The ministry calculates the budget deficit as 3 percent of the gross domestic product (GDP).

Taxes and social security payments will total €14.98 billion of the total – approximately 85 percent of state budget revenues. Non-tax revenues amount to €2.73 billion, or 15 percent.

The tax burden as a percentage of GDP will increase by 0.7 percentage points, reaching 35.8 percent.

Looking at the €18.2 billion expenditures, the lion's share – €10.11 billion – will be allocated to legal entities, for example, companies and organizations. Subsidies paid to individuals will amount to €4.33 billion, and government agency expenses will total €3.17 billion.

Budget investments will increase by 9 percent to €869 million. Approximately 40 percent has been earmarked for real estate, 39 percent for other investments, 11 percent for IT, 7 percent for machinery and equipment, and 3 percent for vehicles.

The difference between state budget expenditures and investments and revenues is €1.35 billion. This is the amount that needs to be borrowed to cover expenses and investments. However, compared to this year's budget, the deficit will decrease by 11.5 percent.

Prime Minister and Reform Party Chairman Kristen Michal said at the press conference introducing the budget that the Estonian state continues to live beyond its means.

"We are still spending more than we have in revenue. Yesterday, the Governor of the Bank of Estonia, Madis Müller, explained it simply by saying that for every €100 we receive in revenue, we are spending €110," said Michal.

"This difference means that we are still living somewhat in debt, as a country spending beyond its means. This is not sustainable. It means that in the coming years, cuts will need to be made," he said, adding that the amount of cuts will total €1 billion over four years.

Minister of Finance Jürgen Ligi (Reform) said that many unpleasant decisions had to be made to balance the budget. "These decisions should have actually been initiated earlier. The state of the budget, the state of the country's finances, is very poor," Ligi said.

"Because of this, we must reduce our expenditures – both on the part of the government and the citizens. This means there will be budget cuts and tax increases at a time when the economy is not yet thriving," Ligi explained.

While the budget has grown, cuts are still planned for the coming years.

The Ministry of Finance said the cuts should reduce costs by €164 million next year, €325 million in 2026, €388 million in 2027 and €397 million in 2028.

Minister of the Interior and Chairman of the Social Democrats Lauri Läänemets said that cuts should avoided in the future, and state employees should receive pay rises.

"Therefore, I am very pleased that we have agreed on the possibility of implementing pay raises in the public sector in 2026," he said. "The most important thing is that we have more and better jobs, so that we have higher wages and the people of Estonia can live with dignity and improved well-being."

Kristina Kallas, Eesti 200 chairman and minister of education said the government made a big effort to reduce public finances and find a path towards sustainability.

She said a better financial balance in 10 years would allow the state to discuss raising pensions. The alternative would have meant not paying pensions at all.

Kallas added that the structural balance still needs to be further improved, but she said some sectors will be spare cuts. "Our people's purchasing power has taken a significant hit, and these are primarily the sectors that depend on the state budget," the minister said.

This article was updated to add comments from Kristen Michal, Jürgen Ligi, Lauri Läänemets, and Kristina Kallas.

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