Over 50,000 people had as of Wednesday signed a citizens' initiative calling on the Riigikogu to slash VAT on food to 10 percent.

Michal said on Wednesday: "Unfortunately, there is no one quick magic wand, as even the Estonian media pointed out yesterday. In Hungary, for instance, food prices have still risen by over 10 percent a year after the introduction of a profit cap, while in Latvia, where there is a VAT exemption on food, prices are essentially the same as they are in Estonia. No one has managed to solve this challenge in a way that the money doesn't end up in the middleman's pocket, but actually helps the producer and the consumer."

"As businesses in the food sector themselves have stated, any new tax exemption should be covered by either bigger cuts or the introduction of other taxes," he went on.

"Prices have been rising faster than, and independently of, taxes. The root cause of the current price rise is the rapid global increase in wages and in raw material prices. The regrettably large inflation spiral was first set in motion by Isamaa's dismantling of the pension system, which was further exacerbated by our aggressive neighbor's war machine. Recovery has taken time, but the pace of inflation is slowing, while next year it will slow down further still."

The government is doing its best, Michal said, to ease the impact of rising prices, he said, citing a reduction in car tax rates for families with children and an income tax-free threshold rise to €700 for all, from next year.

"We will collect €500 million less in taxes. That means €500 million will remain in the hands of Estonian people," the prime minister added.

"In addition, we are doing what businesses themselves suggest to reduce price pressure — we are working together with sectors to sharply reduce regulations, inspections, the public sector burden, and we will cut the public sector this year and in the years ahead," Michal continued.

Michal rejected the idea of tax rises contributing to inflation, saying: "The fact is that due to the very large increase in defense spending, the Estonian state is short on money. All additional tax revenue goes to defend our freedom."

While the state budget deficit remains, "we have to borrow to cover it," he added.

"Within the budget, only defense and social sectors are growing significantly, so everyone will have to say for themselves which one we should cut from and how much — security or existing benefits — if we want a tax exemption," Michal said.

Opposition parties the Conservative People's Party of Estonia (EKRE), the Center Party and, most recently, the Social Democrats (SDE), have all called for cutting VAT on food from its current rate of 24 percent – the new across-the-board rate which came into effect at the start of this month.

SDE leader Lauri Läänemets, who put his name to the petition calling for reducing the VAT rate on food, said this is needed since in addition to improving people's ability to cope, it will also indirectly support Estonian agriculture and food production.

SDE had been in office with Reform and Eesti 200 until March; the prime minister said at that time SDE planned to create new positions and taxes and had no interest in cutting the state budget.

This ultimately was the final straw which led to the party's ejection from office, he said.

"We scrapped their additional tax plans, including the profit tax and taxation starting with the first euro of income earned. SDE have now openly started supporting the moves of the Center Party and EKRE — which is undoubtedly an interesting development," Michal concluded.

Estonia has raised its VAT from 22 percent to 24 percent effective July 1, and boosted gasoline excise duties by 5 percent too, as part of a national defense tax package introduced by the Reform Party–led coalition. The aim is to generate €2.5 billion in additional revenue by 2028, with projected annual gains rising from €113 million in 2025 to €252 million in 2028.

The petition to cut VAT on food was initiated by celebrity chef Jana Guzanova at the end of June via the Citizen Initiative Portal, and aims to send a message to the Riigikogu that the tax burden increases inequality and strains consumers' food budgets. 24 percent VAT on food is one of the highest rates in the EU.

According to Statistics Estonia, the month-on-month inflation rate was 1.1 percent in June, while the on-year figure stood at 5.2 percent.

Reform's finance minister, Jürgen Ligi, recently drew a parallel between price rises and the current poor summer weather, stating that blaming the government for either phenomenon was "foolish."

--

Follow ERR News on Facebook, Bluesky and X and never miss an update!