Key issues
- Tax changes and budget cuts do not take into consideration accumulation and uneven distribution of their effects. The ones benefitting the most from tax policy changes are the higher earners.
- The decline in volume and availability of public services increases people’s daily expenses, which in turn are affected by inflation, decline in purchasing power and the uneven distribution of wage increases. The greatest risk is borne by social groups that are already the most vulnerable.
- Instead of public interest, the government has prioritised business interests, creating an opportunity for large companies to influence legislation without taking into account the needs of other interest groups and without analysing the broader impact of several proposed amendments.
Political and institutional developments
In 2025‒2026, several changes to tax and excise duty have been implemented or are about to be implemented, which will be imposed on everyone uniformly, and without distinction for people in vulnerable situations. This year, the standard rate of the value added tax increased[1], a new tax was imposed for motor vehicles (car tax)[2], and a registration fee must be paid when registering a motor vehicle for the first time. The excise duty rates on alcohol, tobacco products, electricity, and several types of fuel have increased.[3] According to the Ministry of Finance’s forecast, the impact of raising excise duty rates will be small[4], but in the appraisal of think tank Praxis, the simultaneous increase of the VAT and the petrol excise duty rates will have the greatest impact on household spending.[5]
Subsistence of the most socio-economically vulnerable people will be most affected by the increase of the income tax rate going up from 20% to 22%, and the elimination of the tax curve as of 1 January 2026.[6] The positive impact of basic exemption independent of income size, is more pronounced primarily for middle- and high-income working-age and employed people, according to the analysis by Praxis, which increases income inequality both in the population as a whole and within vulnerable groups.[7]
In order to reduce the state budget deficit and limit expenses, the government has decided to cut several public sector labour and administrative expenses, as well as operating and specific purpose subsidies.[8] State administrative agencies, foundations and state enterprises are about to face 10% of budget cuts in 2025‒2027. Vulnerable groups are most affected by lengthening of the Social Insurance Board’s time-limits of proceedings, the reduction of strategic partnership support for non-governmental organisations by a quarter in the Ministry of Social Affairs’ budget (including for mental health, child welfare and other activities in the social field), the 15.6 million euro cut in general education, youth and language sectors (including activity subsidies for youth organisations), and the reduction of local government support for extracurricular education by 10%.[9] In the health sector, ambulatory specialist care visit fees, prescription fees, and in-patient fees increased in 2025, while patient cost-sharing for stationary nursing care decreased. From this year, the payment of allowance for pensioners living alone that receive round-the-clock care services will be discontinued.
Tax changes and budget cuts do not take into consideration the accumulation and uneven distribution of their effects.[10] The subsistence of especially those households that are in more difficult socio-economic situations is reduced[11], as is the case with low income and high risk of poverty – even a decrease of twenty euros in income makes it more difficult to get by.[12] The decline in volume and availability of public services due to cuts increases people’s daily spending, which in turn is affected by inflation, decrease in purchasing power, and uneven distribution of wage increases. As a result of the state’s budgetary policy choices, particularly the opportunities of the most vulnerable groups to exercise their social rights are dwindling, but so is the state’s ability to mitigate the effects of the economic environment on risk groups.
Legislative developments
At the time of writing, the draft legislation amending the Employment Contracts Act and other acts has passed its first reading in Riigikogu, which aims to create an opportunity for concluding flexible working hours agreements. In case of flexible working hours, the employer is obliged to guarantee the employee a minimum of 10 hours of working time within seven days at a minimum hourly wage of at least 1.2 times the minimum wage.[13] The explanatory memorandum to the draft highlights the risk that some employers may pressure employees to agree to the agreement, and the work load and income of those who previously worked full-time will therefore decrease. In the estimate of the Confederation of Estonian Trade Unions, the adoption of the draft act would make the employees’ work load and income unpredictable, the employees would lack flexibility in employment relationships, business risks would be transferred to the employees, and flexible working hours would eliminate overtime and overtime pay.[14] The head of the confederation, Kaia Vask, emphasises that the employees are not on an equal footing with the employers and therefore there can be no talk of employees voluntarily changing the working conditions.[15] The explanatory memorandum to the draft also shows that the unintended effects of the amendment can lead to more extensive negative consequences for the employees than for the employers.[16]
Legislative trends as a whole are characterised by a significant influence of business interests on state governance, one of the significant manifestations of which is the so-called Efficiency and Economic Growth Council established in March of 2025 at the Government Office at the initiative of the Prime Minister.[17] The majority of the council’s membership is currently or has been previously associated with the government parties, either as members, candidates or donors.[18] The collective consisting primarily of large businesses is not officially a government agency, nor a form of an interest group meeting, but it has an unprecedentedly large influence on legislation: in the first seven months, more than 360 amendments from the council have made it into Riigikogu in draft legislations through the mediation of the government.[19] The volume and speed of proceedings of the initiatives make it difficult for other interest groups to respond in time and provide a more in-depth analysis and feedback on specific amendments, tilting the platform towards the profit interests of large businesses and industries.
Statistics and surveys
The latest data on poverty from Statistics Estonia describe the state of things in 2023 and show a decline in the number of people living in absolute poverty (36,400 persons, or 11,300 fewer than in 2022)[20] as well as in relative poverty (274,800 persons, or 29,100 fewer than in 2022)[21]. State measures of previous years have played an important role in alleviating poverty, including increases in pensions, child and family benefits and maintenance allowance.[22] According to think tank Praxis’ forecast, the rate of relative poverty will continue to increase and the income will decrease primarily among the people whose poverty risk has also been highest so far. Calculations show the biggest impact of changes caused by the state’s budget strategy on older women living alone and single-mother households.[23]
In Swedbank’s estimate, this year’s price increase (the consumer price index had increased 5.2% within the year as of September)[24] is affected up to a third by the increase in taxes and excise rates, which, in conjunction with the increase in income tax rate reduces the purchasing power of the average wage earner.[25] The average gross wages in the second quarter of 2025 was 2126 euros (up 5.9% from the same quarter previous year) and the median wage was 1734 euros (up 5.7% from the same quarter previous year).[26] According to a salary survey conducted by job search portal cv.ee, nearly half of employees have had a very small salary increase or no salary increase.[27] The minimum wage in full-time employment (886 euros gross) increased by 8% in comparison to the previous year[28], but in terms of purchasing power of minimum-wage earners we are in the last place among the European Union states.[29] A broader problem with subsistence is also reflected in the fact that, according to Eurostat, 24.2% of Estonians cannot afford to take a minimum of a week-long vacation.[30,31]
According to the Norstat 2025 survey, in the 12 months preceding the survey, 57% of Estonian residents have used their savings to cover daily expenses, a third of them have done so occasionally, and 24% have done so repeatedly. A third of Estonians have not used their savings for everyday expenses, and a fifth have no savings at all.[32] According to the analysis of Julianus Inkasso, the number of people in payment difficulties (85,000) had decreased compared to the first quarter of the previous year, but the amount of payment defaults per average debtor has increased and the amount of all debts has increased by 9 million euros over the year.[33] The company’s CEO Merle Laurimäe anticipates the combined effects of the economic recession, unemployment and wage poverty will lead to an increase in both the number of people with payment difficulties and the total amount of average debt.[34]
Noteworthy public discussions
In public statements over the past two years, both government members and large businesses have accused the public sector of unfeasible and unreasonable spending, as well as lack of sustainability in fiscal policy. The latter has been described as one of the main reasons for slow economic growth.[35] The narrative of a bloated public sector[36], its irresponsible spending[37] and a bureaucracy in need of cuts[38] has been countered by the need to prioritise business interests, realisation of which boosts the economy and thereby increases the national revenue base.
The societal reaction to the rising cost of living has been perhaps most clearly manifested by the popular initiative to reduce the VAT rate on food products, which gathered 98,580 signatures. The Minister of Finance has called the dissatisfaction with the VAT rate increase insolent, self-centred and petty.[39] The Minister of Finance has described the unification of the tax-free minimum as a great relief, especially for lower income earners[40], although the data published by the Ministry of Finance itself shows the opposite.[41] The former Prime Minister Siim Kallas has argued[42], downplaying relative poverty as a social issue, that it is a “left-wing populist demagoguery for political purposes” and that poverty is in fact caused by provision of public goods.[43] Other commentators, however, have pointed out that Estonia’s regressive tax system disproportionately favours higher income earners and places too great of a burden on those earning lower incomes, which is what many of today’s societal problems stem from.[44]
Case study
An article published in “Pere ja Kodu” illustrates, through the experience of four women, the combined effect of social risks for single parents, 30.5% of whom as of 2023 live in relative poverty.[45] The fathers of the children of Marianne, Anetti, Elisa and Vanessa refused to financially support their descendants after the break-up, and in two cases the men wrote off their property to avoid the obligation to pay the maintenance imposed by the court. When children get sick, mothers are forced to stay at home with them, which further reduces their income. Unavoidable expenses, such as medications, glasses, orthopaedic shoes, and visits to specialists that Marianne’s 9-year-old son needs due to his disability makes it harder to make ends meet. The women describe how the constant worry about coping and caring for children alone has worsened their mental health, but there is no time nor resources for rest and recovery.
Recommendations
- Assess the cumulative impact on subsistence of different societal groups when planning tax changes and public sector cuts.
- Establish a progressive tax system, lower the level of consumption taxes, and introduce a traditional corporate income tax to increase the state’s revenue base, reduce the burden on lower-income earners, and public spending to alleviate their situation.
- Include businesses in lawmaking in a transparent manner, taking into account other societal interest, and consider the needs of the state and the population as a whole.
[1] Eesti Maksu- ja Tolliamet. 2024. 2025. aasta maksumuudatused, 21.10.2024.
[2] Eesti Maksu- ja Tolliamet. 2025. Mootorsõidukimaks, 09.09.2025.
[3] ERR. 2025. Ministeerium: aktsiisitõusude mõju pole märkimisväärne, 30.04.2025.
[4] Ibid.
[5] Mõttekoda Praxis. 2025. Analüüs riiklike maksutõusude ja eelarvekärbete mõjust haavatavas olukorras sihtrühmadele, 02.05.2025.
[6] Eesti Maksu- ja Tolliamet. 2024. 2025. aasta maksumuudatused, 21.10.2024.
[7] Mõttekoda Praxis. 2025. Analüüs riiklike maksutõusude ja eelarvekärbete mõjust haavatavas olukorras sihtrühmadele, 02.05.2025.
[8] Rahandusministeerium. 2024. Riigi eelarvestrateegia 2025-2028, 25.09.2024.
[9] Mõttekoda Praxis. 2025. Analüüs riiklike maksutõusude ja eelarvekärbete mõjust haavatavas olukorras sihtrühmadele, 02.05.2025.
[10] Ibid.
[11] ERR. 2025. Maksumuudatustest võidavad suurema sissetulekuga inimesed, 19.09.2025.
[12] Mõttekoda Praxis. 2025. Analüüs riiklike maksutõusude ja eelarvekärbete mõjust haavatavas olukorras sihtrühmadele, 02.05.2025.
[13] Eelnõude Infosüsteem. 2024. Töölepingu seaduse ja teiste seaduste muutmise seaduse eelnõu seletuskiri, 31.05.2024.
[14] Eesti Ametiühingute Keskliit. 2025. Ametiühingud Riigikogule: peatage eelnõu menetlus, kuni saavutatakse sisuline kokkulepe tööandjate ja ametiühingute vahel, 09.06.2025.
[15] ERR. 2025. Kaia Vask: töötaja ei ole ettevõtja turvapadi, 15.05.2025.
[16] Eelnõude Infosüsteem. 2024. Töölepingu seaduse ja teiste seaduste muutmise seaduse eelnõu seletuskiri, 31.05.2024.
[17] Riigikantselei. 2025. Efektiivsuse ja majanduskasvu nõukoda, 16.10.2025.
[18] Arno Lauk, Müürileht. 2025. Õhem riik, paksemad kasumid, mai 2025.
[19] Vabariigi Valitsus. 2025. Otsused majanduse elavdamiseks ja bürokraatia vähendamiseks, 24.07.2025.
[20] Eesti Statistikaamet. 2025. Absoluutne vaesus, veebis 26.10.2025.
[21] Eesti Statistikaamet. 2025. Suhteline vaesus, veebis 26.10.2025.
[22] Eesti Statistikaamet. 2024. Vaesuses elavate inimeste arv on aastaga vähenenud, tajutav ilmajäetus kasvanud, 06.11.2024.
[23] Mõttekoda Praxis. 2025. Analüüs riiklike maksutõusude ja eelarvekärbete mõjust haavatavas olukorras sihtrühmadele, 02.05.2025.
[24] Äripäev. 2025. Hinnatõus püsib üle 5%, kuid leeveneva märgiga, 07.10.2025.
[25] Postimees. 2025. Valmis olla: pank ütleb, et keskmine eestlane kaotab tänavu oma ostujõudu, 07.03.2025.
[26] Eesti Statistikaamet. 2025. Keskmine brutokuupalk, veebis 26.10.2025.
[27] Postimees. 2024. Lapse arvuti ost tõukas võlgadesse: palgavaesus Eestis aina suureneb, 11.09.2024.
[28] Palgainfo. 2025. Alampalk Eestis, veebis 26.10.2025.
[29] Eesti Ekspress. 2025. Eesti on miinimumpalgaliste ostujõu poolest Euroopa Liidus viimasel kohal, 31.07.2025.
[30] Maaleht. 2025. Kui vaene on Eesti võrreldes teiste Euroopa Liidu riikidega? Tulemused on masendavad, 03.09.2025.
[31] Eesti Ametiühingute Keskliit. 2025. Iga üheksas Eesti töötaja ei saa endale isegi nädalast puhkust lubada, 19.08.2025.
[32] Maaleht. 2025. Kui vaene on Eesti võrreldes teiste Euroopa Liidu riikidega? Tulemused on masendavad, 03.09.2025.
[33] Julianus Inkasso. 2025. Julianus Inkasso eraisikute maksehäirete analüüs 2025, veebis 29.10.2025.
[34] Delfi Ärileht. 2025. Võlad süvenevad: tööpuudus ja palgavaesus paisutavad Eesti inimeste inkassonõudeid, 21.04.2025.
[35] Postimees. 2024. Margus Tsahkna: riik peab oma rasva maha hööveldama, 18.04.2024.
[36] Eesti Päevaleht. 2024. Leon Glikman: maksumaksja on liiga kaua kinni maksnud tühjade tünnide kõminaid, töötamise imiteerimist ja ettevõtjatele vastandumist, 02.08.2024.
[37] Eesti Päevaleht. 2024. Raul Kirjanen: pasunad või kahurid. Valitsuse kärpekirves hakaku jõuliselt välkuma, 05.07.2024.
[38] Delfi. 2025. Võimukõnelejad asusid plaane koostama. Kallas: me ei kärbi, vaid pühime tolmu, 15.03.2025
[39] ERR. 2025. Ligi: hinnatõusust rääkimine on sama rumal kui halva ilma kirumine, 01.07.2025.
[40] Maaleht. 2025. Jürgen Ligi: ka mina ostan poest allahinnatud kaupa. See on mul sees, et inimene peab kokku hoidma, 17.07.2025.
[41] ERR. 2025. Maksumuudatustest võidavad suurema sissetulekuga inimesed, 19.09.2025.
[42] Maaleht. 2025. Jürgen Ligi: ka mina ostan poest allahinnatud kaupa. See on mul sees, et inimene peab kokku hoidma, 17.07.2025.
[43] Postimees. 2025. SIIM KALLAS: Tasuta hüvede jagamine teeb ühiskonna nii suhteliselt kui absoluutselt vaesemaks, 25.06.2025.
[44] ERR. 2025. Indrek Neivelt: regressiivne maksusüsteem on kinni jooksnud, 11.07.2025.
[45] Pere ja Kodu. 2025. „Pidin otsustama, kumb on tähtsam – mu eneseväärikus või see, et lapsel oleks katus pea kohal.“ Üksikemade koorem on rusuv, 27.03.2025.
