In the directive sent by Terras, it is noted that under the Local Government Organization Act (KOKS), a municipality must adopt a development plan and budget strategy covering at least the next four fiscal years before approving the upcoming year's budget and no later than November 30.

However, Tallinn City Council adopted the city's 2026 budget on February 5 this year, disregarding that requirement and without first approving the city's 2026–2029 budget strategy.

The directive further states that the Local Government Financial Management Act (KOFS) provides that if a local government fails to submit its budget strategy data to the Ministry of Regional Affairs and Agriculture by the deadline, this constitutes a violation. As a result, the ministry may apply the sanction set out in KOFS — suspending transfers from the equalization fund and income tax allocations to a local government that has breached the law.

On that basis, Terras issued a directive in a letter to Tallinn City Government and City Council ordering the violation to be remedied, meaning the council must adopt a budget strategy for 2026–2029 within two months of receiving the directive.

"If Tallinn City Council has not adopted the city's 2026–2029 budget strategy by the specified deadline, we will, pursuant to Section 53(2) of KOFS, issue an order suspending transfers from the equalization fund and income tax until the violation has been remedied, that is, until Tallinn's 2026–2029 budget strategy has been adopted," Terras said.

The alleged breach of law by Tallinn's new governing coalition — made up of representatives of the Center Party and Isamaa — in delaying approval of the budget strategy has been highlighted by former mayor and current City Council member Jevgeni Ossinovski (SDE).

In his inquiry to Mayor Peeter Raudsepp (Isamaa), Ossinovski noted that without a valid budget strategy, it is impossible to assess the long-term impact of the new recurring expenditures included in the recently approved 2026 budget on the city's financial position.

"Without a valid budget strategy, the City Council cannot assess whether the more than €60 million in additional recurring costs planned in the budget by the city government you lead are sustainable in the long term," the inquiry states.

According to the explanation provided in the directive, if a local government fails to comply, KOFS allows the ministry, on the basis of a ministerial order, to withhold during the fiscal year 10 percent of the amounts to be transferred from the equalization fund and income tax. This would be calculated from the funds allocated annually to the municipality from the state budget's equalization fund and from the personal income tax assigned to the municipality under the Income Tax Act.

The estimated sum could amount to €60–70 million.

The ministry told ERR on Wednesday that once the deadline set out in the directive has passed, the minister will issue an order, after proper proceedings, allowing the ministry to suspend the transfers. This does not mean Tallinn would permanently lose the funds; they would be paid out once the violation has been remedied.

Mayor: Scare tactics unacceptable

Tallinn Mayor Peeter Raudsepp responded on social media after ERR published the news, criticizing Ossinovski's actions and promising to submit the budget strategy to the City Council in March.

"Scaring people is unacceptable. Minister Hendrik Johannes Terras' letter stems from Jevgeni Ossinovski's appeal to the ministry with the aim of suspending the allocation of Tallinn residents' tax revenue to the city, which in turn would jeopardize the provision of vital social, education and other services. Such conduct is inappropriate," Raudsepp wrote.

The mayor recalled that on February 9 he announced that the City Government had begun drafting the budget strategy and that on January 22 he had responded to a similar inquiry from Ossinovski. As a result, both City Council members and the ministry are aware that the budget strategy is being prepared.

"Given that everyone has this information, scaring Tallinn residents is wholly inappropriate. The budget strategy will reach the City Council in March and will be adopted," Raudsepp pledged.

The mayor acknowledged that the budget strategy should have been adopted in October 2025 and that this could only have been done by the previous composition of the City Council, with the process led by the previous City Government. "The reasons why Jevgeni Ossinovski was unable to ensure its adoption are for him to explain," he said.

Local government elections were held from October 13 to 19, in which the Center Party won in Tallinn and the incumbent coalition — comprising the Social Democratic Party (SDE), Isamaa and Eesti 200 — lost its majority.

Raudsepp noted that the election results were confirmed later than usual this time, which affected the processing of both the budget and the budget strategy.

"The Association of Estonian Cities and Municipalities has received written clarification from the Ministry of Regional Affairs and Agriculture that this particular circumstance will be taken into account, so that new councils and municipal governments can meaningfully contribute to drafting the budget," he said. "The primary priority of the current City Government was to adopt Tallinn's 2026 budget in order to ensure funding and the continued functioning of essential services. The budget was adopted on February 5, after which we immediately began drafting the budget strategy," the mayor added.

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