"A major problem facing the Estonian economy and society is low confidence, which continues to put the brakes on both investment and consumption. For the sixth year in a row, government spending has grown faster than the economy, only deepening this uncertainty. When expenditures exceed revenue, it means more borrowing and tax hikes for the state, which in turn accelerate inflation," explained Hando Sutter, CEO of the Estonian Employers' Confederation.

"Managing and cutting state spending requires a clear goal from the government and someone held accountable for achieving it. It won't happen on its own," Sutter added.

In a letter to the prime minister, the confederation pointed out that over the past six years, government spending has increased by about 70 percent, while the economy has grown by roughly 45 percent over the same period. This trend continued in the first half of this year — government expenditures rose by 7.4 percent, while the economy grew by around 5 percent. The only area the state cut back on was general administrative spending, which was reduced by 1 percent, but this has little effect on the bigger picture.

Although tax revenues grew by 13 percent in the first half of the year, the confederation noted that this was not due to economic growth but rather to tax hikes and one-off transactions.

The tax increases have also affected prices in Estonia. For example, price growth in Estonia over the past few years (a total of 45 percent from 2019 to 2024) has been three times faster than in Finland (16.2 percent) and nearly twice the EU average (25 percent).

According to employers, between one-third and one-half of this year's price increases can be attributed to tax hikes.

Estonia's tax burden as a share of GDP has also risen sharply, now at 36.7 percent. While this is still below the EU average, it has become the highest in Eastern Europe.

Indexation pulling growth of public spending

Part of the increase in state spending has been driven by higher defense expenditures, which employers say is essential under current circumstances.

"At the same time, focusing on defense investments inevitably requires difficult decisions and limiting spending growth in other areas, where costs have been pushed up by indexation," the confederation added. Employers continue to recommend freezing indexed expenditures from 2026 to 2029 and redesigning the indexation system to reflect the actual state of the economy.

"Freezing indexed expenditures is not a budget cut — it's about bringing the pace of government spending growth under control. If we can get public sector spending under control, we can also get inflation under control," said Ain Hanschmidt, chair of the council of the Estonian Employers' Confederation. "Indexation and Estonia's current situation — rapid price increases amid economic stagnation — don't go together, because indexation causes state spending to grow much faster than the economy that funds it. In the long term, that's not a sustainable way to run the country."

The Estonian Employers' Confederation brings together major sectoral associations and many of Estonia's largest companies. In total, the confederation represents more than 2,000 Estonian businesses — directly and through member organizations — which collectively employ around 250,000 people. The confederation is a non-governmental, nonpartisan organization.

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