Zuzana Smidova
Vaiva Šečkutė
OECD Economic Surveys: Estonia 2026
Abstract
The Estonian economy has been recovering from a deep and protracted recession, triggered by the Russian war of aggression against Ukraine, disruptions to supply chains and a slowdown in key export markets. The economy will continue to recover in 2026 and 2027, despite the drag from the recent rise in energy prices. Risks to financial stability remain contained but fast lending growth and exposure to the real estate sector warrant monitoring. Fiscal policy is easing and will support the recovery, but consolidation will be needed from 2027 to narrow the deficit and fund increased defence spending as well as growing demand for public services.
1.1.1. Recovery has resumed but headwinds to convergence and growth persist
After three years of protracted and deep recession, the Estonian economy returned to modest growth in 2025, expanding by 0.5%. The recession put a brake on the income convergence process of the past three decades and opened up a large output gap. GDP per capita in purchasing power parity terms fell from almost 89% of the OECD average in 2021 to 78% in 2025 (Figure 1.1 Panel A). Estonia has been hit harder by the slowdown than the other two Baltic countries, largely reflecting its greater export exposure to the Nordic economies. A deterioration in competitiveness appears to have amplified the downturn and weighed on the pace of recovery. Higher household and corporate indebtedness may also have strengthened the transmission of the tightening in financial conditions. Over the longer term, sustained improvements in living standards will depend on faster productivity growth. Adverse demographic trends, which were temporarily mitigated by the recent surge in immigration, will again weigh on growth as the working-age population declines and employment gains become more limited, underlining the importance of structural reforms to support potential growth.
The current coalition government took office in the spring of 2023. Initially, it was formed by three parties: Reform Party, Estonia 200 and Social Democratic Party. Key policy priorities included an increase in defence spending to 3% of GDP, fiscal consolidation and increases in funding of education and healthcare, notably for salaries. In education, compulsory education is extended by one year to 18 years, teaching in Russian is being phased out and a reform of the VET system is under way. Priorities in healthcare included a new organisation of long-term care and mental care as well as review of the overall financing model. Priorities in other areas consisted of strengthening crisis preparedness, strategic resource independence, boosting private R&D, and regional convergence.
In July 2024, a leadership change took place, when the Prime Minister resigned to become EU High Representative for Foreign Affairs and was replaced by Kristen Michal of the Reform Party. Policy focused increasingly on defence and consolidation, while public sector salary increases were postponed due to a projected deterioration of the budgetary situation.
In March 2025, the coalition collapsed and new government under the same Prime Minister but without the Social Democratic Party was formed. Increased defence spending remains the key policy priority, with a target of above 5% of GDP from this year onwards. Planned tax increases under the original fiscal consolidation were scrapped. A stronger emphasis on streamlining the public administration and reducing bureaucracy was added.
The next general election is scheduled to take place on March 7, 2027.
1.1.2. The recession was triggered by the large energy and trade shock
The Estonian economy contracted by 5.5% between the fourth quarter of 2021 and the fourth quarter of 2024, marking the longest and deepest contraction in the OECD over that period. It was triggered by the consequences of Russia’s war of aggression against Ukraine, the large increase in energy prices, disruption of trade with Russia and a downturn in construction in key Nordic export markets due to higher interest rates. Export-dependent manufacturing, transport and storage, and wholesale trade declined sharply. Manufacturing output fell by 20%, the largest drop in the OECD, with manufacturing volume falling back to its 2014 level. The manufacturing sector was hit especially hard due to its reliance on imported Russian wood and weak export demand in the region. The wood manufacturing sector accounts for almost one fifth of manufacturing output, with around one third of wood exports going to Sweden and Finland. Following the sanctions imposed on Russia, cheaper Russian inputs had to be replaced with more expensive European supplies (Bank of Estonia, 2024). The Estonian construction sector was also hit hard, with output falling by 22% during the recession, driven by the sharp rise in interest rates. However, some parts of the economy were more resilient: services held up well. Performance in ICT, which accounts for 8.5% of value added in the economy – one of the highest shares in the OECD – was particularly strong. Value added in the sector grew rapidly, recording one of the highest growth rates in the OECD during this period. Service exports continued to grow during the recession.
Source: OECD Annual National Accounts database, Statistics Estonia and Eurostat.
High inflation, rising interest rates and uncertainty from 2022 took their toll on domestic demand. As inflation surged to 19.4% in 2022 - one of the highest rates in the OECD - private consumption fell in volume terms (Figure 1.2). The shock to real incomes, together with the uncertainty linked to Russia’s war against Ukraine, led to a decline in consumer confidence. Higher interest rates added to the pressure by raising debt servicing costs, reflecting the high prevalence of floating-rate contracts and higher household indebtedness rates compared with the other two Baltic countries. Interest payments as a share of disposable income increased from 1.8% in 2022 to 6.3% in 2024, one of the largest increases in Europe. The interest rate shock slowed activity in the residential real estate market, but prices continued to rise, albeit at a slower pace than before. Since the end of 2022, consumption has remained broadly stable, with consumption volumes in the fourth quarter of 2025 still 2.6% below their peak of early 2022. While spending has been clearly weak, inflation measurement issues may have exaggerated the depth of the contraction (Box 1.2). Similarly, total real compensation of employees in the fourth quarter of 2025 was almost 2% below the peak in the third quarter of 2021 (Figure 1.2. Panel A). With an easing of labour shortages nominal compensation per employee has slowed recently (Figure 1.2. Panel B). The saving rate has recovered but remains slightly below the pre-pandemic average.
After a slowdown following the post-pandemic surge, government consumption began to accelerate again in 2024. Estonia’s energy-support measures in 2021-23 totalled about 0.7% of GDP, one of the lowest in Europe (OECD, 2023). Fiscal policy was neutral or mildly contractionary during the recession, as the government consolidated public finances after the pandemic-related expansion. Investment fell sharply as interest rates rose and uncertainty increased following Russia’s invasion of Ukraine. The investment rate dropped from 30% of GDP in 2021 - one of the highest shares in the OECD - to below 24% in 2024, though still remaining above the OECD average of 22.4%. During 2024-25, EU transfers provided around 3% of GDP, including via the Recovery and Resilience Fund and other Cohesion policies.
1. Average in industry, services and construction.
Source: OECD Economic Outlook database, Eurostat, European Commission, and OECD calculations.
Income inequality, as measured by the Gini coefficient, is close to the OECD median. It rose temporarily in 2022–23 but returned to its pre-recession level of around 31 in 2024-25. Estonia has one of the highest rates of poverty risk in the OECD. In 2025, 22% of the population lived on less than 60% of median household income, largely reflecting high risk of poverty among older people (Eurostat, 2026). In 2022, more than half of those aged 65 and over were at risk of poverty – one of the highest shares in the OECD. The situation has improved since, as old-age pensions have grown faster than average wages since 2023, and the old-age poverty risk rate fell to 34.5%, its lowest rate in over a decade. Nevertheless, at 38% in 2024, the net pension replacement rate for an average earner remains among the lowest in the OECD.
1.1.3. Inflation has been high and volatile, driven by tax increases, food and energy
Inflation fell significantly since the peak in 2022 but prices in 2025 remained 47% above the 2019 level. In 2025, headline inflation accelerated to 4.8%, driven by tax increases and higher food prices. The introduction of a car tax and a two-percentage point increase in the VAT and other taxes added around 2 percentage points. Energy prices continued to decline for the second consecutive year in 2025 but remained volatile with more hours of both very high and very low electricity prices due to changing weather conditions, maintenance and repair work at power plants, as well as transmission capacity constraints (Estonian Competition Authority, 2024). In early 2025, almost half of consumers had variable-price electricity contracts, exposing them directly to wholesale price volatility. Inflation is expected to rise again due to the surge in energy prices in early 2026, but to remain well below previous peaks if energy prices remain in line with current expectations.
Measuring inflation in recent years has been challenging given the strong movements in prices. There is a concern in Estonia that price statistics may have overestimated inflation and underestimated real economic growth during this period (ERR, 2025; Bank of Estonia, 2022).
The issue appears most acute for electricity prices, which account for around 4% of the consumer basket. The methodology used until the end of 2025 did not take full account of electricity contracts with fixed prices even though around 40-50% of electricity contracts appear to have had a fixed price at the start of 2022. Moreover, the prices used to calculate the index for fixed-price electricity packages have been those available to new customers, not those paid under existing contracts. As a result, electricity inflation has at times exceeded price movements implied by market developments. For example, between September and June 2022, Nord Pool prices rose by 42%, while the CPI implied consumer electricity prices increased by almost 70%.
Another potential overstatement concerns food inflation, where the CPI underweight large-scale discounting for certain consumer groups. Since January 2026, Statistics Estonia incorporates improved electricity and retail chain sales data into the calculations to overcome the above-mentioned shortcomings. The methodological changes include the use of sales data from four retail chains for food, beverages and tobacco, replacing in-store price collection, and the use of electricity sales data reflecting actual household consumption and prices paid, instead of exchange prices and fixed-rate package prices.
Inflation peaked at 19.4% in 2022 but would have been 17.6% under the new methodology. Comparable estimates for neighbouring countries are 18.9% in Lithuania and 17.1% in Latvia. However, consumer price statistics will not be revised retrospectively.
Source: ERR (2025), Bank of Estonia (2022) and Statistics Estonia (2026).
Core inflation has moderated, with services inflation remaining elevated and other components weak. While core inflation increased from 5.1% in 2024 to 5.9% in 2025, at constant tax rates it decreased from 3.8% to 3.4% (Figure 1.3. Panel B). Average wages increased by 5.6% in 2025, compared with 8% in 2024 and yearly increases of 11.5% during 2022-23. Slowing unit labour cost growth will further ease pressures on core inflation in the coming years. The VAT increase last July had a greater impact on services prices than on goods prices, reflecting weaker competition in many service markets (Bank of Estonia, 2025d). Services price inflation reached 9.6% in 2025. At constant taxes service price inflation decreased from 6.2% in 2024 to 5.7% in 2025. In addition to labour shortages, wage dynamics were influenced by discretionary policy measures. The minimum wage rose by an average of 11% per year over 2022–25, while average wages increased by 9.3%. This year, the monthly minimum wage will increase by 6.8% to EUR 946, possibly outpacing the average wage growth. Public-sector compensation per employee also accelerated to 13% in 2023–24, almost twice the growth rate of total compensation per employee. These measures compensated for lower increases in public-sector and minimum wages in earlier years, but they are likely to have added to service inflation and prolonged the inflationary impact.
Wage growth in Estonia significantly outpaced productivity growth, and unit labour costs rose faster than in many trading partners, eroding cost competitiveness. Although more recently the competitive position of Estonian exporters has stabilised, some sectors, such as wood manufacturing, may have permanently lost part of their market position due to persistently higher input prices. Estonia’s wage-setting system is highly decentralised, with wages set predominantly at firm level. The statutory national minimum wage serves as the main wage floor and is agreed through annual negotiations between the social partners. In 2023, the social partners concluded a goodwill agreement, aiming for the minimum wage to reach 50% of the average wage by 2027 from around 40% in 2024-2025.
Monetary policy transmission in Estonia is likely faster than in an average euro area country, reflecting the high share of loans with variable interest rates. Transmission also is likely stronger than in the other Baltic countries, as indebtedness is higher. While non-financial corporation and household debt is not high by euro area standards - at below 60% of GDP and below 70% of disposable income respectively - it exceeds levels in Latvia (below 40% of GDP and above 30% of disposable income) and Lithuania (above 30% of GDP and below 40% of disposable income). As euro area monetary policy rates rose from summer 2022 to late 2023, interest rates on new business loans in Estonia peaked above 7%, while rates on new mortgages peaked at 6.7%. These high interest rates weighed on activity at a time when demand was far weaker than in the euro area as a whole. Since then, improving financing conditions have supported the economy. Interest rates on mortgages declined to 3.8%, and rates on new business loans to 4.7% at the end of 2025.
Source: OECD, Consumer Price Indices database and Eurostat.
1.1.4. Employment has slowed due to the contracting economy
Employment growth slowed down as the economy contracted. The employment rate reached a record high of 69.7% in mid-2024 and then declined but remained relatively high at 68% in the beginning of 2026. Hours worked per worker have been broadly stable since the beginning of 2022. Last year, employment declined by 0.7% year-on-year with the largest negative contribution from manufacturing sector. By the end of 2025, total employment was almost 5% above the level at the end of 2021, even though value added was more than 5% lower. Employment in manufacturing was almost 15% lower than at end 2021, although in many other sectors employment has increased or declined less than value added. The very tight labour market conditions prior to the recession encouraged firms to retain workers despite lower orders.
The unemployment rate started to rise in 2023, reflecting slower employment growth and an increase in the labour force and peaked at 8.2% in the first quarter of 2025. Currently, it stands below 7%. Youth unemployment rose from 19% in 2024 to 20.6% in 2025, almost double of the OECD average. As the number of vacancies declined, opportunities to work worsened (Figure 1.4. Panel B). However, this seems to be a short-term phenomenon for a majority as 76% of young unemployed remain unemployed for less than six months. The share of long-term unemployment among youth is lower than in the other Baltic countries and below the OECD average. Participation has continued to increase among the elderly, supported by further increases in the retirement age, and also across other age groups.
The working-age population has grown since 2022, mainly due to Ukrainian refugees. By 2025, Ukrainians had increased the working-age population by around 4%. This, together with higher participation, drove rapid labour force growth. However, this momentum weakened in 2025 as immigration eased and participation rates edged down. Net migration decreased from 2.9% of the population in 2022 to 0.1% in 2024 and became negative at -0.2% in 2025. Ukrainian citizens continue to have weaker labour market outcomes than the overall working-age population. In the middle of 2025, their unemployment rate was 9.5%, compared to 7.5% for the population as a whole, and their employment rate was 51.2%, compared with 69.3% overall.
Source: OECD Economic Outlook database and Statistics Estonia.
1.1.5. Competitiveness losses have deepened the recession
Estonian exporters have faced a marked loss of competitiveness following sharp increases in input costs during the energy crisis, supply-chain disruptions and rapid wage growth. Unit labour costs rose significantly more in manufacturing than in the neighbouring Baltic economies, causing Estonia to lose in terms of cost competitiveness (Figure 1.5. Panel A). In late 2022, firms rated their competitiveness worse than during the global financial crisis, according to the European Commission business survey. Estonian companies’ assessment of their competitive position inside and outside of EU remained below that in Latvia and Lithuania. Estonian export goods prices increased by 34% between 2019 and 2024, which was the highest increase in the EU and much stronger than in other two Baltic countries. During the recession Estonia lost post-pandemic market share gains. The export market share in volume terms fell by about 15% between 2022 and 2024, one of the largest declines in Europe (Figure 1.5. Panel B).
Source: Eurostat.
Weakness in manufacturing and labour hoarding contributed to a decline in productivity, although this decline appears to have bottomed out in 2024. Labour productivity has fallen most in export-dependent transport and manufacturing sectors, as well as in construction and finance, while since 2021 developments have been more resilient in some service activities. Although the competitive position of Estonian companies has stabilised more recently and some of these developments may be cyclical and reversed as demand picks up, it is likely that there will be a permanent effect on the level of productivity due to lost investment, higher energy prices and lasting shifts in demand and supply linkages to Russia that will not be fully reversed.
Economic growth has accelerated from 0.5% in 2025 to 1.3% annual growth in the first quarter of 2026. The recovery is projected to continue this year and next, despite the headwinds from the evolving conflict in the Middle East, with GDP growth reaching 1.8% in 2026 and 2.7% in 2027, supported by strong fiscal stimulus (Figure 1.6). Adjustments to the basic tax allowance will reduce effective tax rates - especially for middle and higher-income earners – and, together with moderating inflation, support a steady recovery in household consumption. Investment will be supported by defence expenditure, while private investment is also set to pick up as capacity utilisation rises and financial conditions become more favourable.
Note: In Panel A, years 2026 and 2027 are based on the latest projections in the Economic Outlook.
Source: OECD Economic Outlook 119 database, European Commission and OECD calculations.
1. Contributions to changes in real GDP, actual amount in the first column.
2. Harmonised index of consumer prices excluding food, energy, alcohol and tobacco.
3. The Maastricht definition of general government debt includes only loans, debt securities, and currency deposits, with debt at face value rather than market value.
Source: OECD Economic Outlook.
Despite the recovery, employment growth will be modest, reflecting a declining labour force and the past labour hoarding of firms. Unemployment, including among the youth, is expected to decline as growth recovers. The output gap is expected to gradually narrow and wage growth is projected to ease to around 4-5% given remaining slack in the labour market and the catching up of wages to past increases in prices. Higher energy prices in 2026 are expected to raise headline inflation to 4.1% in 2026 and to 2.6% in 2027. The effect on core inflation is likely to be more muted, given easing wage pressures.
There are significant risks to growth, including those related to developments in the Middle East and the scale of the energy price shock. Other downside risks include a potential escalation of Russia’s war of aggression against Ukraine that could impact security in the region and critical infrastructure (Table 1.2.) More prolonged economic slowdown in the Nordic countries could also lead to weaker growth.
Despite the economic downturn and volatility in the global financial markets, the financial sector has remained resilient. Banks’ capitalisation remains well above regulatory requirements and has withstood considerable dividend payments in 2024 (Figure 1.7). Profitability, in the past supported by elevated net interest margins, decreased during 2024-25. The banking sector is dominated by subsidiaries of Nordic banks. The 2025 EU-wide stress testing exercises included two parent Swedish banks and two medium-sized Estonian banks and modelled an adverse scenario combining a severe recession with escalating geopolitical tensions and a worldwide rise in protectionist trade policies (Finanstinspektsioon, 2025). In 2024, the central bank and the financial regulator (Finantsinspektsioon) proposed measures to boost competition in the mortgage market by simplifying mortgage transfers and reducing costs, such as removing the requirement for notary approval and re-valuation, as well as abolishing the three-month interest charge for early repayment. Adoption of these measures is ongoing.
Source: IMF Financial Soundness Indicators (FSI) database.
The debt-servicing capacity of both households and businesses remains strong (Bank of Estonia, 2025b). At 0.5% of total assets and just over 1% of total loans, the share of non-performing loans (NPL) has increased only mildly and remains low by international standards (Figure 1.7). In March, NPLs in the business sector remained stable at 0.5%, among households this share was 0.2% for housing loans and 2.5% for other household consumer loans. Manufacturing, real estate and agriculture sectors experienced the most notable increase in NPLs during the downturn.
Risks to financial stability consist of bank exposure to the real estate sector, foreign funding and the debt-servicing capacity of households and businesses (Bank of Estonia, 2025b). Commercial real estate activity recovered in late 2024, with lending to the sector picking up considerably and driving much of the recent growth in business borrowing, which increased by 12% year-on-year in the first three quarters of 2025. Loans to real estate and construction businesses represented 49% of the corporate loan portfolio at the start of the year, above the euro area average of 35%, with smaller domestic banks accounting for a significant proportion of the recent increases. Nevertheless, the average loan-to-value ratio in the real estate sector remains conservative. The vacancy rate in Tallinn has started to edge up but remained below 12% for office space and below 5% for retail and premises. Overall, lending growth in the corporate sector decelerated from 8% in 2024 to 6% in 2025. The indebtedness of the non-financial corporate sector reached 60% of GDP in 2024.
Housing loans have also picked up, increasing 10% year-on-year in the six months to March, outpacing the euro area average of 2.8%. Bank lending survey indicates easing of lending conditions due to competition pressures and increased appetite for risk. Activity in the housing market recovered in 2025, although it remains below long-term average in terms of number of transactions. The ongoing correction has been stronger in Tallinn, where prices remained flat, but grew by 8% nominally in the suburbs. Nominal average house prices are expected to have matched inflation in 2025. In the second quarter of last year, the house price-to-income ratio stood close to the OECD average and just above the euro area average while price-to-rent ratio was above those two benchmarks (Figure 1.9). A risk weight floor of at least 15% for mortgage loans, in force since 2019 and applicable to banks using internal ratings-based approach, expired last September, while the average risk weight in the banking sector reached 18% (Bank of Estonia, 2025c). In this context of rapid lending growth, the countercyclical capital buffer, which has remained unchanged at 1.5% since autumn of 2023, appears appropriate.
Source: ECB, Eesti Pank.
Deterioration in the geopolitical risks in the Baltic region or other volatility in financial markets could increase financing costs of foreign market funding (Bank of Estonia, 2025b). Intra-group financing is key among the large banks, which are subsidiaries of Nordic banking groups. Domestic banks have diversified financing sources, with the role of deposits from non-residents and market funding increasing in recent years. Around a half of non-resident deposits originate from the other Baltic countries, as well as Germany, Austria and the Netherlands.
Other risks to financial stability include those from cybersecurity, financial integrity and climate change. Estonia is among the countries reporting an increase in cyber-attacks. In 2024, there were twice as many impactful incidents than the year before (Bank of Estonia, 2025b). While the majority of these were phishing and fraud incidents resulting in financial losses for individuals, three attacks affected directly card payments of key banks, while another disrupted the provision of authentication services provided by the authorities, resulting in card payments disruptions of between one and five hours. Despite the increase in attacks, the authorities consider the ability of owners of key financial infrastructure to withstand such events to be good (cryptob).
Lending to carbon-intensive sectors, such as transport, manufacturing, and energy, accounted for over a quarter of corporate lending in 2024 (Figure 1.9). Although the energy sector is the most emission-intensive, loans to non-renewable sources accounted for only 2.2% of the total loan stock. Climate change could impact asset values, particularly in the areas exposed to coastal flooding (Chapter 3), calling for further improvements in risk assessment and adapting macroprudential policy to reflect unpriced systemic risks associated with climate change. Implementation of the EU’s Corporate Sustainability Reporting Directive obliges disclosure of climate-related risks in large companies, including in financial institutions.
Source: Central Bank of Estonia and OECD Housing Prices database.
A nationwide risk assessment of money laundering and terrorist financing was conducted last year, third such assessment since 2015. High-risk activities include banking and cross-border payments, virtual asset service providers (VASP), corporate service providers and gambling operators. In this context, the recent decision to decrease gambling tax from 6% to 4%, raises questions and necessitates the strengthening of public resources for oversight by the Financial Intelligence Unit. VASP assets account for around 4.5% of GDP and regulation and licensing have been tightened in recent years (Bank of Estonia, 2025a). The national risk assessment highlighted a lack of resources and specialisation in law enforcement bodies, limited enforcement and poor data quality in the beneficial ownership registry as well as the need for improved inter-agency cooperation and strategic leadership (Ministry of Finance of Estonia, 2025b). In 2024, a new office focused on investigating economic crime and corruption was established within the public prosecutor (European Commission, 2025a).
Perceptions and experience of corruption are low, with 5% of respondents having experienced corruption in 2025, the same as the EU average, while perceptions of corruption are below the average of the Baltic neighbours (Figure 1.10) (European Commission, 2025b). Nevertheless, trust in government and public institutions in the OECD Trust Survey in 2023 was low, with only 46% of the population aged 15 years and older reporting confidence in the national government, on a par with Lithuania but below neighbouring Finland (OECD, 2025a).
Public integrity regulations are strong, but the implementation and practice can be at times patchy (OECD, 2024b). Estonia stands out as one of the top performers in transparency of public information, with key integrity-related datasets publicly available, such as agendas and minutes of government sessions, salaries of civil servants, information on meetings of elected officials with stakeholders and interest groups, as well as annual monitoring of the previous Anti-Corruption Action Plan 2021-25. Stakeholders are regularly consulted, and a new anti-corruption strategy is in the making. It should build on the best practice of the previous one and involve stakeholders across the civil society and political spectrum, to ensure policy stability given the upcoming general elections in 2027.
In the judiciary, several reforms are under way. To strengthen the institutional independence and organisational autonomy, certain oversight and managerial powers will be moved from the Ministry of Justice and Digital Affairs to a separate judicial body, the Council for the Administration of Courts. While this is welcome as it would bring Estonia closer to the OECD best practices on judicial independence, inclusion of members of parliament in this body is unusual. To reduce administrative spending, a merger of courts of the same instance and further digitalisation of criminal proceedings have been proposed.
Note: In Panel B, respondents who had contact with the public administration in past 12 months and experienced or witnessed corruption. Nordics refers to the average of values for Denmark, Finland and Sweden.
Source: World Bank and European Commission – Eurobarometer No.548.
Conflict of interest is one area of public integrity where Estonia is lagging in implementation behind the OECD average (Figure 1.11). Code of Conduct for lobbying activities was adopted in 2021. Several OECD countries have gone a step further, adopting comprehensive legislation on lobbying that includes mandatory registration of lobbyists, disclosure of lobby activities and clear sanctions for non-compliance. They also publish information about the number of conflict-of-interest declarations that have been verified and issue recommendations for resolving such potential conflicts. In Estonia, a political consensus about the need to update the existing framework has emerged in recent years, but no specific timeline or legislative plans have been announced. While members of the government are subject to rules on post-employment and cooling periods, these do not apply to high-level public officials. An amendment of the law on financing of political parties that would give more powers to the committee overseeing political party financing and clarify reporting obligations has passed a first reading in the Parliament.
Note: Panel C shows ratings from the FATF peer reviews that assess levels of implementation of the FATF Recommendations. The ratings reflect the extent to which a country's measures are effective against 11 immediate outcomes. "Investigation and prosecution¹" refer to money laundering. "Investigation and prosecution²" refer to terrorist financing.
Source: OECD, Financial Action Task Force (FATF) and World Bank, Worldwide Governance Indicators.
Given Estonia’s risk profile, the implementation and enforcement of OECD’s Convention on Combating Bribery of Foreign Public Officials in International Business Transactions continues to be weak (OECD, 2025b). This is due to an insufficient awareness of foreign bribery risks and inadequate prioritisation among authorities. While since the last assessment, Estonia made progress, notably in improving legal provisions defining foreign bribery and allowing for the criminal liability and sanctioning of legal persons, these changes are yet to be put to the test in practice. Engagement with the private sector to improve the awareness of foreign bribery risks can be strengthened. The authorities should promote anti-bribery compliance programmes and exploit detection sources in the private sector. The current whistle-blower regime should explicitly cover foreign bribery and sanctions, and confiscation can be improved, while awareness in the private sector should extend to small and medium-sized businesses active in foreign markets.
Fiscal policy has been restrictive in recent years, while the debt ratio has been rising, although from a very low level. A period of fiscal restraint kept the budget deficit below 3% of GDP in 2024 and 2025, despite the recession and higher defence spending (Figure 1.12). In 2025, consolidation, improved revenue growth and spending restraint resulted in a general government deficit of 2% of GDP, significantly better than the originally budgeted 3% of GDP (Ministry of Finance of Estonia, 2025a). Consolidation measures in both 2024 and 2025 relied mainly on tax increases. In 2025, revenue increased by 0.6% of GDP, due to a new car tax and a two-percentage point increase in the VAT rate, as well as increases in personal income tax and corporate tax rates. At the same time, defence spending continued to rise, reaching 3.4% of GDP in 2025, establishing Estonia as one of the largest spenders on defence as a share of national income among NATO countries (Figure 1.12 and Box 1.3).
The budget deficit will widen to around 4.3% of GDP this year. Defence expenditure is rising by a further 1.6 percentage points to 5% of GDP. Excluding this, the deficit would remain just below 3% of GDP. Public investment is increasing by 32% driven by defence and infrastructure spending and public sector wages are rising by around 8% on average. An earlier plan to introduce a ‘security surcharge’ of 2 percentage points on corporate and personal income taxes to finance the military expenditures has been scrapped, at a cost of 0.5% of GDP. At the same time, the basic tax allowance increased and is no longer withdrawn at higher incomes, at a cost of 1.3% of GDP. Given elevated energy prices due to disrupted global supply of energy, the increase of excise duties scheduled for May has been cancelled. It is likely to lead to a decrease in tax revenue of around 0.1% of GDP, although the overall impact could be mitigated by higher VAT revenues as was the case in the past (Ministry of Finance, 2026).
In 2027, the authorities foresee a budget deficit of 4.9% of GDP and decreasing to 4.3% in 2028, as a result of the cyclical recovery and tightening of fiscal policy. In 2027, planned consolidation includes a continued rise in excise taxes and non-tax revenues, such as environmental fees and charges. Further increases in excise taxes and environmental fees are planned, as well as a reduction of means-tested social benefits in the later years of the consolidation (2028-29), although these have not yet been fully set out or legislated. In 2029, deficit of 4.5% of GDP is planned. Defence expenditures are projected to remain above 5% of GDP up to 2029.
Note: Panel B shows military spending according to NATO methodology. 2025 corresponds to estimates, 2026-27 to the latest forecast.
Source: OECD Economic Outlook 119 database, Stockholm International Peace Research Institute database; and OECD calculations.
OECD estimates point to a widening of the structural deficit in the medium term (Figure 1.12, Panel A). The underlying fiscal position has come under pressure since the pandemic due to higher social and defence spending. In 2024, public expenditure reached an equivalent of 44% of GDP, which is close the OECD average but below the EU average of 49%. Estonia collected revenues equivalent to 43% of GDP, which is below the EU average of 46% and above the OECD average of 40%. Between 2019 and 2024, overall revenues increased by 3.8 percentage points as a share of GDP, while public expenditure increased by almost 5 percentage points. Defence spending increases accounted for 1.6 percentage points, health, education and social protection for 2.2 percentage points (Table 1.3.).
General government, % of GDP
Note: Other expenditures items include defence, public order and safety, housing and community amenities, recreation, culture and religion, environmental protection.
Source: OECD National Accounts database.
In response to the deteriorated security environment Estonia has significantly accelerated the build-up of its defence capabilities. Defence spending increased from 2% of GDP in 2022 to 3.4% in 2025, with a further rise to above 5% of GDP planned for this year and in the medium-term (Ministry of Finance of Estonia, 2025a). With this commitment, Estonia has become one of the top EU spenders in relative terms, comparable – on a GDP basis – to Poland.
During 2023-25, around half of Estonia’s defence expenditure went to investment, with a strong focus on ammunition, equipment procurement and new military infrastructure. While a large share of defence procurement is import-intensive, investment in infrastructure can have positive short-term impact on the domestic economy.
Large-scale investment in ammunition and new capabilities
Ammunition procurement has been a central priority, with plans to allocate over EUR 4 billion between 2022 and 2031 to build up strategic, large scale, multi-annual ammunition reserves, including HIMARS munitions, IRIS‑T air defence missiles, 155 mm and 120 mm artillery shells, mines, and fuses. Continued capability development includes the establishment of layered air defence, supported by the creation of a new air‑defence brigade integrating medium‑ and short‑range systems.
Major investments in infrastructure, bases and allied presence.
Infrastructure spending covers the construction and expansion of training areas, ammunition depots, barracks, and the Baltic Defence Line, a joint initiative with Latvia and Lithuania to strengthen the border with Russia and Belarus through defensive structures such as trenches, bunkers and surveillance systems. Estonia is also developing a defence industry park, aimed at attracting predominantly export‑oriented ammunition production.
Transition to division-level defence and strengthened allied presence
Estonia is moving from a brigade‑level national defence structure toward an integrated, multinational division‑level model. The country hosts a permanent or rotational presence of US, UK, and French forces. Since 2023, Estonia also hosts a regional hub of NATO’s Defence Innovation Accelerator for the North Atlantic (DIANA), which supports the development of dual‑use technologies relevant for defence and security challenges across the Alliance.
Expansion of personnel, increased training of reservists
A major, multi‑year expansion of its military personnel base is taking place to match the rapid growth in capabilities and the shift towards a division‑level defence structure. The number of active servicemen is rising steadily—from around 3,700 in 2024 to 4,300 by 2029, alongside a growing cohort of civilian specialists supporting new technologies, logistics, and administrative functions. To strengthen mass‑mobilisation readiness, the wartime composition of the Defence Forces was expanded to 43,700 fighters in 2023, with plans to increase this further to 55,000 personnel under the forthcoming National Defence Development Plan 2035.
To improve conditions to attract and retain personnel recent measures include increases to conscripts’ allowances, better support for reservists (allowances last increased in 2018), and new benefits such as monthly transport compensation linked to inflation and reimbursement of driving‑licence application costs. Length‑of‑service bonuses are being introduced to keep trained active servicemen in service longer. Estonia is deepening cooperation with local authorities and private‑sector partners to ensure whole‑of‑society readiness. Between 2026 and 2029, 70% of local governments are expected to participate in military‑defence readiness training days, ensuring civilian institutions are integrated into mobilisation and crisis‑response planning.
Annual support to Ukraine of 0.25% of GDP
Estonia has embedded support to Ukraine as a permanent, structural element of its defence budget. The government committed to providing 0.25% of GDP annually in military assistance to Ukraine, at least until 2027, and this support is explicitly integrated into the medium‑term defence expenditure plans. As a share of GDP Estonia’s support is the highest among the Baltics. During 2024-27, the support consists of direct military equipment and munition transfers, financial contributions to international mechanisms, including the European Peace Facility and integration of Ukrainian personnel into exercise and cooperation in military education and logistics.
Note: The figure shows the composition of general government defence expenditure. “Personnel” is compensation of employees. “Investment” is gross fixed capital formation. “Intermediates” is intermediate inputs. “Other” includes change in inventories among other items.
Source: OECD COFOG database and OECD calculations.
From a cyclical perspective, the widening of the deficit, while the economy recovers, carries risks. OECD estimates suggest still a large negative output gap of 3.6% of potential GDP in 2026, which would make the stimulus appropriate in the near term. These estimates are clouded by considerable uncertainty for such a small open economy, and the gap is set to close in the coming years. The import content of defence spending tends to be high, with fiscal multipliers smaller than for traditional government spending (Olejnik L. W., 2025). Around 2% of GDP of the defence spending is allocated to infrastructure upgrades and personnel and a decrease of effective personal income taxation is adding 1.3% of GDP, while available EU funding this year is estimated at 2% of GDP, similar to that in 2025. While the planned policy will support the recovery, any upside surprises to revenues or expenditures in 2026 should be used to narrow the deficit more quickly. In the past, revenue predictions often proved conservative. Moreover, inflation higher than budgeted would lead to higher nominal revenues. Should the budgetary position turn out better than budgeted, as was the case for instance in 2025, savings should be used to lower the deficit. A gradual narrowing of the deficit from 2027 should be undertaken as it would weigh only modestly on the economy, especially if undertaken with growth enhancing reforms.
General government debt reached 24% of GDP in 2025 (EU’s Maastricht definition), among the lowest in the OECD. Despite the rapid increase in nominal GDP in recent years, debt is 15 percentage points higher than in 2019, a result of mostly pandemic-era borrowing. The planned large deficits imply that under current tax and spending settings debt would continue to rise substantially in the years ahead (Figure 1.14.) According to the governmental Medium-term Budgetary Strategy headline deficits over 3% of GDP are projected over the next four years, with the debt ratio rising further by around 10 percentage points between 2024 to 2029, reaching 36.7% of GDP (Ministry of Finance of Estonia, 2025a).
The Estonian national fiscal rules aim to achieve a small structural deficit in the medium term. The rules distinguish two scenarios: In the first scenario, when debt to GDP is below 30% of GDP and the structural government balance is larger than -1% of GDP, consolidation of 0.5% of GDP annually is required until attaining a structural balance of -1% of GDP. In the second scenario, when debt is above the 30% threshold, consolidation of 0.5 percentage points of GDP annually is required to bring the structural balance to -0.5% of GDP. These requirements are more demanding than the revised EU fiscal framework that aims to stabilise debt ratio below 60% of GDP in the medium term. Currently, the consolidation requirement is suspended due to the EU ‘escape clause’ for defence spending until 2028.
The national fiscal rules should be adapted in the light of current needs and to strengthen the focus on keeping the debt ratio low and close to current levels. First, given Estonia’s low debt ratio and significant investment and security needs, focussing more strongly on the debt ratio rather than the budget balance and avoiding a threshold may provide a more credible policy framework, as well as being more aligned with the revised EU fiscal rules that emphasise stabilising debt ratios durably in the medium term. The experience of debt thresholds in fiscal rules is that they may complicate policy making near the ceiling and lead to undesirable outcomes, such as the use of off-budgetary funds to avoid crossing the threshold or procyclical policies. Second, the authorities should consider introducing a national well-defined ‘escape clause’. Currently, any suspension of the consolidation requirement is linked to the European fiscal framework and requires approval of the EU Council. However, there may be situations such as the recent downturn that are specific to the Estonian economy, while, at other times, an EU-wide exemption may not be appropriate to Estonia’s circumstances.
To accommodate fiscal pressures of ageing, the climate transition, any additional security needs as well as rising public expectations in terms of social policy, education and health, stabilising debt at around 35% of GDP in the long term is prudent. Given the projected recovery and rising debt, a fiscal adjustment in non-defence spending is warranted and should start already in 2027 to help to stabilise the debt and avoid undue contribution to domestic demand. Funding the higher level of defence spending requires a permanent source of financing in the medium term. In the context of Estonia’s relatively moderate level of spending and the efficiency of public services, the consolidation could be achieved largely on the revenue side. Table 1.4. outlines the estimated fiscal impact of reforms suggested in past Economic Surveys and OECD reports that could raise additional revenue of 2.6% of GDP in medium term.
Estonia will need to develop a long-term strategy for spending and taxation to meet future spending pressures in a growth-friendly and fair way (as discussed in depth Chapter 2). OECD estimates show the cost of climate change could be up to 2% of GDP in 2050 relative to 2024 (Box 1.4). While the country is transitioning to a pension system where individual savings in asset-backed pension plans will play a bigger role, replacement rates from the public pension pillar are and will remain low, leading to a risk of higher future public spending. The public coverage of long-term care is among the lowest in the OECD and represents another ageing related fiscal pressure. Public financing of healthcare has been rising and population ageing is likely to push the costs even higher. Furthermore, wage pressures in both the education and healthcare sectors have been present for a number of years, and both areas are affected by staff shortages and an ageing workforce.
This box draws on OECD-Edison, an experimental modelling framework developed by the OECD Governance Directorate to assess the budgetary implications of the climate transition. It builds on work by the UK Office for Budget Responsibility and the Irish Fiscal Advisory Council. The framework combines estimates of the economic impact of transition policies with detailed assessments of their effects on spending and revenues. Projections extend to 2050, although uncertainty rises over time.
The modelling assumes net zero scenario from the Network for Greening the Financial System (NGFS), a global group of central banks and financial supervisors that has developed climate scenarios widely used by financial institutions for risk analysis and reporting. In this scenario, energy use is projected to shift from fossil fuels to electricity. Policy costs are based on Estonia’s National Climate and Energy Plan (NECP), with estimates available until 2030. These are extended beyond 2030 by adjusting for inflation. Excise duty projections until 2029 have been provided by the Ministry of Finance and are assumed to rise with inflation thereafter. Another important assumption is on adoption of electric vehicles, which follows an S-curve pattern: a slow initial uptake while the technology is emerging, followed by rapid uptake, and eventually plateauing as the market nears saturation.
The modelling illustrates how government revenues will fall sharply unless the tax system adapts. Tax revenues from vehicle and energy taxes, at around 3.4% of GDP in 2024, are projected to decline to around 1.6% of GDP as the vehicle fleet shifts from combustion engines to electric vehicles. Annual car taxes and fuel excise receipts will shrink despite higher rates of taxation. This is partly offset by a temporary rise in VAT from new electric car sales (Figure 1.14. Panel A). On the spending side, the largest item is investment in building renovation, amounting to more than EUR 1 billion over ten years to 2030 (0.2% of annual GDP), according to the NECP. Substantial investments are also planned in transport, energy and agriculture.
Overall, the budget balance is projected to deteriorate by around 2% of GDP in 2050 relative to 2024, mainly due to falling revenues (Figure 1.14. Panel B). Backtracking or delaying the transition could lead to even higher costs for health, infrastructure repairs, defence and penalties for missing EU targets.
Source: OECD-Edison.
Figure 1.15 presents illustrative scenarios for the development of the debt-to-GDP ratio to 2060. Under the first scenario (blue line), current spending and revenue settings are kept unchanged, which together with rising ageing and climate transition costs, lead to a steep upward trajectory in the debt-to-GDP ratio, largely reflecting the size of the current budget deficit. The second scenario (red line) assumes a gradual and sustained consolidation effort starting in 2027 which would stabilise the debt at around 35% of GDP in the medium term. Over the longer-term, substantial additional consolidation effort of 6.7% of GDP or 0.3% of GDP annually would be needed to maintain debt at such level, highlighting the importance of underlying reforms to the tax and spending system. The third scenario (green line) supplements the consolidation effort with the growth impact of structural reforms, as listed in Table 1.5.
General government debt to GDP (Maastricht definition)
Note: In the blue line scenario, the primary government balance includes higher defence spending and is projected to gradually deteriorate with rising ageing-related costs and lower tax revenues due to the climate transition. The red line scenario accounts for the mechanical impact of the consolidation measures presented in Table 1.4 in the medium term and additional consolidation of 6.7 pp during 2037-60. In the green line scenario, in addition to the consolidation effort of the red-line scenario, GDP growth is boosted by structural reforms (Table 1.5).
Source: Simulations based on the OECD’s Global Long-Term Model, OECD Economic Outlook 119 database.
Structural reforms can provide a boost to economic growth. In case of Estonia, illustrative estimates show that the combined effect of such reforms can lift GDP level by close to 6% over a decade (Table 1.5). Such structural reforms should include increasing upskilling of the labour force. Broadening the reach of current upskilling policies could help advance digital transition of the traditional industries, prepare the labour force for widespread adoption of AI (Chapter 4), as well as the climate transition (OECD, 2024a). A shrinking labour force is likely to intensify skills shortages in innovative sectors. Estonia spends around 0.3% of GDP on active labour market policies, which is at the OECD average, while the average of the three biggest OECD spenders is close to 0.9% of GDP. An extension of the compulsory education as well as policies to decrease drop-out rates are already under way and have the potential to increase educational attainment (Chapter 2). Growth impact of educational policies can be substantial but takes a time to manifest, given the time needed for today’s pupils to enter the labour market (Egert B., 2023).
While Estonia ranks well in terms of favourable business environment, with generally low regulatory burden, trade barriers and pro-competitive product market regulations, a scope for decreasing red tape remains, as identified by the Economic Growth Council and earlier OECD Economic Surveys. Digitalisation and adoption of AI offer a key opportunity to reinvigorate productivity growth but will require broader take up across traditional sectors of the economy (Chapter 4).
Note: Reform impacts are based on simulations using the OECD long-term model, which is informed by empirical estimates of the relationship between policy indicators and trend labour efficiency, capital deepening and employment rate from cross-country econometric analysis (Guillemette and Château, 2023 and references therein). Many assumptions and uncertainties underly these estimates and only some of the reform recommendations are covered. 1. As recommended in (OECD, 2022)
1. As recommended in (OECD, 2022)
Source: Simulations using OECD Long-Term Model.
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