Canceling next year’s income tax hike will have negative impacts, including leaving the country’s poor to shoulder the burden of paying for national defense, said Lauri Läänemets, chair of the opposition SDE party. He supports lowering VAT on food.

On Thursday, Minister of Finance Jürgen Ligi (Reform) said that tax revenues have been better than expected, and it could be possible to reduce the rate of scrap planned new taxes.

The move comes after 93,000 people signed a petition calling for VAT to be lowered on food from 24 percent to 10 percent, which politicians are against.

Rates have risen under the temporary security tax which is needed to fund defense investments and has several stands. It was supposed to take money from all parts of society.

A new 2 percent corporate tax was set to be introduced in 2026 for companies until 2028. However, this was scrapped by the coalition earlier this year. The VAT rate also rose to 24 percent and income tax is expected to rise next year.

On Thursday, Läänemets called the situation a “big mess”.

“First, the idea behind the security tax was that all of society contributes — all the people of Estonia, all business owners would be able to contribute. With this change, only the VAT would remain of the security tax. VAT impacts low-income earners the most, meaning only the poor will be left contributing to Estonia’s national defense via taxes,” he said.

Under the Reform Party’s plan, he stressed, Estonia’s national defense will be built “solely on the backs of the poor.”

The SDE chairman highlighted that Estonia’s flat tax system is regressive, favoring higher-income individuals, and that this decision will now further cement that.

“Now, with the canceling of the income tax hike and all the other changes made — basically, the rich are protected and the poor have to pick up society’s entire tab,” he said.

The other major concern is the state budget, which is in poor shape and poised to worsen further.

Läänemets warned that Estonia will not be able to keep the budget deficit within the up to 3 percent limit prescribed by EU rules once the exception allowing a higher deficit due to defense spending expires in 2029.

“In 2029, about €1 billion will have to be found,” he stated. “And currently, the government is adding several hundred million more to the deficit. This cannot be balanced by economic growth, nor can it be replaced by reallocating EU funds. The EU funding period is ending soon, and there will be nothing to draw from.”

Such large cuts to the state budget will not be possible either. “Such a big cut will lead to a reduction in vital state services, and reducing services means that people’s out-of-pocket costs will go up,” Läänemets noted.

“This is one big mess, both for the people of Estonia, especially low-income earners left to bear the entire burden of national defense, and for everyone else because the state budget situation will worsen further, and that will also have economic consequences,” he said.

The coalition agreement drawn up in 2024 by the Reform Party, the SDE and Eesti 200 foresaw a VAT hike of two percentage points from July 2025, with a two-percentage-point personal income tax hike to follow starting January 1, 2026.

This spring, the Reform Party and Eesti 200 kicked the Social Democrats out of the government.

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