(Bloomberg) -- Estonians have no choice but to stomach more tax increases and reduced state spending if the country wants to beef up its security against threats from Russia, according to the Baltic nation’s new premier Kristen Michal.
The Kremlin’s full-scale invasion of Ukraine has prompted some of Russia’s neighbors to boost military expenditure to deter Moscow. Already grappling with Europe’s longest recession, Estonia’s coalition government has rolled out a defense tax and the country’s biggest wave of budget cuts since the global financial crisis.
Those moves mean that Estonia, with a population of 1.3 million, is now the second biggest defense spender as a portion of economic output in the 32-member NATO alliance.
“Some don’t like cuts, some don’t like taxes — that’s all very logical. It would be great if there were another way,” Prime Minister Kristen Michal, 49, said in an interview after his first cabinet meeting in Tallinn on Thursday. “But we need more ammunition and those decisions need to be made.”
The new administration has a long list of projects to fund, including €1.1 billion ($1.2 billion) in ammunition, as well as fortifications and a “drone wall” along the border with Russia. Michal himself is a reserve officer in Estonia’s defense forces.
“The Defense Ministry has reevaluated that we need to hit targets that are further away and with more precision,” Michal said. “We will put an additional €4 billion into defense spending over five years.”
The tax increases will include 2% hikes to income, corporate and value-added tax as well as excise duties.
“I’m not saying it’s good for the economy — the income tax will certainly hurt business, but it’s not the end of the world,” said Finance Minister Jurgen Ligi. “The value-added tax is structurally harmless for the economy, although it does add tension to domestic consumption.”
Ligi held the role of finance minister from 2009-2014, when he presided over Estonia’s deep austerity measures after the global financial crisis. He will now be tasked with delivering a 10% cut to various government’s expenses and lowering the projected 2025 budget deficit to 3% from 5.6% of gross domestic product.
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