OECD Economic Surveys: Estonia 2026

The Estonian economy has emerged from a deep and protracted recession. The economic recovery is projected to continue this year and next, despite the headwinds from the evolving conflict in the Middle East, but uncertainty is high. Estonia has a good business environment, a resilient labour market and sound fiscal framework. Nevertheless, growth-enhancing reforms are needed to strengthen the convergence path.

In 2025, the Estonian economy returned to growth, expanding by 0.5%. This follows three years of recession, during which GDP fell by 5.5%, driven by the energy shocks, supply-chain disruptions with Russia and a cyclical downturn in key Nordic export markets. Manufacturing output declined at the trough by 20% and contraction in construction was of a similar size. However, ICT services demonstrated resilience, sustaining value-added growth and service exports. During the recession, Estonia has lost in terms of economic convergence on its peers (Figure 1).

Although headline inflation has moderated, it remained elevated at 4.8% in 2025, partly due to tax increases and persistent service price pressures, and will be boosted again by rising energy prices. Core inflation at constant tax rates eased slightly to 3.4% in 2025, supported by a slowing of wage growth.

Employment growth has been resilient, but unemployment remains higher than before the COVID pandemic. Employment reached a record high in the middle of 2024 and remained at a high level at the beginning of 2026, although manufacturing employment has declined sharply. The unemployment rate peaked at 8.2% at the beginning of 2025 but has since declined to 6.8% in the first quarter of 2026. Immigration, notably by Ukrainian refugees, temporarily boosted labour supply, but demographic headwinds persist.

Looking ahead, GDP growth is projected to recover to 1.8% in 2026 and 2.7% in 2027, but with a drag from higher energy prices. Recovery will be supported by tax cuts, rising household purchasing power and stronger investment (Table 1). Higher energy prices in 2026 and higher food prices in 2027 are expected to raise headline inflation to 4.1% in 2026 and to 2.6% in 2027. Risks include uncertainty around energy and food prices, an escalation of regional geopolitical tensions, and a slower recovery in the Nordic countries. The financial system remains robust, with well-capitalised banks and low non-performing loans, although fast lending growth and exposure to real estate warrant monitoring.

While debt is low, the deficit is widening this year due to higher defence spending, alongside tax cuts. Narrowing the deficit and managing rising spending pressures related to population ageing, health, climate and defence call for a steady consolidation from 2027 underpinned by measures to improve spending efficiency and an overhaul of the tax system.

This year, the budget deficit is widening due to increasing defence spending and tax cuts. Following a period of consolidation as earlier energy supports were reduced and taxes increased, the deficit is set to widen with a rapid increase in defence spending to 5% of GDP and large income tax cuts. These measures will boost the economy during the recovery, although the impact of increased defence spending is likely to be limited given the high import content. Energy supports will add to spending, but inflation will boost revenues. The general government deficit will widen to 4.3% of GDP in 2026 and 4.7% of GDP in 2027 (Figure 2). The debt-to-GDP ratio will increase from 24% in 2025 to over 30% of GDP in 2027. Estonia is applying the escape clause of the EU fiscal rules that allows a higher general government deficit due to increased defence spending until 2028.

With the debt ratio rising and the economy recovering, the deficit should be narrowed over time. An adjustment in non-defence spending should start already in 2027 to narrow the deficit, put debt on a more prudent path, as well as reduce fiscal support to the economy as it recovers. Maintaining a low debt-to-GDP ratio in the long-term will require a further strategy on how to finance defence and how to create fiscal space for rising public sector wages in education and healthcare, the climate transition and age-related fiscal pressures, in a growth-friendly and fair way.

While spending is relatively efficient, and the budget process strong, some scope exists to improve how public services are delivered. The pension system is on a transition path towards a larger role for voluntary defined contribution pensions, and reinforcing savings through private pensions would help to reduce risks of future government spending needs for retirees. The authorities should introduce well-defined conditions for withdrawal from the second pension pillar and encourage workers to make up for withdrawn savings. Public coverage of long-term care is low, which could add to future fiscal pressures, and a long-term solution to financing care is needed.

Healthcare spending is below the EU average but has been increasing. However, years spent in good health are low, out-of-pocket payments remain elevated, staff shortages persist and risk getting worse with an ageing workforce. Improving health outcomes requires both efficiency savings and more resources, not least for improving working conditions. The education sector delivers very good results but is affected by teacher shortages due to a declining attractiveness of the profession. Social spending has increased in recent years, and family support is relatively generous, in particular for large families, while child allowances are universal. The generosity of family policy should be reduced and child allowances phased out for high-income earners.

To mobilise additional revenues in a fair and growth-friendly way, taxation needs to shift from labour to other tax bases. The Estonian tax system scores well in terms of simplicity and identical statutory income rates applied to labour and capital. Moreover, the standard VAT rate is already among the highest in the EU. However, social security contributions are high and contribute to a significant overall burden on labour, including on low-income earners. To explore reform options, an ad hoc tax commission should undertake a comprehensive review of the tax system, including the taxation of wages and capital income.

Planned increases in excise and environmental taxes will help bring in some revenue but this is not sufficient for funding planned defence and social expenditures. Recurrent taxes on property offer a growth-friendly avenue for mobilising resources. Currently, Estonia applies only a land tax with widespread exemptions in place, which raises only modest revenues, one of the lowest in the OECD. The current phase-in of new land valuations could be accelerated and once fully entrenched, a tax on residential buildings should be introduced.

Estonia does not have a conventional corporate income tax and taxes only distributed profits. Corporate taxation yields revenue equivalent to 2.4% of GDP, little more than half of the OECD average and below the EU average. This regime encourages firms to retain earnings and may lead to ‘under taxation’ of these returns, as well as distorting decisions about incorporation and savings.

Estonia remains among the most carbon-intensive economies in the OECD, despite significant progress. Emissions reductions need to accelerate in transport and forestry, while more progress is needed to adapt the energy infrastructure to changing demand and supply and to ensure resilience. A key Climate Law that would allocate clear responsibilities for implementation is still pending. Moderate but rising climate risks call for an acceleration of investments in adaptation and stronger policy governance.

Estonia has reduced greenhouse gas emissions by 44% from the 2018 peak, largely via the decline of oil shale in power generation. However, it remains among the most carbon-intensive OECD economies. Emissions reductions in transport and agriculture have lagged, while land use and forestry (LULUCF) have shifted from an emission sink to a source of emissions, jeopardising the achievement of climate targets. Existing measures are insufficient to meet the 2030 targets for LULUCF and for sectors covered by the EU Effort Sharing Regulation (ESR) as well as to meet climate neutrality in 2050 (Figure 3).

Energy security has improved but strengthening physical and cyber resilience will require sustained co-operation with EU and Baltic Sea partners, as well as ensuring diversity of energy suppliers. Rapid electrification and expansion of renewables also call for further grid reinforcement and more storage capacity. While renewables have expanded rapidly and now account for half of electricity supply, expansion of wind generation faces planning, permitting, data and grid bottlenecks, and uncertainty about support for offshore capacity. Setting a long-term policy framework for wind generation, centralising environmental data and harmonising methodologies for Environmental Impact Analysis would help improve investment certainty.

Emissions in the transport sector remain broadly unchanged compared to 2018. The 2025 introduction of a new CO₂-based car tax is welcome, but age-related reductions blunt the incentive for fleet renewal. Estonia should maintain the existing motor tax, consider phasing out age‑based reductions and using part of the revenues for a car scrappage scheme for low-income households.

Sectoral targets and roadmaps, clear responsibilities for implementation and additional climate mitigation measures are needed. To this end, adopting the long-discussed Climate Law would improve policy clarity, helping to harness private sector investment into the transition. The draft law also includes proposals for regular climate reporting and improved monitoring of adaptation progress, offering an opportunity to clarify responsibilities, strengthen governance and ensure that local, sectoral and national climate actions are aligned, financed and implemented. High carbon taxation weighs more heavily on low-income households. To alleviate the burden, subsistence benefits need to keep pace with energy costs and could be coupled with investment into enhancing energy efficiency.

Risks from climate-related events such as flooding are moderate, nevertheless call for an acceleration of policies. The authorities need to strengthen the resilience of existing infrastructure and ecosystems and tighten land-use regulation and building standards. Enhanced municipal capacity, targeted financial support and robust tracking of policy progress are needed to manage rising climate risks effectively.

As a pioneer in digital governance with advanced online public services and a thriving ICT sector, Estonia is well placed to reap the benefits of AI. Adoption among firms has accelerated rapidly and is above the EU average. More than half of firms in knowledge-intensive sectors reported using AI in 2025. However, traditional sectors of the economy continue to lag, uptake in production and capital-intensive sectors is limited and a lack of relevant expertise is a key barrier to wider adoption.

The Estonian public sector has long been a leader in digitalisation. The public sector acts as a vital early adopter and testbed for AI systems, for example with Bürokratt, an interoperable ecosystem of chatbots delivering proactive, user-centric public services, or automatic transcription in courts and the Parliament. Estonia is the first OECD country to test generative AI at a large scale in the education system under the so-called “AI Leap Programme”, which provides an opportunity to build skills and tools to use AI at the secondary school level, including an AI application trained to guide students to formulate their own conclusions.

The ICT sector accounts for around 9% of value added in the Estonian economy, one of the highest shares in the OECD, and has experienced strong investment in recent years. Venture capital (VC) investment has also been strong. Access to VC is traditionally good and AI investment has accounted for around a third of the VC capital in recent years.

While AI adoption is high in knowledge-intensive sectors, in more traditional sectors of the economy it remains average (Figure 4). For now, AI primarily supports administrative efficiency rather than improvements in production processes, suggesting a considerable potential for productivity enhancements in the future, conditional on succeeding in nurturing an AI-skilled workforce.

Estonia benefits from a digitally skilled workforce, with skills generally above the EU average. The share of ICT graduates in tertiary education is also above the OECD average. This is a good starting point for capitalising on AI more generally. Nevertheless, firms highlight a lack of relevant expertise as the primary barrier to wider adoption of AI. In part, this is likely due to the thriving ICT sector where demand for people with AI skills is strong already and expected to grow even further. Current upskilling programmes prioritise youth and higher education, with less of a focus on the existing workforce. The authorities should therefore expand continuous upskilling and reskilling for those already working with a focus on applied AI skills.

AI-related research publications are above the OECD average and growing. In terms of infrastructure, Estonia participates in the European-wide high-performance computing project.