The 2025 state budget, which passed its second reading in the Riigikogu last Wednesday, projects revenues of €17.7 billion and expenditures of €18.2 billion. The government sector's budget deficit remains at 3 percent of GDP.

Urmas Reinsalu, chair of the Riigikogu State Budget Control Select Committee and leader of the opposition Isamaa party, presented his calculations to the committee on Monday. He argued that while the government has justified increases in excise taxes, VAT, the additional 2 percent taxation on all income sources and the taxation of reinvested corporate profits as necessary for defense spending, his analysis does not support this claim.

Reinsalu pointed out that the government's assertion of saving over €100 million in administrative costs next year, as well as the claim that tax increases are needed to cover new defense expenditures, including ammunition, are both incorrect.

He explained that while the coalition promised to reduce administrative costs – such as personnel and operating expenses, as well as subsidies – by 5 percent, a comprehensive calculation of administrative expenses across all ministries shows an increase of €54.5 million in personnel costs and €23.6 million in subsidies.

Although operating expenses initially appear to decrease by €85.2 million, Reinsalu noted that this reduction is primarily due to the government cutting €97 million in defense-specific special equipment purchases, including ammunition, from the operating expenses in next year's budget compared to the current year.

"The government has promised to allocate an additional €75 million for ammunition in the 2025 budget. In reality, this amount is set to decrease compared to 2024," Reinsalu said.

He added that when the defense-specific special equipment line is excluded from operating expenses, administrative costs do not decrease by 5 percent but instead increase by 2 percent.

Auditor General Janar Holm stated during the committee meeting that his review of the budget's explanatory memorandum supports Reinsalu's claims. According to Holm, the memorandum shows only a 0.1 percent reduction in operating costs and other subsidies. He also confirmed that excluding cuts to the Ministry of Defense's operating expenses results in a net increase in expenditures.

Holm further explained that just before the meeting, he received clarification from the Ministry of Finance indicating that their calculations were based on a different methodology. Specifically, the ministry compared the 2025 budget to the government's long-term budget strategy (RES) rather than to the 2024 budget. As a result, the figures presented by the ministry differ from those in the explanatory memorandum.

However, Holm noted that these figures are not officially documented in the RES, which complicates efforts to verify their accuracy. He suggested that the Ministry of Finance should clarify what basis they used for their calculations. Neither the finance minister nor ministry representatives attended the meeting.

"Presumably, the RES figures exist somewhere within the system, but they are not documented in any confirmed form. It would be reasonable to clarify the baseline amount from which the percentage changes in the explanatory memorandum are calculated. Currently, this remains unclear," Holm said.

Regarding Reinsalu's claim that ammunition procurement will decrease next year compared to this year, the National Audit Office confirmed that the explanatory memorandum also reflects a decrease rather than an increase. Holm emphasized that further explanations from the Ministry of Defense or the Ministry of Finance are necessary to clarify the situation, as no evidence in the available materials indicates an increase in spending.

Ministry: Reinsalu proceeding from incorrect base

Regina Vällik, head of the financial service of the state budget department at the Ministry of Finance, told ERR that the conclusions and data presented by Urmas Reinsalu are inconsistent with the methodology used in budgeting. According to Vällik, Reinsalu's assertions are based on the assumption that if next year's state budget is larger than this year's, no cuts have been made, which she said is incorrect.

"The state budget is prepared based on the current State Budget Strategy (RES) and financial forecast, as regulated by Section 34 of the State Budget Act. Therefore, it cannot be assumed that the baseline for cost reductions is the 2024 budget. Comparisons should be made between the budget planned at the start of the RES 2025-2028 process and the draft 2025 state budget submitted to the Riigikogu," Vällik explained.

She added that a reduction does not necessarily mean that the total amount must be smaller than the comparable budget – whether that is the 2024 state budget or the RES 2024-2027. For example, it is possible to cut the growth of the budget.

The reducible portion of the budget, Vällik said, does not correspond to the total volume of the planned budget since all funds must be reflected in the state budget.

"This means that, for example, budgets financed by external grants are not subject to percentage cuts in the same way as capped budgets. For externally funded projects, specific agreements with donors determine the objectives that must be achieved. Cutting these activities could result in a loss of revenue or, in the worst-case scenario, broader funding," she noted.

Vällik also clarified that budgets mandated by law are not subject to percentage cuts since such expenses are dictated by legal requirements. Similarly, expenses funded from CO2 sales revenue do not yield the expected results when cut. For this reason, only capped budget funds are used as the baseline for cuts.

State budget institutions include schools, the Defense Forces, the police and rescue services, among others. Local governments are also funded through state budget allocations, such as the support and equalization fund. According to Vällik, these budgets were either not subject to cuts at all or cuts were not fully applied to entire budgets.

"In addition to budget cuts, other measures outlined in the coalition agreement and the RES 2025-2028 process are also reflected in the state budget as expenses and revenues. The economic content of specific activities is regulated by the budget classifier regulation," Vällik said.

Therefore, Vällik argued, it is not possible to isolate a single measure or budget line from the broader 2025 state budget draft and draw conclusions from it.

"Administrative domains have the ability and the right to adjust forecasts during the budget process based on economic content. This includes procurement plans, training costs, building maintenance, outsourced services and similar items. Consequently, the economic content of the budget, including personnel costs, operating expenses, subsidies and investments, may change according to the choices made or refined activity plans," she added.

In summary, according to the Ministry of Finance's calculations, the 2025 state budget is 1.8 percent smaller – €138.2 million – than the initial 2024 budget. Operating expenses are projected to decrease by over 8 percent, subsidies (excluding social benefits) by 1.2 percent, while personnel costs are expected to grow by 2 percent.

Ministry calculations also fail to demonstrate a defense spending cut

When assessing the reduction in the budget for defense-specific special equipment, including ammunition, Urmas Reinsalu did not take into account that an additional €75 million was planned for ammunition procurement based on the current state budget strategy and the summer economic forecast, rather than the 2024 state budget, said Regina Vällik.

"The budget for defense-specific special equipment is part of defense spending and the defense budget. In 2025, there have been no cuts to the defense budget or defense spending," Vällik stated. "The basis for the defense budget remains at 3 percent of GDP, with additional agreed-upon funds allocated for allied presence and additional ammunition procurement."

Therefore, according to Vällik, changes within the defense-specific special equipment budget are not related to administrative cost savings.

She noted that the defense-specific special equipment budget should not be viewed solely as expenditures but alongside investments, as the classification depends on whether the procurement is recorded as an expense or an investment in accounting terms, i.e., whether it is capitalized.

"The budget for defense-specific special equipment, including ammunition, is planned on an accrual basis, meaning it depends on when the goods are delivered according to the procurement plan, which varies by year," the ministry representative added.

The draft 2025 state budget law is scheduled for its third reading in the Riigikogu plenary session on December.

--

Follow ERR News on Facebook and Twitter and never miss an update!