In recent years, the people of Estonia have had to listen to the same justification over and over again: Taxes must be raised and spending cut because the country's finances need to be put in order. To that end, we have paid higher value-added tax, gotten used to the motor vehicle tax and watched as everyday purchases eat up an ever-larger share of our incomes.

Now we are looking at the 2027 state budget and the deficit still amounts to 4 percent of GDP. So where are the promised results?

Prime Minister Kristen Michal calls the new budget prudent and responsible. I would ask a much simpler question: How will this budget make life better for people in Estonia? Will groceries become more affordable? Will the fuel people need to get to work become cheaper? Will businesses have greater confidence to hire people and expand production? These are precisely the questions I expect the government to answer.

Borrowing to cover current spending

Before passing judgment, it is worth looking at how we got to where we are today. According to recently revised data from Statistics Estonia, the general government deficit was 2.5 percent of GDP in 2021, 1 percent in 2022, 2.7 percent in 2023, 1.4 percent in 2024 and 2.2 percent in 2025. Those are the actual figures. This year's deficit is forecast at 4.2 to 4.5 percent, while a 4 percent deficit is planned for next year.

The deficit, then, has not risen steadily every year; the situation has improved at times as well. Yet after tax hikes and promises of spending cuts, this year's projected deficit is nearly twice as large as last year's. The government can compare the new budget with an earlier, even worse forecast and talk about progress. People nevertheless have every right to ask why they must keep making greater sacrifices when the country's finances are still not being put on a sustainable footing.

The increase in the deficit is primarily being attributed to defense spending. Money must indeed be found to defend Estonia, but the country's security needs cannot explain away every decision the government has made. At the same time as the government's funding needs increased, it decided to significantly reduce its own revenue. Abolishing the so-called tax hump is one important reason a larger hole has emerged in the budget, a connection the Fiscal Council has also emphasized.

The tax hump (Estonia's gradual basic exemption reduction scheme — ed.) was abolished on January 1, 2026, so it cannot be used to explain deficits in previous years. It can, however, help explain the deterioration this year and the funding shortfalls in the years ahead.

Annely Akkermann, a representative of the Reform Party itself, estimated that this change would have an impact of approximately €500 million on the 2026 budget. Together with the decision to scrap the planned income tax increase, officials spoke of leaving about €780 million in the economy. These were two separate decisions, but both reduced government revenue compared with previous plans.

The most important point about this decision tends to get lost: The tax cut was not backed by sufficient permanent funding and the deficit is being financed through borrowing. In effect, the hole in the budget created by abolishing the tax hump is being filled with borrowed money. The government does not, of course, take out a separate loan for each tax decision, but lower tax revenue increases its financing needs, all else being equal. The bill for the tax relief, including interest, is therefore being left to future taxpayers. That is a deliberate choice by the government and one it must take responsibility for.

Spending deferred

Of course, I too want people to keep more of their money, but who benefits and by how much? As a rule, a lower-paid worker who previously made full use of the tax exemption gains €10 a month from the change to the universal tax-free allowance. For someone whose tax-free allowance was previously zero, the same change can mean an extra €154 a month. The calculation is based on a 22 percent income tax rate and full use of the tax exemption. Both, however, will share the burden of the additional debt and interest payments.

People earning the average wage need relief as well, but how do you explain to a lower-income family that it will get an extra €10 while continuing to pay high value-added tax at the grocery store? Tax policy must be based on people's actual ability to make ends meet. When money is tight, it is especially important to choose carefully how to use it to help the greatest number of people.

What concerns me greatly about the new budget is that the fundamental issues remain unresolved. Revenue is projected at €19.4 billion, spending at approximately €20.2 billion and investment at approximately €1.2 billion. The budget includes necessary spending and measures to support businesses, but taken as a whole, I see fine-tuning at a time when Estonia needs a clear shift in its economic and tax policies.

This assessment is not based solely on dissatisfaction from the opposition. According to the Fiscal Council, next year's budget position will improve by approximately €220 million compared with the summer forecast, mainly through adjustments involving investments, foreign funds and accounting. This does not produce a lasting improvement in the balance between revenue and spending.

Under current plans, the deficit will remain at 4 percent in both 2028 and 2029. Moving an expense into the following year may make the current figures look better, but someone will still have to pay the bill eventually.

Banking tax

We need to ease the tax burden on everyday expenses by lowering value-added tax on staple foods, cutting fuel excise duties and supporting jobs in the food service sector through a temporary VAT reduction. People's purchasing power and the fortunes of businesses are interconnected. If families cannot afford to spend, local businesses lose revenue as well.

These decisions require sources of funding. That is why the Center Party has advocated higher taxes on bank profits and proposed a conventional 24 percent corporate income tax for banks. The exact additional revenue would have to be calculated in light of changes to the existing tax regime. The government's administrative costs, overlapping functions and the effectiveness of subsidies must also be reviewed. Cost-cutting must be evident in the way the government itself operates.

Borrowing can be justified for necessary investments or exceptional defense needs. But permanent obligations cannot be financed indefinitely with new debt. According to the Fiscal Council, Estonia will spend nearly €2 billion on interest on government debt over the next four years. Every euro spent on interest reduces the resources available to improve healthcare, education and people's sense of security.

With this budget, the government is acknowledging that its policies have reached a dead end. Taxes have been raised, yet public finances are still not in order. Spending cuts have been promised, yet the need to borrow remains. Now expenditures are being shifted from one year to another and presented as an improvement. A government whose solution amounts to postponing problems is leaving the substantive decisions to its successors.

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