Recommendation for a COUNCIL RECOMMENDATION on the economic, social, employment, structural and budgetary policies of Estonia
Date: 2025-06-04
Institutions: European Commission, Reform and Investment Task Force
Subjects: Estonia, budget policy, economic policy, economic recovery, economic reform, employment policy, energy policy, labour market, social policy, stability pact

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   EUROPEAN COMMISSION  Brussels, 4.6.2025  COM(2025) 206 final  Recommendation for a COUNCIL RECOMMENDATION on the economic, social, employment, structural and budgetary policies of Estonia {SWD(2025) 206 final}  
 
Recommendation for a 

COUNCIL RECOMMENDATION 

on the economic, social, employment, structural and budgetary policies of Estonia 

THE COUNCIL OF THE EUROPEAN UNION, 

Having  regard  to  the  Treaty  on  the  Functioning  of  the  European  Union,  and  in  particular 
Article 121(2) and Article 148(4) thereof, 

Having regard to Regulation (EU) 2024/1263 of the European Parliament and of the Council 
of  29 April  2024  on  the  effective  coordination  of  economic  policies  and  on  multilateral 
budgetary surveillance and repealing Council Regulation (EC) No 1466/971, and in particular 
Article 3(3) thereof, 

Having  regard  to  Regulation  (EU)  No 1176/2011  of  the  European  Parliament  and  of  the 
Council  of  16 November 2011  on  the  prevention  and  correction  of  macroeconomic 
imbalances2, and in particular Article 6(1) thereof, 

Having regard to the recommendation of the European Commission, 

Having regard to the resolutions of the European Parliament, 

Having regard to the conclusions of the European Council, 

Having regard to the opinion of the Employment Committee, 

Having regard to the opinion of the Economic and Financial Committee, 

Having regard to the opinion of the Social Protection Committee, 

Having regard to the opinion of the Economic Policy Committee, 

Whereas: 

General considerations 

(1) 

Regulation (EU) 2024/1263, which entered into force on 30 April 2024, specifies the 
objectives  of  the  economic  governance  framework,  which  aims  at  promoting  sound 
and  sustainable  public  finances  and  sustainable  and  inclusive  growth  and  resilience 
through reforms and investments, and preventing excessive government deficits. The 
Regulation  stipulates  that  the  Council  and  the  Commission  conduct  multilateral 
surveillance in the context of the European Semester in accordance with the objectives 
and requirements set out in the TFEU. The European Semester includes, in particular, 
the  formulation,  and  the  surveillance  of  the  implementation  of  country-specific 
recommendations.  The  Regulation  also  promotes  national  ownership  of  fiscal  policy 
and  emphasises  its  medium-term  focus,  combined  with  more  effective  and  coherent 
enforcement. Each Member State must submit to  the Council and the Commission  a 
national  medium-term  fiscal-structural  plan,  containing  its  fiscal,  reform  and 
investment  commitments,  over  4  or  5  years,  depending  on  the  length  of the  national 

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OJ L, 2024/1263, 30.4.2024, ELI: http://data.europa.eu/eli/reg/2024/1263/oj. 
OJ L 306, 23.11.2011, p. 25, ELI: http://data.europa.eu/eli/reg/2011/1176/oj. 

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legislative  term.  The  net  expenditure3  path  in  these  plans  has  to  comply  with  the 
Regulation’s  requirements,  including  the  requirements  to  put  or  keep  general 
government debt on a plausibly downward path by the end of the adjustment period, or 
for it to remain at prudent levels below 60% of gross domestic product (GDP), and to 
bring  and/or  maintain  the  general  government  deficit  below  the  3%-of-GDP  Treaty 
reference value over the medium term. Where a Member State commits to a relevant 
set  of  reforms  and  investments  in  accordance  with  the  criteria  set  out  in  the 
Regulation, the adjustment period may be extended by up to three years.  
Regulation  (EU)  2021/241  of  the  European  Parliament  and  of  the  Council4,  which 
established  the  Recovery  and  Resilience  Facility  (the  ‘RRF’),  entered  into  force  on 
19 February 2021.  The  RRF  provides  financial  support  to  Member  States  for 
implementing  reforms  and  investments,  delivering  a  fiscal  impulse  financed  by  the 
Union.  In  line  with  the  priorities  of  the  European  Semester  for  economic  policy 
coordination, the RRF fosters economic and social recovery while driving sustainable 
reforms and investments, in particular promoting the green and digital transitions and 
making  Member  States’  economies  more  resilient.  It  also  helps  strengthen  public 
finances  and  boost  growth  and  job  creation  in  the  medium  and  long  term,  improve 
territorial cohesion within the Union and support the continued implementation of the 
European Pillar of Social Rights. 
Regulation  (EU)  2023/435  of  the  European  Parliament  and  of  the  Council5  (the 
‘REPowerEU  Regulation’),  which  was  adopted  on  27 February 2023,  aims  to  phase 
out the Union’s dependence on Russian fossil-fuel imports. This helps achieve energy 
security  and  diversify  the  Union’s  energy  supply,  while  increasing  the  uptake  of 
renewables,  energy  storage  capacities  and  energy  efficiency.  Estonia  added  a  new 
REPowerEU chapter to its national recovery and resilience plan in order to finance key 
reforms and investments that will help achieve the REPowerEU objectives. 

On  18 June  2021,  Estonia  submitted  its  national  recovery  and  resilience  plan  to  the 
Commission, in accordance with Article 18(1) of Regulation (EU) 2021/241. Pursuant 
to Article 19 of that Regulation, the Commission assessed the relevance, effectiveness, 
efficiency  and  coherence  of  the  recovery  and  resilience  plan,  in  accordance  with  the 
assessment guidelines set out in Annex V. On 29 October 2021, the Council adopted 
its  Implementing  Decision  approving  the  assessment  of  the  recovery  and  resilience 
plan for Estonia6, which was amended under Article 18(2) on 16 June 2023 to update 
the maximum financial contribution for non-repayable financial support, as well as to 

Net  expenditure  as  defined  in  Article  2,  point  (2),  of  Regulation  (EU)  2024/1263:  ‘net  expenditure’ 
means government expenditure net of (i) interest expenditure; (ii) discretionary revenue measures; (iii) 
expenditure  on  programmes  of  the  Union  fully  matched  by  revenue  from  Union  funds;  (iv)  national 
expenditure  on  co-financing  of  programmes  funded  by  the  Union;  (v)  cyclical  elements  of 
unemployment benefit expenditure; and (vi) one-offs and other temporary measures. 
Regulation  (EU)  2021/241  of  the  European  Parliament  and  of  the  Council  of  12 February 2021 
establishing 
(OJ  L  57,  18.2.2021,  p. 17,  ELI: 
http://data.europa.eu/eli/reg/2021/241/oj). 
Regulation  (EU)  2023/435  of  the  European  Parliament  and  of  the  Council  of  27 February 2023 
amending Regulation (EU) 2021/241 as regards REPowerEU chapters in recovery and resilience plans 
and  amending  Regulations  (EU)  No 1303/2013,  (EU)  2021/1060  and  (EU)  2021/1755,  and  Directive 
2003/87/EC (OJ L 63, 28.2.2023, p. 1, ELI: http://data.europa. eu/eli/reg/2023/435/oj). 
Council Implementing Decision of 29 October 2021 on the approval of the assessment of the recovery 
and resilience plan for Estonia (0319/2021). 

the  Recovery  and  Resilience  Facility 

(2) 

(3) 

(4) 

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(5) 

(6) 

(7) 

include  the  REPowerEU  chapter7.  The  release  of  instalments  is  conditional  on  the 
adoption  of  a  decision  by  the  Commission,  in  accordance  with  Article 24(5),  stating 
that  Estonia  has  satisfactorily  achieved  the  relevant  milestones  and  targets  set  out  in 
the  Council  Implementing  Decision.  Satisfactory  achievement  requires  that  the 
achievement  of  preceding  milestones  and  targets  for  the  same  reform  or  investment 
has not been reversed. 

On  21  January  2025  the  Council,  upon  the  recommendation  of  the  Commission, 
adopted a recommendation endorsing the national medium-term fiscal-structural plan 
of  Estonia8.  The  plan  was  submitted  in  accordance  with  Articles  11  and  36(1), 
point (a) of Regulation (EU) 2024/1263,  covers the period from  2025 until  2028 and 
presents a fiscal adjustment spread over four years. 

On  26 November 2024,  the  Commission  adopted  an  opinion  on  the  2025  draft 
budgetary  plan  of  Estonia.  On  the  same  date,  on  the  basis  of  Regulation  (EU) 
No 1176/2011, the Commission adopted the 2025 Alert Mechanism Report, in which 
it identified Estonia as one of the Member States for which an in-depth review would 
be  needed.  The  Commission  also  adopted  a  recommendation  for  a  Council 
recommendation on the economic policy of the euro area and a proposal for the 2025 
Joint  Employment  Report,  which  analyses  the  implementation  of  the  Employment 
Guidelines  and  the  principles  of  the  European  Pillar  of  Social  Rights.  The  Council 
adopted  the  Recommendation  on  the  economic  policy  of  the  euro  area9  on  13  May  
2025 and the Joint Employment Report on 10 March 2025. 

On  29 January 2025,  the  Commission  published  the  Competitiveness  Compass,  a 
strategic framework that aims to boost the EU’s global competitiveness over the next 
five  years.  It  identifies  the  three  transformative  imperatives  of  sustainable  economic 
growth: (i) innovation; (ii) decarbonisation and competitiveness; and (iii) security. To 
close  the  innovation  gap,  the  EU  aims  to  foster  industrial  innovation,  support  the 
growth of start-ups through initiatives like the EU Start-up and Scale-up Strategy, and 
promote the adoption of advanced technologies like artificial intelligence and quantum 
computing.  In  pursuit  of  a  greener  economy,  the  Commission  has  outlined  a 
comprehensive Affordable Energy Action Plan and a Clean Industrial Deal, ensuring 
that  the  shift  to  clean  energy  remains  cost-effective,  competitiveness-friendly, 
particularly  for  energy-intensive  sectors,  and  is  a  driver  for  growth.  To  reduce 
excessive dependencies and increase security, the Union is committed to strengthening 
global  trade  partnerships,  diversifying  supply  chains  and  securing  access  to  critical 
raw materials and clean energy sources. These priorities are underpinned by horizontal 
enablers, namely regulatory simplification, deepening of the single market, financing 
competitiveness and a Savings and Investments Union, promotion of skills and quality 
jobs, and better coordination of EU policies. The Competitiveness Compass is aligned 
with  the  European  Semester,  ensuring  that  Member  States’  economic  policies  are 
consistent with the Commission’s strategic objectives, creating a unified approach to 
economic governance that fosters sustainable growth, innovation and resilience across 
the Union. 

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Council  Implementing  Decision of  16 June  2023  amending  the Implementing  Decision of  29 October 
2021 on the approval of the assessment of the recovery and resilience plan for Estonia (9367/2023). 
Council  Recommendation  of  21  January  2025  endorsing  the  medium-term  fiscal-structural  plan  of 
Estonia, OJ C/2025/655, 10.02.2025. 
Council  Recommendation  of  13  May  2025  on  the  economic  policy  of  the  euro  area  (OJ  C, 
C/2025/2782, 22.5.2025, ELI: http://data.europa.eu/eli/C/2025/2782/oj). 

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(8) 

In  2025,  the  European  Semester  for  economic  policy  coordination  continues  to 
develop  alongside  the  implementation  of  the  RRF.  The  full  implementation  of  the 
recovery and resilience plans remains essential for delivering on the policy priorities 
under the European Semester, as the plans help effectively address all or a significant 
subset  of  challenges  identified  in  the  relevant  country-specific  recommendations 
issued  in  recent  years.  These  country-specific  recommendations  remain  equally 
relevant  for  the  assessment  of  amended  recovery  and  resilience  plans  in  accordance 
with Article 21 of Regulation (EU) 2021/241. 

(9) 

the  key  economic  policy 
The  2025  country-specific  recommendations  cover 
challenges that are not sufficiently addressed by measures included in the recovery and 
resilience  plans,  taking  into  account  the  relevant  challenges  identified  in  the  2019-
2024 country-specific recommendations. 

in 

(10)  On  4 June  2025,  the  Commission  published  the  2025  country  report  for  Estonia.  It 
assessed  Estonia’s  progress 
country-specific 
recommendations  and  took  stock  of  Estonia’s  implementation  of  the  recovery  and 
resilience plan. Based on this analysis, the country report identified the most pressing 
challenges  Estonia  is  facing.  It  also  assessed  Estonia’s  progress  in  implementing  the 
European  Pillar  of  Social  Rights  and  in  achieving  the  Union  headline  targets  on 
employment, skills and poverty reduction, as well as progress in achieving the United 
Nations Sustainable Development Goals. 

addressing 

relevant 

the 

(11)  The  Commission  carried  out  an  in-depth  review  under  Article 5  of  Regulation  (EU) 
No 1176/2011  for  Estonia.  The  main  findings  of  the  Commission’s  assessment  of 
macroeconomic  vulnerabilities  for  Estonia  for  the  purposes  of  that  Regulation  were 
published on 13 May 202510. On 4 June 2025, the Commission concluded that Estonia 
is  not  experiencing  macroeconomic  imbalances.  In  particular,  vulnerabilities  relating 
to deteriorating price and cost competitiveness have been present in recent years amid 
a  protracted  recession,  and  house  prices  have  grown  considerably,  but  overall 
vulnerabilities seem to be contained at present. Wages and prices have grown strongly 
for a number of years, and core inflation remained well above the euro area average in 
early  2025,  driven  by  wage  growth,  especially  in  the  public  sector.  These  price  and 
cost  pressures are impairing  the competitiveness  position of the economy.  While the 
loss  of  cheap  energy  and  other  inputs  following  Russia’s  war  of  aggression  against 
Ukraine were the triggers for sustained price growth in 2022, inflationary pressure is 
now  mostly  domestic.  Strong  domestic  demand  and  a  tight  labour  market  enabled 
wages  to  grow  quickly  at  a  time  of  weak  productivity.  Public  wages,  especially  for 
teachers  and  health  care  staff,  have  increased  over  the  last  years,  catching  up  from 
relatively low levels in the past. Part of the high inflation can be attributed to increases 
in indirect taxes. Estonian exports have lost some market shares in the past two years. 
The current account deficit has shrunk recently, owing to a recession at home; the net 
international  investment  position  is  only  moderately  negative  and  risks  to  external 
sustainability  appear  limited.  House  prices  have  grown  considerably  in  recent  years 
and are estimated to  be  overvalued, but  the  risk to  financial stability  associated with 
mortgage  lending  remains  low.  Some  past  policy  actions  have  contributed  to  this 
situation,  in  particular  by  having  fuelled  domestic  demand  once  the  worst  of  the 
pandemic  crisis  was  behind.  These  included  the  release  of  the  second  pillar  pension 
funds,  which  boosted  prices,  including  house  prices.  In  recent  years,  the  increase  in 

10 

SWD(2025)123 final. 

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public  salaries  and  in  minimum  wages  have  coincided  with  the  recession  and  led  to 
higher  overall  wage  growth  across  the  economy.  Measures  to  improve  labour 
productivity  and  the  business  environment  remain  limited.  The  government  recently 
announced  several  tax-  and  expenditure-reducing  policy  actions  for  2026  that  could 
lower inflationary pressures and alleviate some labour cost pressures. 

Assessment of the Annual Progress Report 

(12)  On 21 January 2025 the Council recommended the following maximum growth rates 
of net expenditure for Estonia: 7.1% in 2025, 5.1% in 2026, 3.6% in 2027, and 3.2% 
in  2028,  which  corresponds  to  the  maximum  cumulative  growth  rates  calculated  by 
reference to 2023 of 9.2% in 2025, 14.8% in 2026, 18.9% in 2027, and 22.6% in 2028. 
(13)  On 29 April 2025, Estonia submitted its Annual Progress Report11, on adherence to the 
recommended  maximum  growth  rates  of  net  expenditure  and  the  implementation  of 
reforms and investments responding to the main challenges identified in the European 
Semester country-specific recommendations. The Annual Progress Report also reflects 
Estonia’s  biannual  reporting  on  the  progress  made  in  achieving  its  recovery  and 
resilience plan in accordance with Article 27 of Regulation (EU) 2021/241. 

(14)  Russia’s  war  of  aggression  against  Ukraine  and  its  repercussions  constitute  an 
existential  challenge  for  the  European  Union.  The  Commission  recommended  to 
activate  the  national  escape  clause  (NEC)  of  the  Stability  and  Growth  Pact  in  a 
coordinated  manner  to  support  the  EU  efforts  to  achieve  a  rapid  and  significant 
increase  in  defence  spending  and  this  proposal  was  welcomed  by  the  European 
Council  of  6  March  2025.  Following  the  request  of  Estonia  on  29  April  2025,  on 
[date]  the  Council,  upon  the  recommendation  of  the  Commission,  adopted  a 
recommendation allowing Estonia to deviate from, and exceed, the maximum growth 
rates of net expenditure12. 

(15)  Based on data validated by Eurostat 13, Estonia’s general government deficit decreased 
from 3.1% of GDP in 2023 to 1.5% in 2024, while general government debt rose from 
20.2%  of  GDP  at  the  end  of  2023  to  23.6%  at  the  end  of  2024.  According  to  the 
Commission’s  calculations,  these  developments  correspond  to  a  net  expenditure 
growth rate of 1.8% in 2024. In the Annual Progress Report, Estonia estimates the net 
expenditure  growth  in  2024  at  1.1%.  The  Commission  estimates  that  the  net 
expenditure  growth  was  higher  than  in  the  Annual  Progress  Report.  The  difference 
between the Commission’s calculations and the estimates of national authorities is due 
to a smaller Commission’s estimate of the impact of discretionary revenue measures. 
Based  on  the  Commission’s  estimates,  the  fiscal  stance14,  which  includes  both 

11 

12 

13 

14 

The  2025  Annual  Progress  Reports  are  available  on:  https://economy-finance.ec.europa.eu/economic-
and-fiscal-governance/stability-and-growth-pact/preventive-arm/annual-progress-reports_en 

Council  Recommendation  allowing  Estonia  to  deviate  from,  and  exceed,  the  recommended  net 
expenditure path (Activation of the national escape clause), [Please complete: OJ C/2025/xxx, x.x.2025] 

Eurostat-Euro Indicators, 22.4.2025. 

The fiscal stance is defined as a measure of the annual change in the underlying budgetary position of 
the  general  government.  It  aims  to  assess  the  economic  impulse  stemming  from  fiscal  policies,  both 
those  that  are  nationally  financed  and  those  that  are  financed  by  the  EU  budget.  The  fiscal  stance  is 
measured as the difference between (i) the medium-term potential growth and (ii) the change in primary 
expenditure net of discretionary revenue measures and including expenditure financed by non-repayable 
support (grants) from the Recovery and Resilience Facility and other Union funds. 

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nationally  and  EU  financed  expenditure,  was  contractionary,  by  1.8%  of  GDP,  in 
2024. 

(16)  According to the Annual Progress Report, the macroeconomic scenario underpinning 
the  budgetary  projections  by  Estonia  expects  real  GDP  growth  of  1.7%  in  2025  and 
2.5%  in  2026,  while  HICP  inflation  is  projected  at  5.1%  in  2025  and  4.3%  in  2026. 
The  Commission  Spring  2025  Forecast  projects  real  GDP  to  grow  by  1.1%  in  2025 
and 2.3% in 2026, and HICP inflation to stand at 3.8% in 2025 and 2.3% in 2026. 

(17) 

In the Annual Progress Report, the general government deficit is expected to remain at 
1.5%  of  GDP  in  2025,  while  the  general  government  debt-to-GDP  ratio  is  set  to 
decrease  to  22.5%  by  the  end  of  2025.  These  developments  correspond  to  net 
expenditure growth of 1.0% in 2025. The Commission Spring 2025 Forecast projects a 
general  government  deficit  of  1.4%  of  GDP  in  2025.  Increases  in  revenue,  due  to 
increased tax rates on personal and corporate income, income from credit institutions 
and value added, as well as from the introduction of a motor vehicle tax, are expected 
to more than offset the increase in government expenditure. The economic recovery is 
also  set  to  improve  the  intake  of  these  taxes.  According  to  the  Commission’s 
calculations,  these  developments  correspond  to  net  expenditure  growth  of  2.1%  in 
2025. These higher projections of net expenditure growth than in the Annual Progress 
Report  are  also  due  to  Commission  assuming  higher  growth  of  current  primary 
expenditure,  lower  expenditure  funded  by  transfers  from  the  EU  and  lower  national 
co-financing  of  EU  programmes.  Based  on  the  Commission’s  estimates,  the  fiscal 
stance, which includes both nationally and EU financed expenditure, is projected to be 
expansionary  by  1.0%  of  GDP  in  2025.  According  to  the  Commission  Spring  2025 
Forecast, the general government debt-to-GDP ratio is set to increase to 23.8% by the 
end of 2025. The increase of the debt-to-GDP ratio in 2025 mainly reflects the budget 
deficit as well as stock-flow adjustments. 

(18)  General  government  expenditure  amounting  to  0.6%  of  GDP  is  expected  to  be 
financed  by  non-repayable  support  (“grants”)  from  the  Recovery  and  Resilience 
Facility  in  2025,  compared  to  0.4%  of  GDP  in  2024,  according  to  the  Commission 
Spring 2025 Forecast. Expenditure financed by Recovery and Resilience Facility non-
repayable  support  enables  high-quality 
investment  and  productivity-enhancing 
reforms,  without  a  direct  impact  on  the  general  government  balance  and  debt  of 
Estonia.  

(19)  General  government  defence  expenditure  in  Estonia  amounted  to  2.0%  of  GDP  in 
2021,  2.2%  of  GDP  in  2022  and  2.7%  of  GDP  in  202315.  According  to  the 
Commission Spring 2025 Forecast, expenditure on defence is projected to amount to 
3.4% of GDP in 2024 and 3.8% of GDP in 2025. This corresponds to an increase of 
1.7 percentage points of GDP compared to 2021. The period when the national escape 
clause is activated (2025-2028) allows Estonia to reprioritise government expenditure 
or increase government revenue so that lastingly higher defence expenditure would not 
endanger fiscal sustainability in the medium term.  

(20)  According  to  the  Commission  Spring  2025  Forecast,  net  expenditure  in  Estonia  is 
projected to grow by 2.1% in 2025 and 3.9% cumulatively in 2024 and 2025. Based on 
the Commission  Spring 2025  Forecast,  net  expenditure growth  of Estonia in  2025 is 

15 

Eurostat, government expenditure by classification of functions of government (COFOG).  

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(21) 

projected  to  be  below  the  recommended  maximum  growth  rate,  both  annually  and 
when considering 2024 and 2025 together. 

In the Annual Progress Report, the general government deficit is projected to increase 
to 2.5% of GDP in 2026, while the general government debt-to-GDP ratio is projected 
to increase to 24.0% by the end of 2026. The 2025 Annual Progress Report does not 
include  budgetary  projections  beyond  2026.  Based  on  policy  measures  known  at  the 
cut-off  date  of  the  forecast,  the  Commission  Spring  2025  Forecast  projects  a 
government deficit of 2.4% of GDP in 2026. The projected increase in the deficit for 
2026  is  driven  by  the  revenue  side,  due  mainly  to  the  application  of  a  tax-free 
allowance to  all taxpayers of personal  income tax and lower tax intakes  on dividend 
earnings,  reflecting  companies  distributing  high  dividends  in  2024  and  2025  in 
anticipation of the tax hike on corporate income tax. These developments correspond 
to net expenditure growth of 4.1% in 2026. Based on the Commission’s estimates, the 
fiscal stance, which includes both nationally and EU financed expenditure, is projected 
to be expansionary, by 0.5% of GDP, in 2026. The general government debt-to-GDP 
ratio  is  projected  by  the  Commission  to  increase  to  25.4%  by  the  end  of  2026.  The 
increase  of  the  debt-to-GDP  ratio  in  2026  mainly  reflects  the  projected  government 
deficit. 

Key policy challenges 

(22)  Although  Estonia’s  tax  revenue  continued  to  increase  as  a  share  of  GDP  in  2024,  it 
remains below the EU average. Closing that gap would make extra funding available 
for  public  expenditure  priorities  such  as  defence,  healthcare  and  long-term  care. 
Property  taxes,  which  are  among  the  taxes  least  detrimental  to  growth,  have  been 
about  seven  times  lower  than  the  EU  average  for  the  past  years  up  to  2023,  at  just 
0.3% of GDP. Over the same period, capital taxes have followed a similar trend, being 
three  times  lower  than  the  EU  average.  In  2025,  Estonia  will  raise  the  corporate 
income tax rate from 20% to 22% and abolish the reduced tax rate of 14% applied to 
regular  dividends.  These  measures  will  increase  the  share  of  capital  taxes  in  total 
revenues  and  help  reduce  the  gap  with  the  EU  average.  Conversely,  Estonia  relies 
mostly on taxes on labour and consumption, with revenue from these taxes above the 
EU average as a percentage of GDP. The share of these taxes in total revenues is set to 
increase following recent and planned rises in the value added tax rate. Although the 
tax  increases  will  also  help  reduce  the  total  tax  revenue  gap  with  the  EU,  they  are 
regressive,  with  the  tax  burden  being  unevenly  distributed.  They  can  therefore 
exacerbate the already high income inequality and risk having an inflationary impact, 
with high inflation identified as a considerable challenge to Estonia’s competitiveness. 
Estonia is also working on integrating regular spending reviews and policy evaluations 
into  the  medium-term  budget  planning.  Implementing  these  reviews  to  prioritise  key 
areas  of  spending  would  contribute  to  a  more  efficient  allocation  of  public  funds  to 
help  meet  rising  structural  spending  needs  and  reduce  the  pressure  to  increase  tax 
revenue. 

(23)  Access  to  adequate  and  affordable  healthcare  and  long-term  care  is  not  yet  ensured. 
Reforms  and  increased  investment  in  recent  years  have  contributed  to  reducing  the 
level  of  self-reported  unmet  needs  for  medical  care  from  12.5%  in  2023  to  8.5%  in 
2024. However, unmet needs remain among the highest in the EU, due to long waiting 
times and the uneven quality and availability of healthcare services across the country. 
Public spending on long-term care and healthcare services remains low, well below the 
EU  average,  and  workforce  shortages  and  the  reliance  on  municipal  funding  limit 
service provision. Low levels of public spending lead to high out-of-pocket payments 

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for healthcare and long-term  care. The  care reform  that entered into force in  2023 is 
the  first  major  step  in  strengthening  long-term  care  in  Estonia,  though  its  impact 
remains  to  be  seen.  To  further  reduce  the  unmet  needs  for  medical  care  and  out-of-
pocket  payments,  it  is  crucial  to  ensure  adequate  financing  for  high-quality  care 
provision,  especially  as  population  ageing 
increase  demand. 
Strengthening  home  and  community-based  care,  alongside  assistive  technologies, 
would also help improve service accessibility and effectiveness across the country. 

is  expected 

to 

(24) 

In accordance with Article 19(3), point (b), of Regulation (EU) 2021/241 and criterion 
2.2  of  Annex  V  to  that  Regulation,  the  recovery  and  resilience  plan  includes  an 
extensive set  of mutually reinforcing  reforms and investments  to  be implemented by 
2026.  These  are  expected  to  help  effectively  address  all  or  a  significant  subset  of 
challenges  identified  in  the  relevant  country-specific  recommendations.  Within  this 
tight timeframe, finalising the effective implementation of the recovery and resilience 
plan  including  the  REPowerEU  chapter,  is  essential  to  boost  Estonia’s  long-term 
competitiveness  through  the  green  and  digital  transitions,  while  ensuring  social 
fairness. The systematic involvement of local and regional authorities, social partners, 
civil society and other relevant stakeholders remains essential in order to ensure broad 
ownership for the successful implementation of the recovery and resilience plan. 

(25)  The  implementation  of  the  cohesion  policy  programme,  which  encompasses  support 
from  the  European  Regional  Development  Fund  (ERDF),  the  Just  Transition  Fund 
(JTF),  the  European  Social  Fund  Plus  (ESF+)  and  the  Cohesion  Fund  (CF),  has 
accelerated  in  Estonia.  It  is  important  to  continue  efforts  to  ensure  the  swift 
implementation  of  this  programme,  while  maximising  its  impact  on  the  ground. 
Estonia  is  already  taking  action  under  its  cohesion  policy  programme  to  boost 
competitiveness  and growth. At the same time, Estonia continues to  face challenges, 
including those relating to economic and social resilience, including poverty and social 
integration  of 
exclusion,  healthcare  and 
disadvantaged groups, as well as skills and educational supply, energy transition and 
regional  competitiveness,  especially  in  eastern  border  regions.  In  accordance  with 
Article 18 of Regulation (EU) 2021/1060, Estonia is required – as part of the mid-term 
review  of  the  cohesion  policy  funds  –  to  review  its  programme  taking  into  account, 
among  other 
the  2024  country-specific 
recommendations.  The  Commission  proposals  adopted  on  1  April  202516  extend  the 
deadline for submitting an assessment of the outcome of the mid-term review beyond 
31  March  2025.  It  also  provides  flexibilities  to  help  speed  up  programme 
implementation  and  incentives  for  Member  States  to  allocate  cohesion  policy 
resources  to  five  strategic  priority  areas  of  the  Union,  namely  competitiveness  in 
strategic technologies, defence, housing, water resilience and energy transition. 

long-term  care, 

the  challenges 

labour  market 

identified 

things, 

the 

in 

(26)  The  Strategic  Technologies  for  Europe  Platform  (STEP)  provides  the  opportunity  to 
invest in a key EU strategic priority by strengthening the EU’s competitiveness. STEP 
is channelled through 11 existing EU funds. Member States can also contribute to the 
InvestEU programme supporting investments in priority areas. Estonia could use these 
initiatives  to  support  the  development  or  manufacturing  of  critical  technologies, 
including clean and resource-efficient technologies. 

16 

Proposal  for  a  REGULATION  OF  THE  EUROPEAN  PARLIAMENT  AND  OF  THE  COUNCIL 
amending  Regulations  (EU)  2021/1058  and  (EU)  2021/1056  as  regards  specific  measures  to  address 
strategic challenges in the context of the mid-term review - COM(2025) 123 final. 

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(27)  Beyond the economic and social challenges addressed by the recovery and resilience 
plan  and  other  EU  funds,  Estonia  faces  several  additional  challenges  related  to 
research  and  innovation  policy,  access  to  financing,  labour  productivity  and  skills 
supply, social protection, renewable energy and energy efficiency, and decarbonisation 
including in the transport sector. 

(28) 

Although Estonia’s overall innovation performance has steadily improved since 2017, 
business research and development (R&D) spending as a percentage of GDP remains 
below  the  EU  average,  with  the  information  and  communications  technology  sector 
accounting for nearly half of total R&D spending. Concurrently, the number of patent 
applications filed under the Patent Cooperation Treaty per EUR 1 billion of GDP has 
declined,  suggesting  that  the  public  science  base  does  not  translate  well  into 
technological  performance  and  business  innovation.  While  direct  public  support  for 
business  R&D  has  increased,  policies  beyond  grant  schemes  are  underdeveloped, 
hindering  Estonia’s  ability  to  address  the  needs  of  companies  with  limited  ability  to 
apply  research  discoveries.  In  addition,  the  share  of  applied  research  in  total  R&D 
financing fell to 23% in 2023. The Applied Research Centre was launched in 2024 and 
it will take time to develop a fully functional research technology organisation. There 
is  a  lack  of  close  collaboration  between  business  and  academia.  There  is  scope  to 
strengthen the role of universities and applied research organisations in innovation to 
accelerate the take up of new technologies and to boost competitiveness. 

(29)  Access to finance for small and medium-sized enterprises (SMEs) in Estonia is more 
heavily  constrained  than  on  average  in  the  EU.  This  undermines  investment  in 
innovation,  especially  in  remote  regions  where  regional  shortages  of  skills  and 
resources  make 
investment  financing  particularly  risky.  Estonian 
companies have a high need of investment to promote the digital and green transition 
and yet draw less on funding from capital markets than the EU average, relying instead 
more on investment funded internally. This is encouraged by the income tax system, 
the  prevalence  of  SMEs  and  a  modest  institutional  investor  base.  Promoting 
institutional  investor  participation  in  the  equity  market  and  encouraging  the 
development of a self-sustained venture capital market could help attract investors. 

innovative 

(30)  Recently, the shortage of labour has become less acute, but the lack of skilled workers 
remains the major obstacle to investment for 32% of businesses and skills mismatches 
occur in many sectors. Continuing investment in the green transition has increased and 
will further increase the demand for workers with specialised skills. This shortage of 
skills  has  coincided  with  rapid  wage  growth  and  a  higher  unit  labour  cost,  limiting 
business productivity growth. In recent years, rapid wage growth has been one of the 
factors fuelling inflation and weighing on competitiveness. Relatively high rates both 
of  early  school  leaving  and  drop  out  in  higher  education  result  in  an  insufficient 
number of skilled graduates, adding to the problem. The skills shortage is particularly 
acute  at  regional  level,  as  rural  and  remote  areas  face  more  difficulties  in  attracting 
qualified  professionals  and  have  greater  needs  for  reskilling  and  upskilling  due  to 
transition challenges. Skills mismatches could be limited by improving the job market 
relevance  of  the  education  and  training  system,  notably  for  specialists  in  science, 
technology,  engineering  and  mathematics.  Policies  could  also  improve  access  to 
reskilling  and  upskilling,  notably  for  individuals  with  a  low  level  of  education,  and 
also  for  older  workers,  including  policies  to  improve  basic  digital  skills.  To  support 
economic diversification to high value-added activities, greater use could be made of 
the OSKA system to anticipate demand for skills and simpler rules could be brought in 
to hire foreign skilled workers in shortage areas and help boost competitiveness. 

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(31)  Estonia  is  making  notable  progress  towards  meeting  the  2030  EU  energy  efficiency 
targets.  By  better  targeting  energy-efficient  renovation  schemes  to  vulnerable 
households  and  increasing  support  for  the  residential  sector  under  new  schemes  to 
complement  existing  schemes  (such  as  the  RRF  and  the  Apartment  Building 
Reconstruction grant), Estonia could better meet the goals of its long-term renovation 
strategy  and  contribute  to  achieve  the  target  to  reduce  emissions  under  the  Effort 
Sharing Regulation. Currently, the country primarily draws on grant-based funding for 
energy  efficiency  improvements,  with  limited  use  of  financial  instruments.  Estonia 
would benefit from more targeted schemes and from making broader use of financial 
instruments to achieve the EU energy efficiency targets. 

(32)  Although Estonia’s energy mix saw a notable shift towards renewables (from 27.7% in 
2022 to 34.6% in 2023), the energy mix still has a significant share of oil shale (58.2% 
in 2023), which hinders the green transition. Electricity prices remain high and volatile 
in Estonia due to the intermittent nature of renewable energy, driving up inflation and 
lowering competitiveness of businesses. Estonia also faces energy security issues due 
to  hybrid attacks on pipelines and submarine cables in  the Baltic Sea. Increasing  the 
roll-out of renewable energy production (34.6% of the energy mix in 2023) and energy 
storage  would  help  the  ongoing  and  gradual  phase-out  of  fossil  fuels  while 
maintaining  a  high  degree  of  energy 
the  successful 
synchronisation  with  the  continental  European  electricity  grid  in  2025,  additional 
action  is  needed  to  improve  grid  resilience  and  flexibility.  Continuing  work  to 
strengthen the protection of critical energy infrastructure is also crucial, in particular in 
the area of cybersecurity and infrastructure surveillance. 

independence.  After 

(33)  Estonia  has  one  of  the  lowest  resource  productivity  rates  in  the  EU,  which  can  be 
partially  attributed  to  the  country’s  resource-intensive  oil  shale  industry  and  to  the 
overall  resource-intensive  industrial  system.  In  2023,  Estonia  generated  only 
EUR 0.63  per  kg  of  material  used,  against  the  EU  average  of  EUR 2.22.  This  has  a 
negative impact on Estonia’s competitiveness. Boosting eco-innovation and bio-based 
innovation to make sustainable use of natural resources could help improve Estonia’s 
resource  productivity  and  competitiveness.  At  33%,  Estonia’s  rate  of  preparing  for 
reuse and recycling of municipal waste is significantly below the EU average of 49%. 
The  country  could  benefit  from  bringing  in  new  policy  instruments  to  speed  up  the 
transition to a circular economy. 

(34)  Estonia’s transport sector is a large greenhouse gas emission producer under the Effort 
Sharing Regulation, accounting for about 15% of the country’s total emissions, 90% of 
which come from road transport. Railways are crucial for shifting transport from road 
to rail to improve sustainable mobility, but just 12% of the rail network is electrified 
compared  to  the  EU  average  of  57%  (2022).  Estonia  could  therefore  benefit  from 
continuing  action  to  electrify  the  rail  network  further  to  reduce  its  dependence  on 
fossil  fuels.  Meanwhile,  the  car  ownership  rate  is  one  of  the  EU’s  highest.  In  2023, 
75.5% of cars were petrol-powered and their average age is high. Only 6.3% of new 
vehicles  in  2023  were  electric,  against  the  EU  average  of  14.5%.  Estonia  recently 
brought in vehicle taxes for private passenger cars based on weight and CO2 emissions 
but  the  tax  rates  are  lower  for  older  vehicles.  Although  lower  rates  help  protect 
vulnerable groups, Estonia could consider increasing the incentives to renew the stock 
of private road vehicles. Estonia is rightly considering raising the share of sustainable 
buses  in  the  whole  public  bus  fleet  to  42%  from  the  current  30%  to  provide  green 
public transport in rural  areas, thereby  helping to renew the stock of public vehicles. 

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Even  though  Estonia  has  integrated  some  local  transport  ticketing  and  planning 
systems with positive results, further action is needed on this front. 

income 

inequality,  despite 

(35)  Due  to  gaps  in  social  protection,  Estonia  continues  to  face  challenges  related  to 
poverty,  social  exclusion  and  persistent 
recent 
improvements.  Although  the  increases  in  pensions  and  child  benefits  have  improved 
some social indicators, the risk of poverty and social exclusion rate remained high in 
2024,  especially  among  older  people  -  in  particular  people  aged  65  and  over  living 
alone  -  persons  with  disabilities  and  single-person  households.  Spending  on  social 
protection benefits is among the lowest in the EU at 15.4% of GDP in 2023, against 
26.8% for the EU as  a whole. The impact  of social benefits  (excluding  pensions) on 
poverty  also  remains  well  below  the  EU  average.  Improving  the  adequacy  and 
efficiency  of  the  benefits  system  could  help  reduce  the  risk  of  poverty,  as  well  as 
targeting support towards vulnerable groups such as persons with disabilities, single-
person households and older people. Despite recent  pension increases, driven mostly 
by  inflation  adjustments  and  rising  social  tax  contributions,  pensions  remain  among 
the lowest in the EU relative to wages, contributing to high old-age poverty. In-work 
poverty remains relatively high, particularly for people in non-standard forms of work, 
and is aggravated by relatively low minimum wages, despite recent increases.  Estonia 
could  extend  the  coverage  of  unemployment  benefits  to  people  who  are  not  yet 
covered, such as people in non-standard forms of work, including self-employed. This 
could lower their risk of poverty. Regional disparities remain pronounced, with rural 
areas and eastern border regions at greater risk of poverty. Addressing these challenges 
would  also  contribute  to  supporting  upward  social  convergence,  in  line  with  the 
Commission  services’  second-stage  country  analysis  of  the  Social  Convergence 
Framework17. 

(36) 

In view of the close interlinkages between the economies of euro-area Member States 
and  their  collective  contribution  to  the  functioning  of  the  economic  and  monetary 
union,  in  2025,  the  Council  recommended  that  the  euro-area  Member  States  take 
action,  including  through  their  recovery  and  resilience  plans,  to  implement  the  2025 
the  euro  area.  For  Estonia, 
Recommendation  on 
recommendations (2), (3) and (4) help implement the first euro-area recommendation 
on  competitiveness,  while  recommendations  (4),  (5)  and  (6)  help  implement  the 
second  euro-area  recommendation  on  resilience,  and  recommendation  (1)  helps 
implement  the  third  euro-area  recommendation  on  macro-economic  and  financial 
stability set out in the 2025 Recommendation. 

the  economic  policy  of 

HEREBY RECOMMENDS that Estonia take action in 2025 and 2026 to: 

1. 

Reinforce overall defence spending and readiness in line with the European Council 
conclusions  of  6  March  2025.  Adhere  to  the  maximum  growth  rates  of  net 
expenditure recommended by the Council on 21 January 2025, while making use of 
the  allowance  under  the  national  escape  clause  for  higher  defence  expenditure. 
Broaden the tax base by tapping into taxes that are less detrimental to growth. Ensure 
sustainable financing for spending needs including defence, and healthcare and long-
term  care  to  improve  accessibility  and  affordability,  while  safeguarding  against 
inflationary pressure. 

17 

SWD(2025)95  –  Second-stage  country  analysis  on  social  convergence  in  line  with  the  Social 
Convergence Framework (SCF), 2025. 

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2. 

3. 

4. 

5. 

In  view  of  the  applicable  deadlines  for  the  timely  completion  of  reforms  and 
investments under Regulation (EU) 2021/241, ensure the effective implementation of 
the recovery and resilience plan, including the REPowerEU chapter. Accelerate the 
implementation  of  the  cohesion  policy  programme  (ERDF,  JTF,  ESF+,  CF), 
building,  where  appropriate,  on  the  opportunities  offered  by  the  mid-term  review. 
Make optimal use of EU instruments, including the scope provided by the InvestEU 
and the Strategic Technologies for Europe Platform, to improve competitiveness. 

Focus  investment  on  research  and  innovation  by  prioritising  funding  for  applied 
research.  Improve  access  to  finance,  especially  for  small  and  medium-sized 
enterprises and companies in remote regions, to facilitate innovative investment, for 
example  investment  in  the  green  and  digital  transitions,  including  by  promoting 
institutional investor participation in the venture capital and equity market. 

Improve energy efficiency by taking new financing and support measures to meet the 
targets  of the long-term  renovation strategy. Reduce overall reliance on fossil  fuels 
and the share of oil shale in the energy mix by investing in renewable energy and by 
promoting  energy  storage.  Increase  energy  security,  for  example  by  ensuring  the 
sufficient  capacity  of  electricity  interconnections.  Raise  resource  productivity 
through bio-based innovation. Take further action to increase the availability and use 
of  sustainable  and  less  polluting  transport,  including  by  electrification  of  the  rail 
network,  renewal  of  the  stock  of  road  vehicles,  and  integration  of  public  transport 
systems. 

Improve  labour  productivity  and  skills  supply  through  action  on  reskilling  and 
upskilling, by reducing early school leaving, by improving the job market relevance 
of the education and training  system,  in  particular by meeting the growing demand 
for  specialists  in  science,  technology,  engineering  and  mathematics,  and  by  better 
attracting  and  retaining  talent.  Step  up  policy  measures  aimed  at  the  provision  and 
acquisition of skills and competences needed for the green transition. Reduce the risk 
of  poverty  by  strengthening  social  protection  for  older  people,  single-person 
households and people with disabilities by increasing the adequacy and efficiency of 
the benefit system, and for the unemployed, inter alia by extending the coverage of 
unemployment benefits, in particular to those in non-standard forms of work, while 
maintaining fiscal sustainability. 

Done at Brussels, 

For the Council 
The President 

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