The Riigikogu discussed the impact of price increases as a matter of significant national importance
The Prime Minister made a political statement in connection with the submission of the State Budget for 2026 Bill, and the Riigikogu discussed the impact of price increases as a matter of significant national importance.
In his political statement, Prime Minister Kristen Michal said that the State Budget for 2026 Bill was a budget of security and prosperity, and that it had been drawn up by a right-wing liberal government on the basis of its values and in order to achieve its objectives. The Prime Minister pointed out that the most important decision of the government in the 2026 budget was aimed at ensuring independence and security at present and for the future generations. “Raising Estonia’s defence spending to an average of over five percent of GDP over four years means that the next four years will see an additional 2.8 billion euros allocated to defence spending. In 2026, defence spending will increase by 844.5 million euros compared to 2025. We will build our freedom, our everyday sense of confidence, as well as our economic well-being on security,” he said.
Secondly, according to him, the budget was based on the principle that a lower tax burden and a more efficient and flexible state would support economic growth and increased prosperity. Thirdly, lower taxation of income would help improve people’s living standards and livelihood. “While preparing the budget of security and prosperity, we have taken fundamental, significant, and forward-looking steps that at first glance may seem almost impossible: lowering taxes while simultaneously increasing defence spending, or, as another example, raising salaries and cutting budget expenditures,” he said. Michal pointed out that clear signs of growth could be seen in the Estonian economy and he assured that Estonia’s economy would grow in 2025. “Our companies have managed to adapt to crises. However, now it is necessary to transform the signs of growth into a broad-based economic growth that is felt by everyone. Next year’s state budget will introduce what are, to our knowledge, the largest income tax changes ever implemented simultaneously. They will provide a solid foundation for prosperity and growth and, in the coming years, will place us amongst the fastest-growing countries in the region”, he said, while presenting the details of the changes.
During the debate, Urmas Reinsalu (Isamaa), Martin Helme (Estonian Conservative People’s Party), Lauri Läänemets (Social Democratic Party), Õnne Pillak (Reform Party), Lauri Laats (Centre Party) and Peeter Tali (Estonia 200) took the floor on behalf of their parliamentary groups.
The sitting then continued with the deliberation of the matter of significant national importance “The impact of price increases on economic competitiveness and people’s livelihoods. What to do?“, initiated by Isamaa Parliamentary Group. Presentations were delivered by representative of Isamaa Parliamentary Group Urmas Reinsalu, economic expert Raivo Vare, Director of the Estonian Institute of Economic Research Peeter Raudsepp, and economist Heido Vitsur.
In his presentation, representative of Isamaa Urmas Reinsalu pointed out that from the beginning of 2021 to the second quarter of 2025, price increases in Estonia had amounted to 46.2 percent. “That is virtually a 50 percent rise in prices. This is unnatural and has far-reaching effects”, he noted, asking what had been done wrong, what we should learn from it, and what we could do about it.
According to Reinsalu, Isamaa has three specific measures for slowing down inflation. “Firstly, we should critically review the burden of indirect taxes. We are at the top of the European Union, alongside Denmark and Hungary. This is a matter of the general VAT rate. We should also honestly assess exemptions from indirect taxes. The government says that VAT has no impact on prices. This has been a basic assumption. The Minister of Economic Affairs even has a questionable theory that if one raises indirect taxes, including VAT, people will consume less, and as a result, the price levels will be lower. But, with district heating or electricity – to give two examples – when VAT is added, it is a mechanical calculation, and the price level of those goods and services is simply higher”, he said.
Secondly, Reinsalu pointed out the need to reduce administrative costs. Thirdly, according to him, some tangible limit must be set on the accumulation of indirect tax burdens in pricing. “The best example is the energy sector. Let’s consider electricity. According to experts’ forecasts, the pile of new fees accumulated this spring will amount to approximately 200 million euros of additional costs or added burden to the final price of electricity in 2026. This is happening in a situation where Estonia’s annual electricity market volume has been 700 million euros since 2024. For example, the frequency reserves market, in its current operating logic, has caused price increases of 10,000 euros. First, we pay for subsidising renewable energy production, and now also for its non-production. The forecasted 60-million-euro cost has been exceeded in just six months and is expected to double,” he explained.
Economic expert Raivo Vare pointed out that the conference on competitiveness, which had been organised at the Riigikogu by the Economic Affairs Committee and the Foresight Centre the day before, had provided excellent input for the discussion. “Many points were already made there, so it is not necessary to repeat them – just take a look and you will find all the key elements related to competitiveness in the report and the discussion,” he said.
Vare also said that, both in terms of their interconnections and from the point of view of the state’s decision-making process, four aspects were crucial. Firstly, the development of the economy as a goal. Secondly, the inflation. “The next topic, directly following from this four-cornered framework, is the growth and distribution of welfare, the continued increase in social expenditures – especially in developed societies. And this is a completely objective process that also affects us, we have reached that point, joined the ‘club’ – along with the changes in demographic factors and specific declines in welfare societies. Why is it important? Because demographics directly affect economic growth and market demand. The greater the growth of the population, the more the factors of economic development are potentially oriented towards growth,” he explained. Fourthly, he pointed out national defence. “Everyone understands this, but it is a clear burden”, he said.
In his speech, Vare also addressed the setbacks linked to the major energy transition, the impact of global events and multiple crises, and the issues related to the cyclical nature of the economy. The economic expert also underlined that Estonia needed a meaningful, attractive, and systematically developed narrative of the country’s success. “Currently, we have started to drift away from our previous success narratives toward a narrative of a front-line state. I am truly sorry! Furthermore – a more boldly experimental economic policy. This should be our advantage as a small country, but our level of rigidity is even higher than the average,” he noted.
Director of the Estonian Institute of Economic Research Peeter Raudsepp said in his presentation that Estonia’s position in the international competitiveness ranking had declined, dropping by 11 places over the past four years. “If we compare our competitiveness to that of the other Baltic countries Latvia and Lithuania, we are bound to regard our neighbours as more successful. While we have been losing our positions, Latvia and Lithuania have made substantial advances – for example, last year Lithuania moved up by nine positions to reach the 21st place, and Latvia rose seven positions, to 38th. Estonia occupies the 33rd position, Lithuania has passed us, and Latvia has come very close,” Raudsepp explained the reasons for the decline.
“One remark we heard here today was that life in Estonia had never been better than today. This is not true. Looking at the shifts over the past five years, from 2019 to 2024, Estonia’s GDP per capita in nominal value and in terms of purchasing power parity declined in such a way that, compared to the EU average, we dropped from 85 percent to 79 percent,” Raudsepp noted, adding that since 2022 the financial situation of Estonian households had also deteriorated.
“We have to improve people’s livelihood. Adjusting various statistical indicators and making promises of economic growth year after year have no real effect. Economic indicators can only be improved through very real, positive changes that would stimulate our economy. Further taxation of a declining economy was, in fact, no solution. That has not resulted in economic recovery. On the contrary, compared to our neighbouring countries, our lag has increased. Bad decisions have come at a cost, which is paid daily by our businesses and consumers – as we have seen, especially by the less financially secure segment of consumers,” he said.
The last to speak before the Riigikogu was economist Heido Vitsur. “Last year, our food was already five percent more expensive than the European average. Based on data of 1 September this year, food prices in our country have risen by another 9.2 percent over the past 12 months, while in Europe they have not. This means that, in terms of food prices, we are currently probably ranked fourth or fifth in Europe, alongside Malta,” he said, adding that it is worth keeping in mind that Malta is a rocky island about one and a half times the size of Muhu Island, with no natural drinking water – it is produced from desalinated water – and the rest of the food is imported. “And we are likely to be just 2–3 percent behind Austria, which ranks third in terms of food prices. At the same time, their wages are on average 2.2 times higher, and pensions are 3.3 times higher than ours. Hence our main problem: our productivity and our wealth do not match our price levels at all,” he said.
In conclusion, Vitsur stated that the current tax structure had left our government and the Riigikogu with poor options. “We cannot respond sensitively to the changes that take place. If we want to move forward, we need to initiate a serious debate on taxes. As regards the reduction of VAT, the IMF did not consider it necessary. They said that it was much wiser to switch to a progressive income tax,” he stated.
During the debate, Lauri Laats (Centre Party), Urmas Reinsalu (Isamaa), Peeter Ernits (Estonian Conservative People’s Party), and Tanel Kiik (Social Democratic Party) took the floor on behalf of their parliamentary groups.
Verbatim record of the sitting (in Estonian)
Photos (Author: Erik Peinar / Chancellery of the Riigikogu)
Video recording will be available on the Riigikogu YouTube channel.
Riigikogu Press Service
Maris Meiessaar
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