Prime Minister Kristen Michal (Reform) said during the government press conference Tuesday that the cabinet has reached an agreement on incoming tax changes.

"In terms of the broad-based defense tax, we will stick with what the coalition agreement provides /.../ where it will be made up of VAT and income tax and an additional 2 percent corporate profits tax," Michal said.

The defense tax will be made up of three components. From July 1, 2025, Estonia's VAT rate will grow by 2 percentage points, which will be complemented in 2026 by a 2 percent additional tax on taxable income of physical persons and a 2 percent tax on corporate profits. The latter will be calculated based on the previous financial year's profit, with the tax due quarterly.

The prime minister promised no new taxes until 2027 when Estonia will hold its next general election.

As concerns the EDF's ammunition needs, it was decided to spend €1.6 billion over several years. The Ministry of Defense will handle relevant procurements as soon as possible, with Estonia set to purchase more than €4 billion worth of munitions in the next decade.

The government plans to invest heavily in livening up the economy, including by investing €402.6 billion from sale of pollution quotas. Two-thirds of the sum will be used to finance the Rail Baltica railroad project, including for a joint Elron and Rail Baltica depot. Sums will also be made available for apartment associations' energy efficiency investments, roadbuilding, but also for marine green technologies.

A new investment measure will be launched in 2026 to bring more high-tech manufacturing to Estonia, boost export and create high-paying jobs.

Work to construct ERR's new television production complex will continue, with the renovation of the National Library building in its final stages and the renovation of the Tallinn Art Hall Gallery (Tallinna Kunstihoone) set to begin.

A cap of two national average salaries will be introduced for sickness and parental benefits from 2026, which is also when the state will stop paying social tax for stay-at-home parents.

Pensioners living in nursing homes will no longer be eligible for the single pensioner benefit from next year.

Austerity of almost a billion euros planned

In terms of austerity, the prime minister said that the government will cut roughly a billion euros worth of public sector costs in the coming years, which is more than the target set during coalition talks.

All ministries and their administrative areas will save 10 percent over the next three year: 5 percent next year, 3 percent in 2026 and 2 percent in 2027. The cost-cutting also applies to state foundations and state-owned companies.

"The cost-cutting will be extensive, with pensions, internal security, police, the Defense Forces and teachers the only exceptions," the premier said, adding that more details will become clear once the state budget bill lands in the parliament next week.

With previously planned austerity measures, public sector cuts now amount to €1.3 billion.

The government's goal is to reduce next year's fiscal deficit from the forecast of 4.4 percent to 3 percent of GDP. Based on the decisions, Estonia is set to save €200 million on interest expenses over the next four years.

To find more revenue for the state budget, state company dividends will grow next year.

Work on the details just beginning

Minister of Finance Jürgen Ligi (Reform) said that work on the budget is only beginning, adding that bolstering national defense in Estonia's current fiscal situation is quite a challenge.

"It was not possible without tax hikes," Ligi admitted but said he hopes the corporate profits tax will be a temporary measure.

Interior Minister Lauri Läänemets (SDE) said that while national defense investments were the focus of budget talks, economic security was not overlooked either.

The important thing is that we will maintain growth of pensions and ensure continued high-quality healthcare. Child and parental benefits being retained in current volume matters to average and low-income households," Läänemets noted.

Minister of Education Kristina Kallas (Eesti 200) said that it was important to stop the public sector's fixed costs from ballooning. "Where the state budget was headed would soon have made it difficult to pay out pensions, not to mention raising them," Kallas remarked.

The government plans to approve the state budget bill at its September 25 sitting, after hearing from the fiscal council. Prime Minister Kristen Michal is set to present the budget to the Riigikogu on September 26.

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