Prime Minister Kristen Michal says that the government’s focus in the budget is on defence, the economy and income growth. “We will not give an inch when it comes to safeguarding Estonia’s freedom and independence,” he remarked. “Defence spending will rise to at least 5% of GDP.
“So as to accelerate economic growth, we will not be raising income tax as has been planned for 2026. Alongside reinstating the general tax-free threshold, the overall tax burden will be reduced, meaning that the state will go without around 780 million euros.
“The third target of the budget is to increase incomes, since price rises have narrowed the choices available to people and families in Estonia. Reinstating the uniform tax-free threshold will boost all working people’s incomes, with those earning the average wage receiving in excess of 1800 euros more a year.
“The budget provides for an increase of up to 10% in the salary fund for police officers, rescue workers, teachers and those employed in the field of culture. Pensions will also increase in line with the current index, for which there is money in the budget.”
Minister of Education and Research Kristina Kallas says the most important goal of the budget negotiations was to restore the competitiveness of the Estonian economy. “The crises and uncertainties that recent years have brought have undermined our business environment, and now is the time to re-establish conditions that will give entrepreneurs a sense of security and bring in new investments,” she said.
Minister Kallas feels it is equally important for the state to invest in the future – particularly in a research-intensive economy and education. “If we want Estonia to be a country in which new technologies and smart solutions are born, we have to invest in research and development, and in our education system,” she explained. “Education is what underpins the development of both society and the economy.”
People’s ability to cope from one day to the next is at the heart of Eesti 200’s policies, Minister Kallas stressed. “That is especially true for teachers, police officers, rescuer workers and others whose work is vital to the functioning of the state,” she added. “The government’s decision to invest in salaries, combined with tax changes, will leave education workers who earn the average teacher’s wage with 3828 euros more in their pockets each year.”
Minister of Finance Jürgen Ligi says that although the budget is in line with the rules, it is exceptionally tight.
“Two figures in it are unusually high,” he noted: “the deficit of 4.5% of GDP and defence spending at 5%. Both stem from Russia’s aggression against the free world, which has forced Europe to temporarily ease its fiscal policy and sharply increase its defence spending. Estonia’s budget is drawn up according to temporary, four-year rules. Unfortunately, most areas will face tough cuts. A major change is in the tax burden: the tax-free threshold will be restored to 700 euros, and there will be no increase in income tax. However, we have increased spending not just on security, but also on education and culture, and areas which are particularly sensitive socially – like pensions and healthcare – are also protected.”
Surge in defence spending
Defence spending will increase to at least 5% of GDP in the 2026 budget, meeting NATO criteria. The increase compared to 2025 will be 844.5 million euros.
The government will also continue to provide 0.25% of GDP in military aid to Ukraine: 110.7 million euros has been earmarked for this in 2026, of which around 100 million will be channelled into orders for the Estonian defence industry which are needed to ensure Ukraine’s victory. This will boost industrial development while taking into account the needs of the Defence Forces. In addition, the supplementary budget for 2025 will provide an additional 39 million euros in military assistance for Ukraine.
The establishment of defence industry parks will continue, with a view to launching on-site production of explosives and ammunition for the Defence Forces and to boost Estonian exports. Nearly 50 million euros is planned for the design and preparation of the Pärnu County defence industry park, whose factories will launch production in late 2026 or early 2027.
The budget of the Ministry of Foreign Affairs will also be strengthened in order to bolster Estonia’s security. An additional 2.1 million euros will be allocated for civilian aid to Ukraine as it continues to counter Russia’s aggression. Furthermore, 1.8 million euros will be allocated for the preparation of the global Ukraine Recovery Conference, whose 2027 edition is to be held in Estonia.
Economic growth
In order for people to receive more of the income they earn, plans to increase income tax in 2026 have been dropped. To boost growth, both corporate and personal income tax will remain at 22%. Alongside the reinstatement of the tax-free threshold, the tax burden in Estonia will be reduced by 1.4 percentage points, from 36.6% to 35.2%. Income tax reductions will leave around 780 million euros in the economy.
In order to make sparing use of taxpayers’ money, the state will postpone or cut non-essential spending. This will affect, for example, the renovation of public buildings.
Cuts in staff and management costs, and in subsidies, will continue as planned. The 5% cut that came into force this year will be increased by 3% and 2%, respectively, in 2026-2027. Institutional spending has been reduced by around 225 million euros for 2026 through budget reviews and percentage cut measures. Ministries will have to cut staff and management costs by a further 20 million euros in 2026, amongst other things to reduce the volume of carry-overs.
The budget deficit of the Health Insurance Fund is planned to be reduced by 70-80 million euros per year in the coming years, compared with the budget strategy forecast.
The budget will provide the means for major investments, which will grant companies a sense of certainty about their future volume of work. The biggest four-lane road construction programme since Estonia restored its independence will be launched in 2026. A total of 276.8 million euros is planned for the development, maintenance and upgrading of road infrastructure, of which 65 million euros will come from the motor vehicle tax.
The 2026 budget will guarantee funding for the completion by 2030 of Rail Baltic, which will link Estonia to the rest of Europe. Next year, 684.2 million euros will be channelled into the development and maintenance of rail transport, including investments.
To support the economy, the adoption of EU Cohesion Funds will be accelerated. A total of around 680 million euros is planned to be paid out in European subsidies during the year. This will support reforms and development in almost all areas of life: renovating homes to make them more energy-efficient; constructing roads and railways; investing in basic infrastructure for defence parks; and supporting the nation’s farmers so as to guarantee Estonia’s food security.
Income growth
Starting in 2026, the tax-free threshold will rise to 700 euros per month. For the average wage earner, this will mean an extra 1800 euros per year.
The budget foresees an up to 10% increase in the salary fund for education, internal security, culture and special welfare. Alongside the tax changes, education workers earning the average teacher’s wage will be left with 319 euros more each month or 3828 euros more per year. In total, around 117 million euros will be invested in wage increases in priority areas next year.
Earlier cuts in operating expenditure will also apply in these areas. In 2026, the total cuts in the Ministry of Education and Research, the Ministry of the Interior and the Ministry of Culture will amount to around 94 million euros, of which the Ministry of Education and Research will add a further 18 million euros through budget reviews.
The average pension is projected to rise by 5.4% next year, for which an increase of 210 million euros has been planned in the state budget.
The budget takes into account changes to the motor vehicle tax, which will reduce the tax burden on families with children by up to 100 euros per child under the age of 19. In total, more than 16 million euros will be left over families in Estonia. The second change is a significant reduction in the tax rate for minibuses from 2026, which will further support the ability to cope of families with children and people with disabilities.
The government will increase the budget for subsistence benefits by a total of 4 million euros, which will see more people in vulnerable financial situations receiving support, and in larger amounts than before.
The government plans to approve the 2026 budget on Wednesday 24 September, with Prime Minister Michal handing it over to the Riigikogu the following day.
