Even though Prime Minister Kristen Michal (Reform) has publicly said that the government's defense tax decision should be the end of the so-called festival of taxes, the reality will be quite different. Taking a closer look at the state's funding decisions and fiscal policy, we soon learn that the promise of tax stability is merely seeming. Hard-coded into the government's recent decisions are new tax hikes in the near future, with both future cabinets and everyone in Estonia left facing the consequences.

Based on available information, most cuts will hit the social, education and culture domains, which form society's foundation and help support national development in the future.

The long-term consequences of such austerity measures can be compared to security risks, as a weakening education system and dwindling cultural identity work to lessen our competitive ability, while weaker social protection deepens poverty, which will end up costing the state an arm and a leg.

Dialing back social benefits, cutting unemployment insurance funding and saving on road maintenance will only alleviate the fiscal situation briefly, while putting more pressure on the public sector in the long run.

Risk of poverty growing

The state cutting social support and financial instruments aimed at children will put families at greater risk of poverty. Unfortunately, we must admit that the more children in a family, the grater its risk of poverty in Estonia. Growth of absolute and relative poverty not only causes social problems directly, but also comes with longer-term negative consequences. Children who grow up living in poverty are likelier to remain poor later in life.

According to data from Statistics Estonia, 22.5 percent of people lived in relative and 3.5 percent in absolute poverty in Estonia in 2022. These figures have grown since then, meaning that over a quarter of people in Estonia live in poverty. But poverty is not just an individual problem and has an effect on all of society.

Cutting back on social and family benefits today entails much steeper spending to address the effects of deepening poverty in the future. It is a systemic problem preventing which would be both cheaper and socially fairer.

Social benefits are more than just lines of expenses in the state budget. They are an investment in society. But the government is even slashing suicide and addiction prevention budgets. Without enough state-level support, relevant problems will only deepen, with expenses and missed revenue in tow.

Unemployment will grow

State funding for the Unemployment Insurance Fund will fall by €50-60 million annually, with students, people taking care of loved ones, coming out of conscription and released from prison about to be cut off from benefits – for a total of some 8,500 people who will be asking their local government for subsistence benefits.

The latter is meant for people living in absolute poverty and subject to strict criteria. Furthermore, the instrument is aimed at households, not specific individuals. Basically, the state is sending people into deeper poverty instead of preventing it through Unemployment Insurance Fund measures. It amounts to telling people in no uncertain terms that absolute poverty is where they belong.

Local government will get the chance to manage a larger number of those in need, without any increase in relevant funding. The state is saving several dozen million euros at the expense of least fortunate groups, while only giving local governments €1.5 million with which to help them. In other words, the central government is saddling local counterparts with a part of its obligations, creating more problems for municipalities and the people living there.

Looking at the long term, in a situation where the Unemployment Insurance Fund's revenue is dwindling, the number of those who will need its services (unemployment benefits) is only set to grow.

Firstly, the economic situation will not improve in the coming years, with unemployment set to rise, as demonstrated, among others, in a recent Bank of Estonia forecast. Secondly, the government plans to start supporting a group (8,000-9,000 people) that was not eligible before.

The goal to try and help more people is noble, but at whose expense? Instead of seeing its budget grow, the Unemployment Insurance Fund will be left with less money, with reserves of use only in the short term. Because the fund gets the lion's share of its revenue from the unemployment insurance premium paid by employers and employees, the only way to bridge the gap is by yet another tax hike.

Banking tax an alleviation

Laying down a banking tax two years ago would have already yielded an extra €500 million for the state budget. It would have helped avoid many cuts we're now seeing and alleviated pressure on the social domain. A progressive income tax system, of which the Center Party has been a proponent for a long time, would similarly have helped distribute the tax burden more fairly. Now, just the opposite is happening – less fortunate people are being left worst off, having to pay double, as they are hit first by higher taxes and second by the benefits cut.

It is important to realize that today's solutions and short-term goals will require paying a much higher price plus interest in the future.

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