The new Estonian government has already announced that it will increase taxes. The reason is growing defense spending to ensure that Estonia's defense is financed at least 3% of the gross domestic product (GDP). In Latvia, these expenses already exceed 3% of GDP this year, and the Bank of Latvia estimates that our country could do without raising taxes and benefit from the consequences that Estonia’s changes will entail, Lsm reports. In Estonia, as in other Eastern European countries, more and more money is being invested in defense. And the new prime minister of the newly approved government, Liberal Reform Party politician Kirsten Michal, admits: in order to cover rising costs, the government must be able to make decisions that are inconvenient. "We must be honest and speak openly: the decisions that need to be made and that we will announce will be difficult. They have consequences that will be felt by all Estonians. We ask for everyone's contribution, and we value that contribution. I thank all Estonians, families and communities affected by these necessary steps,” said the Estonian Prime Minister. The so-called “safety tax” package means that from July next year the value added tax will increase by 2 percentage points to 24%, and the excise tax on alcohol, tobacco, and gasoline will also rise by 5% annually. From 2026, 2 percentage points have been added to the personal income tax (up to 24%) and will return to the old system, when all corporate profits are taxed. This tax regime will be in effect until the end of 2028. At the same time, public sector expenditures will be reduced by 10% over three years. The proposal to freeze pensions was still not accepted. Swedbank's chief economist in Estonia, Tonu Mertsina, admitted to Estonian public media that the new tax hike will hit low-wage earners harder. “Overall, this will likely lead to slower consumption growth than previously predicted, which in turn will slow down tax revenues that the government needs so much,” the economist suggested. The Bank of Latvia argues: since in Latvia 3% of GDP in defense has already been achieved, and our budget deficit is much smaller than in Estonia, even without changing anything in taxes, we can benefit from the changes made by the Estonians. “We may not change anything. Because at this moment, when neighboring countries raise taxes, our tax system becomes more competitive. We may not change anything at this moment,” said Baiba Brusbarde, chief economist of the Bank of Latvia. But it is obvious that we cannot move towards lowering taxes, according to the Bank of Latvia. “All tax changes that may be associated with tax cuts are not the path that should be chosen, because our needs are constantly growing, which means we should not worsen our tax revenues, this is the first point,” she said Brusbarde. Previously, there were proposals, for example, to reduce the labor tax.
