it at the same level in 2026, and then reduce it in 2027.

The new coalition will cut labor and management costs in its ministries, as well as operating and targeted subsidies by 10 percent within three years.

Excise duties on alcohol, tobacco and gasoline will increase by an additional 5 percent per year.

The elimination of the removal of the income tax-free threshold, known as the "tax hump", planned for 2025, will be delayed by a year.

Universities will be allowed to introduce fees for Estonian-language curricula in certain cases and aim to increase learning opportunities in applied higher education.

The coalition also plans to cut red tape and bureaucracy. It wants to implement a rule that says if one new requirement is introduced that increases the administrative burden on companies, then one requirement must also be scrapped.

The construction of Rail Baltic will be sped up, investments to electrify the railway and increase speeds will continue, and train traffic increase due to the arrival of new trains.

The agreement also stressed that the state budget must be understandable.

"We will start publishing a cost-based budget in the 2025 State Budget Explanatory Memorandum in parallel with the activity-based budget. We will then decide on the need to continue with an activity-based budget and on changes to the budgeting process," the agreement states.

To get the budget under control, the government has promised to cut labor, management, and operating costs as well as targeted subsidies by 10 percent over three years: 5 percent in 2025, 3 percent in 2026, and 2 percent in 2027.

Cuts will also be made to foundations and state-owned enterprises.

Prime ministerial candidate Kristen Michal (Reform) said at a press conference introducing the agreement on Friday evening that the state must also sell various assets and privatize companies that are not needed.

SDE Chairman Lauri Läänemets said that the previous coalition agreement (2023-2024) will also remain in force and both agreements must be viewed in parallel.

Currently, the agreement can be read here in Estonian.

The government will take office early next week.

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