On the other hand, a combination of various planned or already enacted reforms including ditching the 2-percentage point income tax hike will make savings of around a billion for next year.

Speaking to ERR webcast "Otse uudistemajast," Keldo said no final agreements have yet been made at cabinet level, though the abolition of the car tax will likely not go ahead.

"We don't have a final agreement, but it is very hard to see that. I know that also within the Reform Party faction, a very large number do not support [abolition]," Keldo said.

Keldo added that under the terms of the agreement, the annual portion of the car tax, which comes to around €70 million a year, will in the future go into road investments, as road funding is in a crisis situation.

Abolishing that tax would need to be accompanied by a solid proposal on where the loss of revenue would come from, he added.

A final agreement on dropping the income tax increase and raising the salaries of teachers, rescuers and police officers has still not been made by the government, and according to Keldo, finding out what the options are in relation to the state budget is still needed, though in any case further cuts and postponements of investments will have to be made.

Keldo said agreements should be settled by the end of this week, noting that his party's goal in the state budget negotiations, dropping the income tax hike, are not at odds with coalition partner Eesti 200's aims: Wage raises for teachers, first responders and police officers.

"Our first preference is indeed to drop the 2-percent income tax increase, because then the net salary will grow for all Estonian people who are working," Keldo said.

"The only thing I can say that we have agreed on among ourselves is that in the coming years defense spending must also be at least five percent of GDP," he added.

Ditching the 2-percent income tax hike would be a wiser step than, for example, cutting the VAT on food, he said, on the grounds that reducing the income tax burden means every euro reaches people's bank accounts.

"I'll bring out a numerical comparison: If next year everyone has a €700 income tax–free minimum, which has already been legislated for, then if the 2-percent income tax rise is ditched and we add in the changed Euribor, which will be at 2 percentage points next year, then from these three things combined, the Estonian economy – people and companies – will end up with an extra billion euros in hand," Keldo said.

This would give the economy a very strong boost, helping consumer confidence recover and companies invest more, he said, adding better pay in some strategic fields – teachers, rescuers, police officers and cultural workers – would motivate people more.

"We must find an opportunity within this financial framework, considering that these two tax changes affect most positively precisely the teachers, the average wage earners," Keldo went on.

As for the €800 million supposedly left over from this year's state budget, that money is not actually left over, but simply the lack of funds is smaller, by that sum.

Overall times are still difficult and we are living beyond the state's financial means, due to the security situation, he went on.

The state budget process is ongoing throughout the fall and must pass three Riigikogu votes before passing into law by year-end. Substantive changes can be made to the state budget bill between the first and second Riigikogu votes.

Eesti 200 had last month proposed scrapping the car tax, which came into effect at the start of this year.

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