The income tax rate for people is 22 percent from this year, rising by two percentage points to 24 percent from the start of 2026.

VAT rose on July 1 to 24 percent and more than 93,000 people have signed a petition to drop the rate to 10 percent. Estonia is one of the only countries in Europe not to have a reduction on food products.

So far, the government has been resistant to cutting VAT or taxes despite public pressure.

However, on Thursday, Minister of Finance Jürgen Ligi (Reform) told Uudis+  that tax revenues have been better than expected, and it could be possible to reduce the rate of scrap planned new taxes. This is the first time a member of the coalition has publicly stated that something may have to change.

At the government's weekly press conference later that day, ERR asked the prime minister if such a move is under consideration.

Michal said the decision will be made after the forecast is released on August 26.

"If the state is receiving more revenue, there are two possible responses – national defense, which is where most of the money is going and is the biggest driver of growth, and the other option is reducing the income tax burden," he said.

Removing the tax hump still one option

Options include eliminating the "tax hump" or halting the planned income tax increase in January 2026. "This can only be discussed if tax revenues are better and we have every possibility to cover national defense expenditures," the prime minister cautioned.

The government's position is to leave more money in people's pockets rather than introduce discounts whose actual impact on individuals is uncertain.

"Even with the best intentions, if, say, 80 or 50 percent of a VAT discount eventually reaches people, that window still eventually closes. And then what do we use to cover defense spending – that question remains," said Michal.

Minister of Foreign Margus Tsahkna (Eesti 200) said the rise in defense spending is placing an additional debt burden on the state.

"Everyone would be delighted if taxes dropped further, but I also want to see the Ministry of Finance's economic and budgetary forecast. We have to keep in mind that this government has decided to hike defense spending to over 5 percent next year. That is a massive amount of money going there. We have to grasp that we are in a large part borrowing [to do this]," he told the press conference.

VAT exemption on food unlikely

ERR also asked whether the state can curb rising food prices and if cutting VAT on food is ruled out.

Michal said an exemption was unlikely.

Referring to a study by the Rural Knowledge Center, he said: "If we compare the prices of different quarters, then, in the comparison between the second and first quarters of 2025, the prices of whole milk, curd and cottage cheese rose primarily due to retail margins. Price rises in meat products were mainly caused by a rise in input raw material costs. It is likely clear that this includes climate change, diseases, and other risks within the supply chain."

The prime minister added that a similar study had been carried out by the Institute of Economic Research.

"If you weigh up these two. If you have the choice between a person getting more from their earnings, deciding for themselves how to use their money, and it fully reaching them, or someone else deciding whether to pass some of that money on to the consumer. Then I would rather choose the option that leaves people with more money in hand. This is more in line with the liberal principle we have followed in this government," he went on.

Foreign minister: VAT exemption on food 'populism'

Tsahkna said that his party also does not support a VAT exemption for food.

"First, in some of the countries that have done this, you can see that for a moment there is a small fluctuation in prices, but in reality it levels out and essentially people end up paying the same, while the retailer takes more," Tsahkna said.

He also called VAT exemptions "populism."

"Eesti 200 has no desire to run along with this populism, whether it's VAT exemptions for food or other such talk. We must also look at the fact that we need to be able to sustain this country," Tsahkna added.

Tsahkna also noted that the coalition has agreed on the goal of raising people's incomes.

Lowering VAT would cost €245 million

There are only a handful of countries in Europe that do not have VAT exemptions on food, including Estonia and Denmark.

While the government says it is against cutting taxes, it announced a €100 reduction per child in car tax for all families with children earlier this year. It will cost the state around €25 million a year.

It also scrapped a 2 percent tax on corporate income due to be introduced next year, which would have netted the government approximately €150 million a year from 2026-2028.

Lowering the VAT rate to 13 percent would cost the state an estimated €245 million per year.

SDE chief: Canceling income tax hike would be a big mess

Following Thursday's government press conference, Lauri Läänemets, chair of the Social Democratic Party (SDE), warned of the negative impacts of canceling the planned income tax rise.

"This is one big mess, both for the people of Estonia, especially low-income earners left to bear the entire burden of national defense, and for everyone else because the state budget situation will worsen further, and that will also have economic consequences," he said.

According to the Reform Party's plan, he emphasized, Estonia's national defense will be built "solely on the backs of the poor."

The SDE chief emphasized that Estonia's tax system is regressive, favoring higher income individuals, and that this decision will now further cement that.

Läänemets warned that Estonia won't be able to keep the budget deficit within the up to 3 percent limit prescribed by EU rules once the exception allowing a higher deficit due to defense spending expires in 2029.

"Such a big cut will lead to a reduction in vital state services, and reducing services means that people's out-of-pocket costs will go up," Läänemets noted.

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