As of next year, a flat monthly tax-free income of €700 — equivalent to €8,400 annually — will apply to everyone. This means that people earning an average salary will have more money left in their pockets.

"As the tax hump disappears and a uniform tax-free income is introduced, people will have a bit more than €150 more per month left over, which has a positive effect," Madis Laas, head of the income tax department at the Tax and Customs Board, told Sunday's "Aktuaalne kaamera."

"The president also announced that the income tax increase will be canceled, and in terms of this flat tax-free income, it means everyone is entitled to €700 per month, or €8,400 annually," he added.

More tax rises

Other tax changes are also coming. On January 1, tobacco and alcohol excise duties will rise, and on May 1, fuel and electricity excise duties will follow.

As a result of all these changes, the economy is expected to begin recovering next year, and banks are forecasting 2.5 percent growth.

"This year we saw economic growth numbers of 0.9 percent overall, but people have not yet felt that in their wallets. That was tied to the electricity sector, the added value of manufacturing, but not people's pockets. Purchasing power declined. Next year, purchasing power is expected to really increase," said Luminor chief economist Lenno Uusküla.

Slower price rises will also provide some relief. While prices rose by an average of 5 percent this year, next year inflation is expected to be 3 percent.

However, the overall picture is less favorable for the state. Eliminating the tax hump comes with a significant financial burden and is expected to cost €780 million. 

The Ministry of Finance said the government sector deficit will grow to 4.5 percent of GDP. More borrowing will be needed to cover expensive expenditures.

"The price tag of eliminating the income tax hump was quite substantial, and that money has to be found somewhere. According to today's forecasts, it cannot be fully covered just by economic growth. Most likely, the trend will continue where the budget is in deficit and the state's debt burden increases," said SEB economist Mihkel Nestor.

"On the positive side, the Ministry of Finance's deficit forecasts have usually been significantly worse than how things actually turn out. I believe we will not actually see that 4.5 percent deficit," Nestor added.

SEB forecasts that the state budget deficit will remain below 3 percent of GDP in the coming years.

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