Estonia keeps taxes steady, boosts defence, and essential worker pay.

Estonia’s government has reached an in-principle agreement on the state budget for 2026. At least 5% of GDP will be earmarked for a surge in Estonia’s defence capabilities.

In order to stimulate the economy, there will be no increase in income tax, changes which will leave around  EUR 780 million in the hands of people and businesses. Salaries will be raised among professions that are essential for the functioning of the state: teachers, police and rescue workers, and those employed in the field of culture.

This announcement was made by the Estonian government on 18 September 2025.

Prime Minister Kristen Michal said,

“We will not give an inch when it comes to safeguarding Estonia’s freedom and independence. Defence spending will rise to at least 5% of GDP.

“So as to accelerate economic growth, we will not be raising income tax as has been planned for 2026. Alongside reinstating the general tax-free threshold, the overall tax burden will be reduced, meaning that the state will go without around EUR 780 million.

“The third target of the budget is to increase incomes, since price rises have narrowed the choices available to people and families in Estonia. Reinstating the uniform tax-free threshold will boost all working people’s incomes, with those earning the average wage receiving in excess of EUR 1,800 more a year.

“The budget provides for an increase of up to 10% in the salary fund for police officers, rescue workers, teachers, and those employed in the field of culture. Pensions will also increase in line with the current index, for which there is money in the budget.”

Economic growth and tax measures

Plans to increase income tax in 2026 have been dropped. Both corporate and personal income tax will remain at 22%, and the reinstatement of the tax-free threshold will reduce the overall tax burden in Estonia from 36.6% to 35.2%, leaving around EUR 780 million in the economy.

Non-essential spending will be postponed or cut, affecting projects such as public building renovations. Staff and management cost reductions, along with subsidy cuts, will continue. Institutional spending will be reduced by around EUR 225 million in 2026, with ministries required to cut a further EUR 20 million. The Health Insurance Fund’s deficit is expected to decrease by EUR 70–80 million per year.

Major infrastructure projects will receive funding, including the largest four-lane road construction programme since Estonia regained independence, with EUR 276.8 million allocated. Rail Baltic will continue to receive funding, with EUR 684.2 million dedicated to rail development and maintenance. EU Cohesion Funds will also accelerate, with approximately EUR 680 million planned for reforms, infrastructure, energy efficiency, defence parks, and agricultural support.

Surge in defence spending

Defence spending will increase by EUR 844.5 million compared to 2025, reaching at least 5% of GDP. The budget provides 0.25% of GDP (EUR 110.7 million) for military aid to Ukraine, with around EUR 100 million earmarked for the Estonian defence industry. The supplementary 2025 budget adds EUR 39 million for military support to Ukraine.

Defence industry parks will continue to be developed, including the Pärnu County park, with nearly EUR 50 million allocated for design and preparation, aiming to start production in late 2026 or early 2027. The Ministry of Foreign Affairs will receive extra funds to bolster Estonia’s security, including EUR  2.1 million for civilian aid to Ukraine and  EUR 1.8 million for preparing the 2027 Global Ukraine Recovery Conference.

Income growth and social measures

The tax-free threshold will rise to EUR 700 per month in 2026, increasing the average worker’s income by around EUR 1,800 annually. Up to 10% increases in the salary fund are planned for education, internal security, culture, and social welfare sectors. Education workers earning the average teacher’s wage will gain EUR 319 per month (EUR 3,828 per year). A total of EUR 117 million will be allocated to these salary increases.

Pensions are projected to rise by 5.4%, requiring EUR 210 million. Motor vehicle tax changes will reduce the tax burden for families with children by up to EUR 100 per child and lower rates for minibuses will support families and people with disabilities. The budget for subsistence benefits will increase by EUR 4 million, aiding vulnerable citizens.

Economy and education
Minister of Education and Research Kristina Kallas said

“If we want Estonia to be a country in which new technologies and smart solutions are born, we have to invest in research and development, and in our education system,”

Minister of Finance Jürgen Ligi described the budget as exceptionally tight but in line with fiscal rules. He highlighted the unusually high deficit of 4.5% of GDP and defence spending of 5%, attributing them to Russia’s aggression and Europe’s temporary fiscal easing.

The budget is scheduled to be submitted to the Parliament on 25 September 2025.