According to the Ministry of Finance, the average public sector wage is expected to grow by 8 to 9 percent next year — higher than the average of recent years.

"This is due to the fact that the 2026 state budget includes approximately €117 million in additional funding for salary increases of up to 10 percent in internal security, education and cultural sectors," Martin Kulp, head of the ministry's public administration department, told ERR.

He said that in recent years, wage growth in the public sector has hovered around 5 percent, compared with about 6 percent in the private sector. Now, however, the balance is shifting in favor of the public sector.

"The reason is likely that these sectors make up about 50 percent of the public workforce," Kulp explained.

As for the rest of the public sector, no additional funds have been allocated, but wage increases can still be expected, according to Kulp.

"Over the years, wage growth has been 4 to 5 percent, driven by overall inflation and the need to keep up with it. For that reason, internal resources have been used to find room for pay increases," Kulp said. He added that it is up to each institution's leadership to decide the exact size of the raises.

Bank of Estonia forecast differs from the ministry's

The Bank of Estonia is forecasting a slightly smaller wage increase in the public sector next year, economist Orsolya Soosaar said.

"In our forecast, we accounted for a faster pace of wage growth in the public sector next year, but we do not expect the gap with the private sector to be quite as large. Double-digit wage increases are expected in those priority areas, but across the public administration sector as a whole, we forecast the growth to be more in the range of 6 to 7 percent," Soosaar explained.

The Bank of Estonia does not publish separate figures for wage growth in the public and private sectors, but according to Soosaar, average wage growth in the private sector next year will likely be a few percentage points lower than in the public sector. This year, average wages are expected to rise more quickly in the private sector.

She also pointed out that wage increases for teachers and healthcare workers were minimal this year. As a result, wage growth in the public sector seems to fluctuate from year to year, alternating between periods of rapid and modest increases.

"There's an aim to maintain a certain wage level in relation to the national average, but that comparison rises and falls over time," Soosaar said. In her view, wage growth would be better if it were consistent year to year.

"If we look back, especially at 2023, when teachers' wages rose by over 20 percent, those kinds of sharp increases are significant shocks that also have strong effects on the private sector. From that perspective, a smoother wage policy in the public sector would be preferable," Soosaar said.

Wage growth might not translate into higher prices

Public sector wage growth also puts pressure on private sector wages, as both compete for the same talent. When factoring in tax cuts as well, inflation could accelerate, since people will have more disposable income.

"The tax hump will be eliminated and that will significantly boost people's incomes. Combined with wage increases, this will drive up demand for goods and services. Naturally, this also has an effect on price growth. The extent of that effect depends on how much Estonian businesses are able to increase the supply of those same goods and services," said Soosaar.

She noted that, given the current weakness in economic growth, there should be enough production capacity available in the economy. As a result, the central bank believes the increase in demand will more likely lead to higher output rather than higher prices.

The Bank of Estonia is forecasting an acceleration in economic growth next year. However, this is overshadowed by the fact that the state budget deficit is widening, public debt is growing and the country will have to pay more in interest on loans — all of which is expected to have long-term negative effects.

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