Estonian government approves 2025 state budget bill

Total state budget revenue in 2025 will be 17.7 billion euros, marking an increase of 900 million euros or 5.2 percent over 2024. Photo: Sander Ilvest

At its extraordinary sitting on Wednesday, the Estonian government approved the draft 2025 State Budget Act.

Total state budget revenue in 2025 will be 17.7 billion euros, marking an increase of 900 million euros or 5.2 percent over 2024. Expenditure will total 18.2 billion euros, an increase of 600 million euros or 3.5 percent compared with the budget for 2024, the state budget documents show.

The nominal budget deficit will be kept at 3 percent of gross domestic product (GDP) in 2025, at the same level as forecast in the supplementary budget for 2024. This is compliant with the Maastricht budget balance rule. Due to significant increases in security and social protection expenditures, among others, debt will increase by around 930 million euros to 24.3 percent of GDP.

Together with the budget, the state budget strategy for 2025-2028 was approved.

According to the government communication office, the government will direct 5.6 billion euros towards the military defense of Estonia in the next four years, to which 1.6 billion euros was added as part of the state budget strategy for the acquisition of munitions for long-range weapons systems during the period until 2031.

Thus, defense spending in the coming years will be significantly higher than 3 percent of GDP, being at least 3.3 percent of GDP each year and reaching 3.6 percent of GDP in 2027. Based on current data, Estonia will rank second in NATO in terms of the share of defense expenditure, after Poland and ahead of the United States.

In strengthening its independent defense capabilities, Estonia will continue supporting Ukraine with an amount equaling 0.25 percent of its GDP, meaning over 100 million euros annually. This will be achieved as much as possible through products from the Estonian defense industry, marking the largest national industrial growth plan to date.

The government said in the press release that military defense is successful when it is supported by society, and when residents and authorities are prepared for crises. To this end, an additional 219 million euros will be allocated over the next four years for investments in broad-based national defense, including 165 million in strengthening internal security. Funded projects will include the construction of the Estonian-Russian border, addressing hybrid threats, and enhancing civil protection.

To finance the surge in defense spending, Estonia will introduce a fixed-term broad security tax until the end of 2028. Over four years, the government will collect up to 2.6 billion euros with the security tax, of which 594 million euros is income from the corporate profit tax.

As a measure to boost the economy, next year's budget contains a total of 1.9 billion euros in investments and investment subsidies. In terms of investment level, Estonia ranks number one in the European Union.

An additional 402.6 million euros in revenue from the sale of carbon dioxide (CO2) quotas will be directed into stimulating the economy over the coming years. Two-thirds of this amount will be allocated for the construction of Rail Baltic. An amount of 50 million euros will be disbursed in energy efficiency investments in apartment buildings, and 25 million euros will support green technologies in the maritime sector.

The government will invest 50 million euros in comprehensive solutions for the production and uptake of green hydrogen. A further 74 million euros will be spent to strengthen the electrical grid and build new connection capacities. To promote renewable energy and ensure energy security, national designated spatial plans are in the pipeline, with the help of private funding, for the Gulf of Riga offshore wind farm connection and the fourth electricity interconnection between Estonia and Latvia.

In 2025-2028, the government will support large-scale investments in high-tech production with an amount of 160 million euros, which will strengthen Estonia's exports and create well-paid jobs outside the so-called golden circles.

By the end of 2025, the government will increase the volume of the defense fund created at the state investment fund Smartcap to 100 million euros. The fund invests in companies developing military products and technologies and in investment funds that support high-value-added and deep-tech entrepreneurship in Estonia.

Next year, the state will allocate 262.6 million euros in operating support for higher education, which will allow larger numbers of students to be trained in the fields of ICT, engineering, manufacturing and construction, among others.

The state's expenditure cuts over the next four years will amount to one billion euros and, taking into account decisions taken earlier, to 1.4 billion euros. Public sector expenditures will be cut by 10 percent over the next three years.

The reduction of the state's interest expenses arising from the government's decisions will be approximately 200 million euros in the next four years.

As part of a review of the budget, the government optimized social services and decided to reform the unemployment benefit system established over 20 years ago. The new unemployment benefit system that will come into effect on Jan. 1, 2026 is expected to save the treasury over 45 million euros by 2028.

Decisions in the field of welfare include capping the sickness benefit and the parental allowance at two times the average monthly pay starting in 2026. Additionally, from 2025, social security contributions will no longer be made for stay-at-home parents. The extra for pensioners living alone will be discontinued for those living in care homes starting in 2025.

The state will also reduce bureaucracy and administration costs in research and development, and ministries will no longer receive additional funds for additional research projects. According to the government, the cuts will not directly affect the work of researchers, centers of excellence and companies engaged in research, meaning the innovation activities that contribute to Estonia's competitiveness.