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COMMISSION

Brussels, 4.6.2025

SWD(2025) 206 final

COMMISSION STAFF WORKING DOCUMENT

2025 Country Report - Estonia

Accompanying the document

Recommendation for a COUNCIL RECOMMENDATION

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

{COM(2025) 206 final}

kom (2025) 0206 - Ingen titel

kom (2025) 0206 - Ingen titel

ECONOMIC DEVELOPMENTS AND KEY POLICY

CHALLENGES

Muted growth with high inflation

but steady employment

In 2024,

Estonia’s economy shrank for

the second year in a row.

Real GDP declined

by 0.3%. The recession was broad-based, with

contractions in private consumption and

exports, and a sharp fall in investment. Growth

showed signs of picking up in the last quarter

of 2024, supported by goods exports and

consumption, but investment remained weak.

The outlook for the recovery is muted for a

number of reasons: Estonia’s main trading

partners are expected to grow only modestly;

investment expectations are very uncertain;

and several tax increases in 2025 will dampen

private spending. Rising government spending

may support growth but, as it is directed

towards defence, could also mean higher

imports. Real GDP is projected to grow by

1.1% in 2025 and 2.3% in 2026.

High inflation accompanied the recession.

The harmonised index of consumer prices

(HICP) increased by 3.7% in 2024. It fell in the

first half of the year but that was later

reversed, with inflation in services and food

particularly high (see Graph 1.1). Inflation is

set to stay on the high side in 2025, as the

new budget plans substantial tax increases.

The HICP was up by around 5% at the start of

the year.

The Estonian labour market remains

resilient.

After rising to historical levels in

2023, employment and activity rates remained

steady at 81.8% and 88.3% respectively in

2024

–

among the highest in the EU (see

Annex 10). The increase has been particularly

marked among older workers in recent years,

due the rising retirement age and relatively

low pensions compared to wages, which

incentivise work beyond pension age.

Unemployment has risen as a result of the

recession, reaching 7.6% in 2024 (see Social

Scoreboard in Annex 13). Labour shortages,

previously widely reported, have eased.

Graph 1.1:

HICP breakdown 2020-2025

y-o-y % change, pps.

-5

Services

Non-energy industrial

Energy

Processed food

Unprocessed food

HICP

Source:

Eurostat

Public finances improved in 2024.

The

general government deficit stood at 1.5% of

GDP (down from 3.1% in 2023). This

improvement was due to a combination of

stronger tax revenues and lower-than-

expected government spending. Firstly,

increased rates of value added tax (VAT) and

environmental taxes were coupled with higher

revenues from labour taxes, due to rapid wage

growth, and from VAT and corporate income

taxes, due to purchases of motor vehicles and

distribution of profits in anticipation of future

tax increases. Secondly, the state spent less on

defence, social benefits and local government

operating expenses than was budgeted for.

The general government deficit is forecast to

be 1.4% in 2025 and 2.4% in 2026.

Government debt is expected to rise from

23.6% of GDP in 2024 to 23.8% in 2025 and

reach 25.4% in 2026.

kom (2025) 0206 - Ingen titel

Net expenditure is projected to grow

below the recommended maxima.

In 2024,

net expenditure(

) in Estonia grew by 1.8%

(see Annex 1). This was mainly driven by

discretionary revenue measures, mentioned

above, whose revenue increasing annual

impact is deducted from net expenditure. On

the expenditure side, also mentioned above,

the foreseen budget was not fully

implemented. In 2025, net expenditure is

forecast by the Commission to grow by 2.1%,

which is below the maximum growth rate

recommended by the Council(

). The

cumulative growth rate of net expenditure in

2024 and 2025 taken together is projected at

3.9%, which is also below the maximum rate

recommended by the Council.

to 3.6% of GDP in 2021 and 3.9% in 2022,

before narrowing to 1.7% in 2023 and 1.5% in

2024. The decline in goods exports was

particularly pronounced.

House prices in Estonia have risen

markedly.

They were 63% higher in 2024

than in 2019 (20% in real terms, allowing for

inflation). In both 2023 and 2024, nominal

house prices increased by 6%, and are thought

to be overvalued, fuelled by a set of one-off

liquidity boosts, such as a release of the

second pillar pension funds and buyouts of

several Estonian startups, and rising nominal

wages. The lack of alternative investment

opportunities amid limited housing supply

added to house price appreciation (see more in

Annex 9).

However, Estonia’s ratio of non-

performing loans is one of the lowest in the

euro area, so risks to macroeconomic stability

seem to be limited.

Some macroeconomic challenges…

Price

and

cost

competitiveness

deteriorated

amid

the

protracted

recession while the current account

remains in deficit and house prices have

risen considerably.

This was highlighted in

the in-depth review for Estonia that was

undertaken as part of the macroeconomic

imbalance procedure earlier this year. The

review also highlighted the limited progress

made on the policy front(

In recent

years, Estonia’s current account

has

been

deficit,

signalling

deteriorating competitiveness.

The current

account swung from surplus in the second half

of the 2010s to deficit since 2020, widening

(

) Net expenditure is defined in Article 2(2) of Regulation

(EU) 2024/1263 as 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-off

and other temporary measures.

(

) Council Recommendation of 21 January 2025

endorsing the national medium-term fiscal-structural

plan of Estonia (OJ C, C/2025/655, 10.2.2025, ELI:

http://data.europa.eu/eli/C/2025/655/oj).

( ) SWD(2025)123 final

…with

several factors contributing

to competitiveness losses

Estonia’s

export

performance

has

deteriorated in the past few years.

Its

world market share increased between 2019

and 2021 but has since been stagnating.

Russia’s war

of aggression against Ukraine

has changed the geopolitical landscape and

driven Estonia to cut its remaining economic

ties with Russia. At the same time,

Estonia’s

major trading partners, Finland, Sweden and

Germany, have experienced very weak growth

over the past few years, which was one of the

factors in the decline in exports in 2023 and

2024.

A new challenge in this respect is the

uncertainty in global trade.

As a very open

economy, Estonia heavily relies on trade for its

growth. While

Estonia’s

direct exposure to the

US is relatively small, the country is vulnerable

to US tariffs through their impact on main

trading partners and also uncertainty that

impacts investment decisions.

Estonia faced a sharp increase in energy

and raw material prices

following Russia’s

full-scale invasion of Ukraine and a decline in

kom (2025) 0206 - Ingen titel

domestic energy production. In Estonia as in its

Baltic neighbours, energy prices have

remained high, feeding into production and

transport costs. In addition, Estonia has seen

strong increases in the price of raw materials,

particularly wood and metals, key inputs in

construction and furniture production.

Nominal wage growth was strong amid a

tight labour market.

After sizeable rises in

the last two years, nominal wage growth

slowed to 5.6%(

) in 2024. Much higher

nominal wages fed through into sharp

increases in unit labour costs (ULCs). Nominal

ULCs per hour increased by 15.6% in 2023

and 7.6% in 2024, compared to increases of

6.7% and 5.0% respectively in the EU as a

whole. Labour productivity per hour worked in

Estonia decreased in 2023 and 2024 by 6.3%

and 0.8% respectively, whereas in the EU as a

whole it decreased by 0.6% in 2023 and

increased by 0.4% in 2024.

Much higher costs led to productivity

losses.

Rising input, capital and labour costs

with no accompanying growth affected

productivity, particularly labour productivity,

which fell to its lowest level in over five years

in 2023, to 67.1% of the EU average per hour

worked. Permanently higher wage and input

costs call for policies that would enable

Estonia to move up the value added ladder to

remain competitive.

collected in recent years. Tax revenues

increased to 33.7% of GDP in 2023, but they

remained substantially below the EU average

of 39% (see Table A13.1 in Annex 2).

Estonia relies heavily on labour and

consumption taxes, while capital taxation

remains limited.

Estonia continues to rely

heavily on taxes on labour, which are often

seen as detrimental to growth (see Graph

A13.1 in Annex 2). A flat-rate tax on labour

leads to relatively high taxation of low-wage

earners, reducing the redistributive power of

the tax system. In 2023, the share of

consumption taxes was, at 38.9%, well above

the EU average of 26.9%, and is bound to

increase further in 2024 mainly due to the

VAT rate increase from 20% to 22%. In

addition, a security surcharge (until end 2028)

will be levied as of mid-2025, temporarily

increasing the VAT rate to 24%. In 2023, taxes

on capital accounted for 8.5% of total tax

revenues in Estonia, versus an EU average of

21.9%. The corporate income tax rate for

distributed dividends has increased from 20%

to 22% in 2025(

). In 2025 the reduced tax

rate of 14% applied to regular dividends will

also be abolished. These measures will reduce

the gap with the EU average.

Increasing the share of land or property

taxes in overall tax revenues could help

boost public revenues, without weighing

on economic growth.

Recurrent taxes on

immovable property amounted to 0.5% of

total revenues (EU average of 2.5%) in 2023.

Estonia levies a yearly land tax of between

0.1% and 1.0% on all residential and

commercial land. Although a land tax still puts

some pressure on property owners to rent out

or dispose of vacant properties, the effect is

modest. According to the 2021 Population and

Housing Census(

), 24% of all dwellings in

Estonia were classified as vacant (up from

16% in 2011). Increasing the land tax rate in

more affluent areas and taxing vacant

(

) The government also approved an additional 2%

security surcharge on corporate income tax as of 2026,

but the new coalition government announced in March

that this increase would be abolished.

(

)

Population census 2021 | Statistikaamet

Public finances under pressure to

address rising structural spending

needs

Estonia is struggling to raise tax

revenues, which is needed to fund public

spending.

As mentioned across this report,

Estonia faces several challenges which will

require additional public spending, including

spending on healthcare, long-term care and

defence.

The

unfavourable

economic

conditions have lowered the amount of tax

(

) European Commission, European Economic Forecast.

Spring 2025.

kom (2025) 0206 - Ingen titel

properties could increase supply in the housing

market and bring in additional public revenue

to finance key policies. The negative impact on

low-income households could be remedied

with

targeted,

need-based

support

mechanisms.

A regular expenditure-review process is

on track to be implemented.

Estonia is

working on integrating regular spending

reviews and policy evaluations into medium-

term budget planning, using the European

Commission’s Technical Support Instrument.

The project is due to be completed in the

autumn of 2025, but some key conclusions

can already be drawn: (i) introduce annual

spending reviews; (ii) integrate spending

reviews into budget planning; and (iii) amend

the legal framework to improve the spending

reviews process and its governance.

Implementing such reviews to prioritise key

areas of expenditure would contribute to a

more efficient allocation of public funds in the

face of rising structural spending needs.

inadequate and skill levels are highly variable

across regions, limiting companies’ ability to

develop higher value added activities. Estonian

policy actively tackles this, but more could be

done to focus the training policy on the low-

skilled and to improve the hiring rules for

foreign workers with technical qualifications

(see Section 2).

Estonia needs to reduce its dependence

on fossil fuels and oil shale and invest

more in renewable energy.

Despite progress

in reducing oil shale production and use,

Estonia faces a significant challenge in its

clean transition due to the high reliance on this

resource-intensive fossil fuel. Transitioning

away from oil shale and supporting companies

in their green initiatives is therefore essential

to improve competitiveness. Estonia would

also benefit from reducing high emissions

from road transport by electrifying railways,

improving rural public transport and reducing

dependence on private cars (see Section 3).

Estonia could benefit from an accelerated

transition to a circular economy.

Despite

progress in waste management, recycling and

reuse rates remain below EU standards. To

address this, Estonia needs new policies and

economic incentives to promote separate

waste collection and increase recycling efforts

(see Section 3).

Estonia faces persistent challenges

regarding its social protection system.

The proportion of older people, single- person

households and people with disabilities at risk

of poverty or social exclusion remains high,

due to low social spending and low impact of

social transfers (excluding pensions) on

poverty reduction. In-work poverty is high

among part-time workers and the self-

employed, and there are people in non-

standard forms of employment not yet eligible

for unemployment benefits. Pension adequacy

is strained by demographic pressures. While

Estonia has taken steps to address the

challenges, they do not appear to be sufficient

to reduce poverty for some groups (see

Section 4).

Despite reforms and investments, access

to healthcare and long-term care remains

Key challenges holding back

growth and competitiveness in

Estonia

There is a growing need to boost

innovation and R&D investment.

Estonia’s

business R&D expenditure as a percentage of

GDP remains below the EU average.

Underinvestment in R&D, outside the

information and communications technology

sector, impedes technological advancement.

Direct public support for business R&D has

increased, but policies beyond grant schemes

are underdeveloped. The effective use of

public funds, national and EU, is crucial for

Estonia to bridge the innovation and

productivity gap and achieve sustainable

economic growth (see Section 2).

Skills shortages hold back labour

productivity and competitiveness.

The lack

of skilled labour is a particular constraint,

especially for Estonia’s manufacturing and

information and communications technology

sectors. The supply of skilled graduates is

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Box 1:

UN Sustainable Development Goals (SDGs)

Estonia performs well and is improving on several of the SDGs related to environmental

sustainability (SDGs 2, 7 and 15), but needs to catch up with the EU average on others (SDGs 6,

9, 12, 13 and 14). The country is similarly improving on one (SDG 5) and performing well and

improving on two SDGs (4 and 7) related to fairness. However, Estonia is diverging from SDGs

related to macroeconomic stability and still needs to catch up on one SDG indicator (SDG 8).

Although Estonia is performing well and improving on quality education (SDG 4), the country still

needs to catch up with the EU average on other indicators (SDG 8 and 9) related to productivity.

uneven due to lack of adequate funding.

While reforms and investments are ongoing,

self-reported unmet needs for medical care

are still among the highest in the EU, as are

out-of-pocket

payments

(on-the-spot

payments made by patients to healthcare

providers), though they appear to be

decreasing. Long waiting times and uneven

quality and availability of health and long-

term care across municipalities are linked to

inadequate public funding, among the lowest

levels in the EU (see Section 4).

kom (2025) 0206 - Ingen titel

Box 2:

Barriers to private and public investment

According to Eurostat, total investment in Estonia as a percentage of GDP is relatively high

compared to the EU average.

As regards private investment, foreign direct investment plays a bigger role in the economy than

in other EU Member States (in 2023, inflows amounted to around 4.5% of GDP), particularly in

the tech and information technology sectors. Estonian firms, by contrast, invest much less than

their European counterparts. Several barriers contribute to this, especially the following.

•

Uncertainty about the future.

This is probably the greatest obstacle to investment in

Estonia, with 88% of firms reporting it as an obstacle. The war in Ukraine and overall

geopolitical context is a key factor.

Lack of skilled workers.

According to a recent survey, this remains an obstacle for

75% of businesses, and the major obstacle to investment for 32% of businesses.

High energy costs.

This is an investment barrier for 73% of Estonian companies,

according to 2024 data.

Access to finance.

16% of firms face financial constraints, more than double the

figure for last year and well above the EU average of 6.9%. Estonian firms rely mostly

on own resources and equity and much less on capital markets to finance new

investments, with a market funding ratio of just 15.8% as of end 2023, compared to an

EU average of 49.6%.

•

Public investment in Estonia is shaped

by the green and digital transitions and increased

defence spending due to

Russia’s full-scale

invasion of Ukraine. In addition, public investment is

hampered by the difficulties of investing in outlying and eastern border regions where the

particular lack of private finance makes public investment all the more important.

•

The implementation of Estonia’s RRP is well underway. At present, Estonia has fulfilled

49 % of the milestones and targets in its RRP.

It remains important to accelerate the implementation of the cohesion policy

programme. The mid-term review offers opportunities to speed up progress and better

address EU strategic priorities related to competitiveness, defence, housing, water

resilience and the energy transition.

Estonia has not yet taken advantage of the opportunities provided by the Strategic

Technologies for Europe Platform under Cohesion Policy and the Recovery and

Resilience Facility to reallocate resources towards this priority. However, Estonia can still

seize these opportunities to support the development or manufacturing of critical

technologies in the areas of digital and deep tech, clean and resource efficient

technologies, and biotechnologies.

•

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INNOVATION, BUSINESS ENVIRONMENT AND

PRODUCTIVITY

Competitiveness is hampered by

low labour productivity and skills

shortages

Recent economic trends have resulted in

competitiveness losses for Estonian

companies.

As described in the previous

section, the Estonian economy has been in

recession for two consecutive years. Yet the

labour market has remained quite resilient,

with high employment rates and strong

increases in nominal wages. This has driven

labour productivity down to well below the

euro area average in most sectors (

) (Graph

2.1).

Skills mismatches and low levels of skills

challenge labour productivity growth.

While the shortage of labour has eased, the

lack of skilled workers remains the major

obstacle to investment for 32% of businesses,

and there are skills mismatches, with both

over- and under-qualification (see Annexes 4

and 10). With a growing information and

communications technology (ICT) sector, the

most critical gap is in science, technology,

engineering, maths, computers and software.

Current challenges will become even more

acute as the digital and green transitions

require more specialists than are expected to

graduate from tertiary and vocational

education. Without more skilled people,

Estonia risks getting stuck in a low-skills trap

in some sectors, limiting companies' ability to

develop higher value added activities.

Graph 2.1:

Gross value added per employee in

2023, NACE activities

160

140

120

100

Euro

Estonia

Euro area

(1) Real estate activities (L), activities of households as

employers (T), and activities of extraterritorial

organisations (U) are not shown.

(2) Sector codes: A agriculture; B mining; C

manufacturing; D energy; E water supply; F construction;

G wholesale and retail trade; H transport; I

accommodation and food services; J information and

communication; K financial services; M professional and

scientific services; N administrative and support services;

O public administration and defence; P education; Q

health services; R arts and entertainment; S other

services.

Source:

Eurostat

(

) See In-Depth Review 2025 Estonia, SWD(2025) 123

final.

To ensure that the supply of skills

matches the demands of the labour

market, skills development policies are

planned from primary education to adult

learning.

Estonia actively promotes science,

technology, engineering and mathematics

education at all levels, focusing on updating

curricula, enhancing teaching quality and

fostering student interest (see section 4). It

has set up ICT and engineering academies,

supported by EU cohesion policy. Although

Estonia performs well in adult learning, there

are considerable differences across age and

skills groups (see Annex 12). Participation is

lowest among the low-skilled population, with

less than 19% participating in adult learning.

The Estonian recovery and resilience plan

contains measures to improve the skills of

TOTAL

kom (2025) 0206 - Ingen titel

young people through the

‘My

First Job’

scheme, helping to closing the skills gap.

Investing more in career guidance and

increasing training opportunities could reduce

skill mismatches, especially for the low-skilled.

Attracting

and

retaining

qualified

workers can help Estonia address skills

shortages.

While Estonia’s capacity to attract

and retain foreign talent has grown in the last

years, it still falls short of meeting the growing

demand for skills in key sectors, considering

the recent data on the most requested

occupations and OSKA projections(

) (see

Annex 10). Simpler rules to hire foreign

workers with technical qualifications targeting

sectors with persistent skills shortages could

help alleviate skills gaps.

Graph 2.2:

Composition of NFC funding in % of GDP

250

200

% of GDP

150

100

Loans

Trade credit and advances

Bonds

Unlisted shares

Listed shares

Other equity

(1) The sum of NFC liabilities reflects only the total of

the NFC liabilities considered. Reference period 2023.

Source:

Eurostat, FISMA E2 calculations

Becoming more competitive is

especially pressing at regional

level

At regional level, policies aimed at

closing productivity gaps have had

limited effect.

Regional GDP per capita data

show that Tallinn and Harju county have a

much higher economic output per person than

other regions (Annex 17). Scaling-up and

larger tech-based companies are based in

Tallinn and Tartu, as are ICT companies, which

are the main investors in innovation. At the

same time, Estonia’s economic restructuring,

aimed at reducing oil shale reliance, is set to

cause significant job losses in Ida-Virumaa

county, where oil shale companies are major

employers.

Simultaneously,

the

green

transition is creating labour shortages in

technical

professions

and

specialised

occupations, despite growing awareness of

green skills among small and medium-sized

enterprises (SMEs). In other regions, the

economy is largely based on forestry,

agriculture, wood and food processing, which

have less added value (see Annex 17).

(

) The Estonian Qualification Authority (OSKA) General

labour forecast 2022 -2031 :

OSKA üldprognoos 2022-

2031 | OSKA uuringud;

The need for foreign labour until

2035:

Välistööjõud | OSKA uuringud

Some market failures are related to the

ineffectiveness of policies to close

disparities.

Regional economies are more

exposed to risks stemming from the limited

supply of skills, high uncertainty and

insufficient access to finance. This limits

domestic and foreign private investment. It

also affects policy outreach in critical domains

like energy and renewables, resource

productivity, and research and innovation,

where the investment required exceeds

companies’ profits

or savings (see Annex 5).

Estonia's performance on licensing processes

is only average compared to other OECD

countries (see Annex 4). Improving it, and

taking further action to lessen the personal

cost of insolvency for entrepreneurs could help

boost investment at local and other levels, as

could reducing uncertainty in building

regulations(

) (see Annex 4).

Improving access to finance and

leveraging public funding could

help raise competitiveness

Access to finance remains a constraint

for businesses, hampering innovative

investment.

According to the SME access-to-

finance survey, a higher proportion of Estonian

(

) OECD Economic Survey Estonia, 2024.

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SMEs report financing constraints compared to

the EU average, demonstrating the need for

improved financial instruments and market

access (see Annex 5). SMEs also report a

particularly high degree of late payments,

resulting in delays in the repayments of loans,

and forcing companies to look for additional

financing (See Annex 4). Estonian firms rely

less on funding from capital markets than the

EU average, with a significant share of

investment funded internally (see Graph 2.2).

This is influenced by the income tax system,

and the prevalence of SMEs contribute to this

trend. A modest institutional investor base

further compounds the issue. Further

promoting institutional investors’ participation

in the venture-capital market, and the equity

market more generally, could help address this

problem (Annex 5).

A coordinated approach targeting the

diverse funding sources could help to

boost innovation potential.

The effective

use of public funds, national and EU, could

help Estonia bridge the innovation and

productivity gap and achieve sustainable

economic growth. There is also scope to

leverage national, private and institutional

financing through financial instruments and

coordinated

investments.

Addressing

fragmentation in funding programmes could

improve policy effectiveness and facilitate the

shift towards higher value added activities. To

adapt to new challenges, it could be useful to

strengthen long-term strategic planning. This

could be done through stronger integration of

new strategic sectors like defence, and raising

resource efficiency (see Annex 17).

investment strategies. The overall picture is

distorted by the strong ICT sector, which

accounts for nearly half of total R&D

expenditure. 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 into

technological performance and business

innovation as well as it might (see Annex 3).

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 firms with limited

ability to make use of research discoveries.

In addition, the share of applied research

in total R&D financing decreased to 23%

in 2023.

The Applied Research Centre was

launched in 2024 and is expected to help

companies to better exploit research results.

Still, it will take time to develop a fully

functional research technology organisation

capable of benefiting a wide range of

businesses. Strong collaboration between

business and academia is missing, and there is

scope to strengthen the role of universities in

innovation, to enable faster deployment of

new technologies.

Since the start of Russia’s war of

aggression against Ukraine, Estonia has

been increasing its spending on defence.

In line with the NATO rules, the country has

allocated at least 2% of its GDP to military

expenditure since 2015. The budget strategy

for 2025 to 2028 calls for yearly defence

allocations of no less than 3.3% of GDP. In

addition, in March 2025, the government

declared its plan to increase it further, to at

least 5% from 2026 onwards. This strong

focus on defence aims to reassure investors

as to the credibility of Estonia’s military

deterrence and thereby reduce geopolitical

investment risks.

Increased defence spending could also

benefit Estonia’s innovative defence and

aerospace companies.

More than half the

military budget is earmarked for acquiring

equipment. In 2024, around 20% of the

defence-equipment-related tenders were won

by Estonian suppliers. The number of

A growing need to boost

innovation and R&D investment,

particularly in defence

Underinvestment

research

and

development, outside the ICT sector,

impedes technological advancement.

Data

from the Innovation Scoreboard (see Annex 3)

show that Estonia’s business R&D expenditure

as a percentage of GDP remains below the EU

average, underscoring the need for enhanced

kom (2025) 0206 - Ingen titel

companies in the sector has already grown

from a handful at the start of the decade to

more than 140. The Estonian government has

decided to develop a defence industry park for

the production of ammunition and military

explosives, which will also boost foreign

investments into Estonia(

). However, the

Estonian defence industry also faces

challenges in raising funds from the private

market due to the rules and restrictions that

some banks, mutual-, pension- and venture-

capital funds have against investing in lethal

technologies.

(

)

Estonian Public Broadcasting (ERR)

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DECARBONISATION, ENERGY AFFORDABILITY AND

SUSTAINABILITY

Estonia faces high energy prices

and security challenges on critical

energy infrastructure

Estonia’s is moving towards renewable

energy though domestically sourced oil

shale remains a significant part of the

energy mix.

After prohibiting imports and

purchases of Russian natural gas in 2022,

Estonia reduced its natural gas demand by

28% between August 2022 and July 2024,

significantly exceeding the EU’s 15% target.

From 2022 to 2023, Estonia’s energy mix

shifted significantly towards renewables (the

share rose from 27.2% to 34.6%). Despite a

slight decrease in its share in the energy mix

from 60.5% in 2022 to 58.2% in 2023,

domestically sourced oil shale remained the

primary energy source (see Annex 8).

Electricity prices in Estonia remain high

and volatile due to the intermittent

nature of renewable energy.

In 2024,

Estonia’s average wholesale electricity price

was EUR 87.3/MWh, similar to other Baltic

states but higher than the EU average of

EUR 81/MWh (see Annex 8). Renewable energy

sources account for a growing proportion of

electricity generation, up from 50% in 2023 to

57% in 2024. Unfortunately, the supply of

renewable energy is volatile (subject to

weather conditions) and often insufficient

when demand is largest (for example during

dark winter months). This pushes up electricity

prices and impacts the economy, driving

inflation and affecting households and

businesses’ competitiveness. For instance, in

2024, 73% of Estonian companies cited

energy costs as an investment barrier.

In addition, Estonia faces energy security

issues due to hybrid attacks on pipelines

and submarine cables in the Baltic Sea.

Successful

synchronisation

with

the

continental European electricity network as of

9 February 2025 strengthens energy security

but demands additional efforts to improve grid

resilience and protect critical energy

infrastructure. In addition, recent disruptions in

the energy connection with Nordic countries

have shown the vulnerabilities of the energy

supply system in Estonia. The implementation

of measures to ensure security of supply in

the Estonian energy market is therefore crucial

(see Annex 8).

Investing in renewable energy capacity

and streamlining permitting processes

are crucial.

In line with the recovery and

resilience plan, legislation was amended in

2024 to streamline planning, permitting and

environmental impact assessment processes

for wind energy projects, and wind priority

development areas were set up (with a total

capacity of 1 000 MW). However, there is

scope for additional measures to promote

investment in renewables and support

flexibility technologies such as battery storage

systems, to ensure grid stability and

renewable energy integration.

Energy-intensive industry and low

resource productivity undermine

Estonia’s competitiveness

Estonia is among the worst performers in

the EU in terms of resource productivity,

largely due to the resource-intensive oil

shale industry.

The Estonian economy is

highly energy-intensive due to the still quite

considerable use of oil shale in the energy

sector, and for transport and heating buildings.

kom (2025) 0206 - Ingen titel

High energy-intensity combined with an

increase in energy consumption puts a strain

on the competitiveness of the Estonian

economy. In 2023, Estonia generated only

EUR 0.63 per kg of material used consumed,

compared to the EU average of EUR 2.22 (see

Annex 7). The construction, wood and

metalworking industries, which are significant

exporters in Estonia, are heavy consumers of

energy and raw materials, such as wood and

energy produced from oil shale, contributing to

the country’s poor resource productivity. This

could be improved by switching away from

fossil fuels, which account for almost 30% of

domestic extraction used (a significant

component in the calculation of resource

productivity). Despite a decrease in 2023, the

domestic extraction of fossil fuels remains

high at 8.1 tonnes per capita, above the 2020

level of 7.4 tonnes. Efforts are underway to

phase out oil shale production and use, which

could be accelerated. Beyond the shift away

from oil shale, other significant measures to

boost resource productivity and decarbonise

could include: further development of

resource-efficient green technologies, support

for energy and resource efficiency in major

sectors, as outlined in the 2023 Circular

Economy

Action

Plan

and

further

improvements in circularity.

Supporting companies in their green

transition and in developing clean

technologies is crucial to reducing the

Estonian economy's resource intensity.

The Green Fund, supported by the Recovery

and Resilience Facility, finances the

development and scaling-up of innovative

green start-ups and small to medium-sized

enterprises, enhancing their competitiveness.

Estonia has high potential for net-zero

technologies and should continue to further

develop 'clean industry' (see Annex 7).

improvement.

Although Estonia’s circular

material use rate is above the EU average

(18.1% in 2023 after reaching 21.4% in 2022,

see Annex 7

for further details), Estonia’s rate

of preparing for reuse and recycling of

municipal waste is 33%, significantly below

the EU average of 49% (see Annex 7).

Estonia could take further steps to fully

embrace circular economy practices and

align with EU standards.

Accelerating the

transition to a circular economy is crucial for

enhancing Estonia’s competitiveness, as it

promotes sustainable economic development,

improves resource efficiency and reduces

reliance on imported raw materials. To speed

up the transition to a circular economy, Estonia

could introduce new policy instruments to

support municipalities in organising separate

collection of different waste types and

improve recycling performance. Economic

policy instruments to make reuse and recycling

more economically attractive could be

introduced,

such

pay-as-you-throw

schemes and financial penalties for not

meeting recycling targets. An incineration tax

to incentivise recycling practices could be

introduced at municipality level.

Climate risks pose significant threats to

Estonia’s economy and society.

In the

period from 1980 to 2023, insurance covered

only 15% of economic losses due to extreme

weather and climate-related events. From

2013 to 2022 considerable loss of life

resulted from extreme heat, one of the highest

figures in northern Europe. With the trend

increasing over time, climate impacts are

posing a risk to public health, especially for

vulnerable

groups

(see

Annex

9).

Strengthening the capacity for systemic risk

assessments would be key to drawing up

proper adaptation action plans and to ensuring

that the public and businesses were prepared.

Estonia’s transition to a circular

economy is underway but could be

faster

Estonia has made progress in waste

management but there is still room for

Improving energy efficiency is

needed

Estonia continues to make significant

progress in its efforts towards reaching

kom (2025) 0206 - Ingen titel

the 2030 EU targets for energy

efficiency.

However, the country could

intensify its efforts in the residential sector

and better target energy renovation schemes

towards the most vulnerable households, to

reach the 2030 building decarbonisation

objective set in its latest long-term renovation

strategy and achieve the target for reduction

of emissions under the Effort Sharing

Regulation. Estonia continues to rely mostly on

grant-based funding schemes for energy

efficiency, and the use of financial instruments

remains limited.

achieve the target under Effort Sharing

Regulation, policies would have to be

designed and implemented swiftly.

Estonia

has recently introduced vehicle taxes for

private passenger cars based on weight and

emissions. However, taxes with lower

rates for older vehicles

–

designed to avoid

negative impacts on vulnerable groups

–

may

fail to induce a shift towards a cleaner vehicle

fleet, while still placing a burden on the most

vulnerable in rural areas with inadequate

public transport. To ensure a just and fair

transition, structural measures could help to

support transport for

Estonia’s vulnerable

populations who may be negatively affected.

To reduce people’s dependence on private

cars, Estonia is making efforts to

electrify the railway network and develop

other means of public transport.

Currently,

12% of the rail network is electrified

compared to an EU average of 57% (2022),

but investments are being made with support

from various EU budget instruments. Estonia is

considering purchasing sustainable electric

buses

with

associated

recharging

infrastructure to provide green, on-demand

public transport in rural areas. It would take

the share of sustainable buses in the whole

public bus fleet up to 42% from the current

30%.

The shift of freight transport from road

to rail

has been lagging. Creating incentives

for companies would help speed up the shift

of freight to rail.

Better transport policy can help reduce

regional disparities.

Improving transport

mobility by integrating local transport systems

can address regional disparities. Integrated

ticketing and planning systems are crucial.

Harjumaa county (including Tallinn) has

implemented such a system under the

recovery and resilience plan, but further

efforts and digitalisation are needed.

Decarbonising transport and

improving urban mobility

Estonia’s record

on transport could be

improved.

Estonia outperforms the EU

average in factors such as transport

infrastructure (Annex 17). However, the sector

is a high greenhouse gas emission producer

accounting for about 15% of the country’s

total emissions, with 90% of those just from

road transport. Estonia’s car ownership rate is

one of the highest in the EU. In 2023, its cars

were amongst the oldest in the EU and 75.5%

were petrol-powered. As a corollary, only 6.3%

of new vehicles were electric (see Annex 7).

Although the increase in electric cars is a

positive trend, the figure is worse than both

Estonia’s Baltic neighbours and the EU

average of 14.5%. The cross-border Rail

Baltica project, which aims to strengthen

connectivity between the Baltic states and the

rest of the EU, is crucial for shifting transport

from road to rail and enhancing sustainable

mobility. However, its progress has been slow

and would benefit from measures to speed up

implementation.

To reach the 2030 target for reducing

greenhouse gas emissions (

) and

(

) The national greenhouse gas emission reduction target

is set in Regulation (EU) 2023/857 (the Effort Sharing

Regulation), to align action in the sectors concerned

with the objective of reaching the EU-level economy-

wide target of achieving a 55% reduction in greenhouse

gas emissions relative to 1990 levels.

kom (2025) 0206 - Ingen titel

SKILLS, QUALITY JOBS AND SOCIAL FAIRNESS

Graph 4.1:

At risk of poverty or social exclusion

(AROPE) rates for different population categories

% of

population

Strengthening social protection

Due to gaps in social protection, Estonia

continues to face challenges related to

poverty and social exclusion, despite

recent improvements.

Effective social policy

is key to Estonia’s competitiveness. While

increases in pensions and child benefits have

improved some social indicators, the risk of

poverty and social exclusion rate (AROPE)

remains high in 2024, especially among older

people, in particular people aged 65 and over

living alone, persons with disabilities and

single-person households. Behind Estonia's

relatively high poverty figures is its low

expenditure on social protection benefits

–

remaining 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 (see Annex 11).

Reviewing the adequacy and efficiency of the

benefits system could help reduce poverty

risks, as could targeting support towards

vulnerable groups such as persons with

disabilities, single-person households and

older people.

In-work poverty remains relatively high,

particularly for those in non-standard

forms of work.

The In-work poverty rate was

10.3% in 2024 (EU: 8.2%). It was particularly

high among part-time workers and the self-

employed, and is aggravated by relatively low

minimum wages, despite recent increases to

adjust for inflation and agreements with social

partners (see Annex 11). The share of low-

wage earners is among the highest in the EU.

Increasing collective bargaining coverage and

the membership in in trade unions and

employers’ organisations could help improve

working conditions and their involvement in

policymaking.

2019

2021

2015

2016

2017

2018

2020

2022

2023

Single-parents

Elderly (65+)

Persons with disabilities

Total

Source:

Eurostat, EU-SILC [ilc_peps01n]

Gaps in unemployment benefit coverage

remain a challenge, particularly gaps for

those in non-standard forms of work,

including self-employed people.

The self-

employed

remain

not

covered

unemployment insurance, which increases

their risk of poverty. They continue to rely on

the non-contributory state unemployment

allowance (under the same conditions as

employees) and have access to sickness

benefits only through voluntary coverage.

Estonia plans to reform its unemployment

insurance system by 2026 and to expand

eligibility for unemployment benefits to

individuals in non-standard forms of work who

are currently excluded (

(

) These include sole proprietors, entrepreneur account

holders and members of management and supervisory

bodies. Those in temporary employment, part-time and

on-call work, temporary agency work, other multi-party

employment relationships and dependent self-

employment are already covered.

2024

kom (2025) 0206 - Ingen titel

Regional disparities remain pronounced, with

rural areas and the eastern border regions

facing greater poverty risks. Poverty rates are

more than twice as high in the Ida-Viru (35%)

and Lääne-Viru (29.2%) counties than in Harju

(15.5%) and Rapla (14.1%) (see Annex 11).

The north-east and south-east border regions

are lagging behind the national average

poverty rate due a lack of entrepreneurial

activity, leading to fewer paid jobs and lower

incomes, as well as lower skills levels and

limited access to services in rural areas. Rural

areas also report the highest rates of young

people not in employment, education or

training, along with higher school leaving

rates. There is scope for special support for

the border areas, to further address income

and regional inequalities and to strengthen

social protection mechanisms so as to provide

an effective safety net for the most affected

households and vulnerable groups, and to

support entrepreneurship (see Chapter 2).

Estonia faces difficulties maintaining

adequate pensions, in part due to

demographic pressures.

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 (see Annex 11)(

). The adequacy of

minimum pensions (EUR 372 as of April 2024)

remains an issue. The 2021 pension reform,

which made it possible to opt out of the

statutory funded pension scheme, risks further

undermining pension adequacy and increasing

the long-term poverty risk for retirees. To

mitigate this, Estonia has introduced measures

such as an income tax exemption, the

possibility to increase contributions to

mandatory funded pensions (the second pillar)

and allowances for pensioners living alone. In

spite of these efforts, improving pension

adequacy remains key to reducing the risk of

poverty for older people.

Improving access to health and

long-term care

Despite past measures, Estonia faces

persistent challenges in healthcare and

long-term care provision.

Access to

adequate healthcare and long-term care

contributes to competitiveness by ensuring

that skilled workers need not stop working

prematurely for health reasons or to care for

family members. Thanks to reforms and

increased investment in recent years, self-

reported unmet needs for medical care fell

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. Unmet

needs are twice as high for persons with

disabilities, mostly as a result of regional

disparities in access to services (see Annex

11). Public expenditure on long-term care and

healthcare services remains low and well

below the EU average, and workforce

shortages and reliance on municipal funding

further limit service provision. Low public

spending leads to high out-of-pocket(

)

payments for healthcare (see Annex 14).

Estonia is developing community-based

service centres, reorganising special care

institutions,

strengthening

primary

healthcare and developing home care

services,

to address these issues, with the

support of the Recovery and Resilience Facility

and EU cohesion funds. The 2023 long-term

care reform allocated additional funding to

local governments, reducing out-of-pocket

costs for general care services. Estonia is also

gradually increasing dental care benefits and

reducing co-payments for medical goods.

However, Estonia has not reformed the

financing of its health and long-term care

systems.

To further reduce the unmet need

for medical care and high out-of-pocket

(

) "Out-of-pocket payments" refer to direct payments

made by individuals to healthcare providers at the time

of service use

(

) Under current policies, public pension spending is

projected to decline by about 1 pp of GDP by 2070 (see

Annex 11).

kom (2025) 0206 - Ingen titel

payments, adequate financing and quality

remain crucial, especially as population ageing

is expected to increase demand. Strengthening

home and community-based care, alongside

assistive technologies, would help improve

service accessibility and effectiveness across

the country. Innovative healthcare solutions

could be further explored, such as integrating

healthcare with the social sector and using

mobile trailers with facilities for medical

examinations.

issue in Tallinn, which accounts for a third of

the population and over half of GDP. In 2024,

apartments were 2.9 times more expensive

per square metre in the capital than in the rest

of Estonia (up from 2.3 in 2010) (

). This is an

obstacle for labour mobility and results in lost

competitiveness.

There is room to improve the quality of

the housing stock, especially outside

major urban areas.

While Estonia has very

high levels of property ownership, with 80.7%

of people living in homes they own in 2023

(EU average: 69.2%), investment in existing

properties is limited outside major urban

areas. Low incomes and low property values

are an obstacle in rural areas, resulting in

incremental deterioration of the housing stock.

Lack of affordable and low quality

of housing

House prices have increased rapidly and,

although wages had mostly caught up by

2024, the lack of affordable housing in

Tallinn remains an issue for labour

mobility.

Residential property prices boomed

in 2021 and 2022, outpacing wage growth

and reducing housing affordability. The boom

was fuelled by

–

among other things

–

pension

fund withdrawals and the conversion of stock

options from Estonian unicorns(

) into real

estate investments, particularly in and near

Tallinn. In 2023 and 2024, residential real

estate prices have more or less stagnated

while wages have continued to increase. Still,

compared to incomes, real estate prices per

square metre remain above the EU average.

Furthermore, partly due to a lack of

competition between mortgage providers,

which is hindered by high costs associated

with refinancing, mortgage interest rates in

Estonia (and Latvia) are the highest in the EU

(

). High interest rates and rising average

property prices have reduced households'

borrowing capacity over the past decade, with

a higher share of annual income going on

mortgage payments. The housing cost

overburden rate has almost doubled since

2021, reaching 8.6% in 2024 (see Annex 11).

The cost of housing is a particularly acute

(

) A unicorn is a privately owned start-up company, which

has reached a valuation of $1 billion or more.

(

) European Central Bank (2025), Loans for house

purchases.

Investment in education will help

alleviate skills shortages

The performance of the education system

is relatively strong but teacher shortages

are a challenge.

According to the OECD PISA

results, Estonia is one of the EU’s top

performers in basic skills. However,

inequalities have been widening slightly over

the past decade, and teacher shortages pose a

risk to the quality of education. Shortages

remain particularly severe in science and

mathematics, with intense labour market

competition for graduates and support

specialists. Many new teachers leave the

profession, leading to an insufficient supply of

fully qualified staff. The shortages of fully

qualified teachers are exacerbated by an

ageing teacher population; the Estonian

teaching force is one of the oldest in the EU

(see Annex 12). Estonia could improve teacher

shortages by implementing the 2022-2026

teacher action plan, focusing on teacher

retention, while preparing a follow-up to the

plan that goes beyond 2026.

(

)

KV.EE real price statistics.

The rest of Estonia refers to

unweighted average price in all counties except

Harjumaa, where Tallinn is located.

kom (2025) 0206 - Ingen titel

The education system could still be better

aligned with skills needs in the labour

market.

The high rate of early school leavers

(11% in 2024) is a persistent challenge for

skills supply to the labour market. Early school

leavers have significantly lower employment

rates and are at greater risk of poverty and

social exclusion. (see Annex 12). The dropout

rate from higher education is relatively high,

as is the gender gap in favour of women.

While educational attainment tends to be

higher among women than men, women are

often hired for less prominent positions,

limiting the full use of their skills. The dropout

rate is also higher for people with disabilities.

Estonia has raised the compulsory education

age to 18. However, the effectiveness of this

reform will depend on its implementation and

appropriate funding. The high rate of early

school leaving could be reduced by fully

implementing the reform of vocational

education and training (VET), which seeks to

better integrate VET with upper secondary

general education. Furthermore, persisting

skills shortages (see Section 2) could also be

better addressed by better aligning education

policy with the OSKA labour market

forecasting system, to improve the labour

market relevance of education and training.

Increasing tertiary educational attainment and

reducing dropout rates could improve the skills

available in the workforce. There is also scope

for further involving social partners in

designing education policies relevant to the

labour market. Addressing these challenges

could also help reduce skills shortages and

thus improve Estonia’s competitiveness (see

Section 2).

These findings are consistent with the

second-stage analysis in line with the

Social Convergence Framework.

The

analysis points to challenges related to the

high share of the population at risk of poverty

or social exclusion, high income inequality, the

low impact of social transfers on poverty

reduction, and high self-reported unmet needs

for medical care. However, it does not point

to overall social convergence challenges for

Estonia, also in light of the measures

implemented or planned.(

)

(

) European Commission,

SWD(2025)95.

The analysis

relies on all the available quantitative and qualitative

evidence and the policy response undertaken and

planned.

kom (2025) 0206 - Ingen titel

KEY FINDINGS

To boost competitiveness, sustainability and

social fairness, Estonia would benefit from:

•

implementing the RRP,

including the

REPowerEU

chapter;

swiftly

implementing cohesion policy,

taking

advantage of the opportunities under the

mid-term review and making optimal use

of EU instruments, including

InvestEU

and

STEP,

to improve competitiveness;

ensuring new and stable sources of

public revenue,

including increasing the

share of property taxation in public

revenue and implementing spending

reviews;

strengthening

the societal

and

economic resilience of regions,

paying

particular attention to Estonia’s eastern

borders;

addressing skills shortages and

mismatches to strengthen labour

productivity

and

innovation

performance,

including by reducing early

school leaving, making education and

training more relevant to the labour

market and better attracting and retaining

talent from third countries;

improving access to financing and

funding,

especially for small businesses

and companies in remote regions, to

facilitate innovative investment, including

promoting institutional investors’

participation in the venture capital and

equity

market

and

addressing

fragmentation in funding programmes;

boosting

innovation

and

R&D

investment

by prioritising applied

research funding, strengthening the role of

universities in the innovation system and

•

enabling faster

technologies;

deployment

new

securing

critical

energy

infrastructure,

while investing in

renewable energy capacity, reducing

overall dependence on fossil fuels and

moving away from oil shale, streamlining

permitting processes and enhancing

flexibility technologies such as battery

storage systems;

improving resource productivity and

reducing the energy intensity of the

economy

by continuing to support the

take-up of resource-efficient green

technologies and supporting resource

efficiency and circularity more generally;

decarbonising transport

and achieving

the target under the Emission Sharing

Regulation by shifting freight transport

from road to rail, speeding up

electrification of railways and supporting

the transition to electric vehicles;

to support upward social convergence,

reducing poverty by strengthening

social protection

for older people, people

with

disabilities

and

single-person

households by increasing the adequacy

and efficiency of the benefit system and

better targeting vulnerable groups, and by

extending coverage of unemployment

benefits, in particular to those in non-

standard forms of work who are still

excluded;

improving access to long-term care

and healthcare

to reduce unmet needs

for medical care and reduce out-of-pocket

payments, by reforming the funding of

healthcare and long-term care.

•

kom (2025) 0206 - Ingen titel kom (2025) 0206 - Ingen titel

ANNEXES

kom (2025) 0206 - Ingen titel kom (2025) 0206 - Ingen titel

LIST OF ANNEXES

Fiscal

A1.

A2.

Fiscal surveillance and debt sustainability

Taxation

Productivity

A3.

A4.

A5.

A6.

Innovation to business

Making business easier

Capital markets, financial stability and access to finance

Effective institutional framework

Sustainability

A7.

A8.

A9.

Clean industry and climate mitigation

Affordable energy transition

Climate adaptation, preparedness and environment

Fairness

A10. Labour market

A11. Social policies

A12. Education and skills

A13. Social Scoreboard

A14. Health and health systems

Horizontal

A15. Sustainable development goals

A16. CSR progress and EU funds implementation

A17. Competitive regions

101

LIST OF TABLES

A1.1.

A1.2.

A1.3.

A1.4.

A1.5.

A1.6.

A1.7.

A1.8.

A1.9.

General government balance and debt

Net expenditure growth

Net expenditure (outturn and forecast), annual and cumulated deviations vis-à-vis the recommendation

Defence expenditure and the national escape clause

Macroeconomic developments and forecasts

General government budgetary position

Debt developments

RRF

–

Grants

Projected change in age-related expenditure in 2024-2040 and 2024-2070

kom (2025) 0206 - Ingen titel

A1.10.

A2.1.

A3.1.

A4.1.

A5.1.

A6.1.

A6.2.

A7.1.

A8.1.

A9.1.

A13.1.

A14.1.

A16.1.

A16.2.

A17.1.

A17.2.

Fiscal Governance Database Indicators

Taxation indicators

Key innovation indicators

Making Business Easier: indicators.

Financial indicators

Estonia. Selected indicators on administrative burden reduction and simplification

Key Digital Decade targets monitored through the Digital Economy and Society Index

Key clean industry and climate mitigation indicators: Estonia

Key Energy Indicators

Key indicators tracking progress on climate adaptation, resilience and environment

Social Scoreboard for Estonia

Key health indicators

Selected EU funds with adopted allocations - summary data (million EUR)

Selection of indicators at regional (NUTS 3) level in Estonia

Socio-demographic indicators by degree of urbanisation, 2024

102

103

LIST OF GRAPHS

A2.1.

A2.2.

A4.1.

A5.1.

A5.2.

A5.3.

A5.4.

A5.5.

A6.1.

A6.2.

A6.3.

A7.1.

A7.2.

A7.3.

A8.1.

A8.2.

A8.3.

A9.1.

A9.2.

A10.1.

A10.2.

A11.1.

A11.2.

A12.1.

A12.2.

A14.1.

A14.2.

A15.1.

A16.1.

A16.2.

A17.1.

Tax revenue shares in 2023

Tax wedge for single and second earners, % of total labour costs, 2024

Making Business Easier: selected indicators.

Net savings-investment balance

International investment position

Capital markets and financial intermediaries in Estonia

Composition of NFC funding as % of GDP

Composition of household financial assest per capita and as % of GDP

Trust in justice, regional / local authorities and in government

Indicators of Regulatory Policy and Governance (iREG)

Participation rate of 25-64 year olds in adult learning (%) by occupation

GHG emissions intensity of manu-facturing and energy-intensive sectors, 2022

Greenhouse gas emissions in the effort sharing sectors, 2005 and 2023

Municipal waste treatment

Retail energy price components for household and non-household consumers, 2024

Monthly average day-ahead wholesale electricity prices and European benchmark natural gas prices (Dutch TTF)

Estonia's installed renewable capacity (left) and electricity generation mix (right)

Direct dependency(1) on ecosystem services(2) of the gross value added generated by economic sector in 2022

Investment needs and gaps in EUR million, in 2022 constant prices

Key labour market indicators

Labour market outcomes of young people (15-24)

At-risk-of-poverty or social exclusion rate, age groups

In-work-poverty rate, groups

Teacher shortages (2015-2022)

Employment rate by educational attainment (annual)

Life expectancy at birth, years

Treatable mortality

Progress towards the SDGs in Estonia

Distribution of RRF funding in Estonia by policy field

Distribution of cohesion policy funding across policy objectives in Estonia

GDP per capita in 2010-2022 in capital region (Harjumaa) and counties at EUs external border (% of Estonian average)

103

LIST OF MAPS

A17.1.

GDP per head (in purchasing power standard PPS), NUTS 3, 2023

101

kom (2025) 0206 - Ingen titel

FISCAL

ANNEX 1: FISCAL SURVEILLANCE AND DEBT SUSTAINABILITY

This Annex contains a series of tables relevant for the assessment of the fiscal situation in Estonia,

including how Estonia is responding to Council recommendations issued under the reformed Economic

Governance Framework.

The reformed framework, which entered into force on 30 April 2024(

), aims to strengthen debt

sustainability and promote sustainable and inclusive growth through growth-enhancing reforms and

priority investments. The medium-term fiscal-structural plans (hereinafter, MTPs or plans) constitute the

cornerstone of the framework, setting the budgetary commitment of Member States over the medium

term. The latter is defined in terms of net expenditure growth, which is the single operational indicator for

fiscal surveillance.

Estonia submitted its plan on 11 October 2024. The plan covers the period until 2028, presenting a fiscal

adjustment over four years. On 21 January 2025, the Council adopted the Recommendation endorsing

Estonia’s

plan.(

)

The assessment of the implementation of the Council Recommendation endorsing Estonia’s

plan is carried

out on the basis of outturn data from Eurostat and

the Commission’s Spring 2025 Forecast and taking

into account the Annual Progress Report (APR) that Estonia submitted on 29 April 2025. Furthermore,

given Estonia’s

request to activate the National Escape Clause

(

) in accordance with the Commission

Communication of 19 March 2025(

), the assessment also considers, as appropriate, the projected

increase in defence expenditure based on the Commission Spring 2025 Forecast.

The Annex is organised as follows. First, developments in

government deficit and debt

are presented

based on the figures reported in table A1.1. Then, the assessment of the

implementation of the

Council Recommendation endorsing the plan

follows, based on the relevant figures presented in

Tables A1.2 to A1.8, including data on defence expenditure.

The Annex also provides information on the

cost of ageing

and the

national fiscal framework.

Fiscal

sustainability risks are discussed in the Debt Sustainability Monitor 2024.(

)

Developments in government deficit and debt

Estonia’s government deficit amounted to 1.5% of GDP in 2024. Based on the Commission’s Spring 2025

Forecast, it is projected to decrease to 1.4% in 2025. The government debt-to-GDP ratio amounted to

23.6% of GDP at the end of 2024 and, according to the Commission, it is projected to increase to 23.8%

end-2025.

(

) Regulation (EU) 2024/1263 of the European Parliament and of the Council (EU) on the effective coordination of economic policies

and on multilateral budgetary surveillance, together with the amended Regulation (EC) No 1467/97 on the implementation of the

excessive deficit procedure, and the amended Council Directive 2011/85/EU on the budgetary frameworks of Member States are the

core elements of the reformed EU economic governance framework.

(

) OJ C, C/2025/655, 10.02.2025, ELI:

http://data.europa.eu/eli/C/2025/655/oj.

(

) On 30 April 2025, Estonia requested to the Commission and to the Council the activation of the National Escape Clause. On this

basis, the Commission adopted a Recommendation for a Council Recommendation allowing Estonia to deviate from, and exceed,

the net expenditure path set by the Council, COM(2025)604.

(

) Communication from the Commission accommodating increased defence expenditure within the Stability and Growth Pact of 19

March 2025, C(2025) 2000 final.

(

)

European Commission (2025) ‘Debt Sustainability Monitor 2024,’

European Economy-Institutional Papers

306.

kom (2025) 0206 - Ingen titel

Table A1.1:

General government balance and debt

Variables

2024

% GDP

Outturn

-1.5

23.6

APR

-1.5

22.5

2025

COM

-1.4

23.8

APR

-2.5

24.0

2026

COM

-2.4

25.4

General government balance

General government gross debt

Source:

Commission Spring 2025 Forecast (COM), Annual Progress Report (APR)

Developments in net expenditure

The net expenditure(

) growth of Estonia in 2025 is forecast by the Commission(

) to be below the

recommended maximum. Considering 2024 and 2025 together, the cumulative growth rate of net

expenditure is also projected below the recommended maximum cumulative growth rate.

Table A1.2:

Net expenditure growth

Annual

REC

2024

2025

2026

Cumulative*

COM

REC

Growth rates

1.8%

n.a.

2.1%

9.2%

4.1%

14.8%

APR

n.a.

2.1%

n.a.

COM

n.a.

3.9%

8.2%

APR

1.1%

1.0%

5.0%

n.a.

7.1%

5.1%

* The cumulative growth rates are calculated by reference to the base year of 2023.

Source:

Council Recommendation endorsing the national medium-term fiscal-structural plan of Estonia, Annual Progress Report

(APR) and Commission's calculation based on Commission Spring 2025 Forecast (COM).

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 2023.(

) According to the Commission 2025 Spring Forecast, expenditure on

defence is projected to amount to 3.4% of GDP in 2024 and 3.8% of GDP in 2025.

(

) Net expenditure is defined in Article 2(2) of Regulation (EU) 2024/1263 as 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-off and other temporary measures.

(

) European Commission Spring 2025 Forecast

European Economy-Institutional paper 318,

May 2025.

(

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

kom (2025) 0206 - Ingen titel

Table A1.3:

Net expenditure (outturn and forecast), annual and cumulated deviations vis-à-vis the

recommendation

Variables

Total expenditure

Interest expenditure

Cyclical unemployment expenditure

Expenditure funded by transfers from the EU

National co-financing of EU programmes

One-off expenditure (levels, excl. EU funded)

Net nationally financed primary expenditure (before

7=1-2-3-4-5-6

discretionary revenue measures, DRM)

Change in net nationally financed primary expenditure (before DRM)

DRM (excl. one-off revenue, incremental impact)

Change in net nationally financed primary expenditure

10=8-9

(after DRM)

Outturn / forecast net expenditure growth

Recommended net expenditure growth*

13=(11-12) x 7

Annual deviation

14 (cumulated from 13)

Cumulated deviation

15=13/17

Annual balance

16=14/17

Cumulated balance

p.m. Nominal GDP

bn NAC

% change

bn NAC

% GDP

bn NAC

2023

Outturn

16.7

0.1

0.0

0.7

0.1

0.0

15.8

2024

Outturn

17.4

0.2

0.0

0.5

0.1

0.0

16.5

0.7

0.4

0.3

1.82%

1.9%

0.0

39.5

2025

COM

18.7

0.2

0.0

0.7

0.1

0.0

17.7

1.2

0.9

0.3

2.1%

7.1%

-0.8

-2.0

41.5

2026

COM

19.7

0.3

0.0

0.8

0.1

0.0

18.5

0.8

0.1

0.7

4.1%

5.1%

-0.2

-1.0

-0.4

-2.3

43.5

38.2

* The growth rate for 2024 is not a recommendation but serves to anchor the base, as the latest year with outturn data when

setting the net expenditure path is year 2023.

Source:

Commission Spring 2025 Forecast and Commission's calculation

Table A1.4:

Defence expenditure and the national escape clause

Total defence expenditure

of which: gross fixed capital formation

Flexibility from increases in defence expenditure

Cumulated balance after flexibility

% GDP

2021

2.0

0.7

2022

2.2

0.7

2023

2.7

1.3

2024

3.4

1.2

2025

3.8

1.5

-3.5

2026

4.1

1.5

-3.8

Source:

Eurostat (COFOG), Commission Spring 2025 Forecast and Commission's calculation

Table A1.5:

Macroeconomic developments and forecasts

Variables

1=7+8+9

2024

% change

pps

% pot GDP

% change

% GDP

Outturn

-0.3

0.3

-6.9

-1.1

0.0

-2.0

1.2

-0.9

-4.3

0.2

7.6

-0.5

3.7

5.6

-0.8

APR

1.7

-0.4

0.0

7.6

2.5

2.0

1.9

-1.7

0.4

-3.6

-0.1

7.1

1.8

5.1

3.9

5.2

n.a.

2025

COM

1.1

1.4

1.2

1.6

2.2

2.6

1.4

0.0

-0.3

-3.4

-0.1

7.6

1.2

3.8

3.9

4.5

-0.7

APR

2.5

1.5

2.0

1.1

3.0

2.6

1.5

-0.9

0.2

-2.1

0.5

6.6

2.0

3.4

2.8

5.1

n.a.

2026

COM

2.3

2.4

2.5

3.1

2.4

2.9

2.6

0.0

-0.3

-1.5

0.2

7.3

2.0

2.3

2.6

4.0

-0.4

Real GDP

Private consumption

Government consumption expenditure

Gross fixed capital formation

Exports of goods and services

Imports of goods and services

Contributions to real GDP growth

- Final domestic demand

- Change in inventories

- Net exports

Output gap

Employment

Unemployment rate

Labour productivity

HICP

GDP deflator

Compensation of employees per head

Net lending/borrowing vis-à-vis the rest of the

world

Source:

Commission Spring 2025 Forecast (COM), Annual Progress Report (APR)

kom (2025) 0206 - Ingen titel

Table A1.6:

General government budgetary position

Variables (% GDP)

1=2+3+4+5

8=9+16

18=1-8

19=1-9

22=20-21

23=22+16

2024

Outturn

42.5

14.1

9.0

12.7

6.7

44.0

43.4

12.3

6.4

15.1

0.7

6.1

2.9

0.6

-1.5

-0.9

0.6

0.0

0.6

1.2

APR

43.5

14.4

9.9

12.6

6.6

45.0

44.5

11.8

6.5

15.3

0.8

7.1

3.0

0.5

-1.5

-1.0

n.a.

0.0

0.2

0.8

2025

COM

43.8

14.9

9.9

12.7

6.3

45.2

44.6

11.9

6.6

15.4

0.8

7.2

2.8

0.5

-1.4

-0.8

0.3

0.0

0.3

0.8

APR

42.7

14.6

9.1

12.6

6.4

45.2

44.7

11.7

6.7

15.2

0.8

7.0

3.3

0.5

-2.5

-1.9

n.a.

0.0

-1.5

-0.9

2026

COM

42.8

15.2

9.2

12.6

5.8

45.3

44.7

11.9

6.8

15.4

0.8

7.1

2.7

0.6

-2.4

-1.8

-1.7

0.0

-1.7

-1.1

Revenue

of which:

- Taxes on production and imports

- Current taxes on income, wealth, etc.

- Social contributions

- Other (residual)

Expenditure

of which:

- Primary expenditure

of which:

- Compensation of employees

- Intermediate consumption

- Social payments

- Subsidies

- Gross fixed capital formation

- Other

- Interest expenditure

General government balance

Primary balance

Cyclically adjusted balance

One-offs

Structural balance

Structural primary balance

Source:

Commission Spring 2025 Forecast (COM), Annual Progress Report (APR)

Table A1.7:

Debt developments

Variables

2=3+4+8

4≈5+6+7

Gross debt ratio* (% of GDP)

Change in the ratio (pps. of GDP)

Contributions**

Primary balance

'Snow-ball' effect

of which:

- Interest expenditure

- Real growth effect

- Inflation effect

'Stock-flow' adjustment

2024

Outturn

23.6

3.4

0.9

-0.1

0.6

0.1

-0.7

2.6

2025

APR

22.5

-1.1

1.0

-0.7

0.5

-0.4

-0.9

-1.3

COM

23.8

0.2

0.8

-0.6

0.5

-0.2

-0.9

0.0

APR

24.0

1.5

1.9

-0.6

0.5

-0.5

-0.6

0.1

2026

COM

25.4

1.5

1.8

-0.5

0.6

-0.5

-0.6

0.2

* End of period.

** The 'snow-ball' effect captures the impact of interest expenditure on accumulated general government debt, as well as the

impact of real GDP growth and inflation on the general government debt-to-GDP ratio (through the denominator). The stock-flow

adjustment includes differences in cash and accrual accounting (including leads and lags in Recovery and Resilience Facility grant

disbursements), accumulation of financial assets, and valuation and other residual effects.

Source:

Commission Spring 2025 Forecast and Commission's calculation (COM), Annual Progress Report (APR)

kom (2025) 0206 - Ingen titel

Table A1.8:

RRF

–

Grants

Revenue from RRF grants (% of GDP)

RRF grants as included in the revenue projections

Cash disbursements of RRF grants from EU

2020

n.a.

2021

0.0

0.3

2022

0.1

0.0

2023

0.3

0.6

2024

0.4

0.3

2025

0.6

2026

0.4

Expenditure financed by RRF grants (% of GDP)

6=4+5

Total current expenditure

Gross fixed capital formation

Capital transfers

Total capital expenditure

2020

0.0

2021

0.0

2022

0.0

0.1

2023

0.0

0.2

0.3

2024

0.1

0.3

2025

0.1

0.2

0.3

0.5

2026

0.0

0.3

Other costs financed by RRF grants (% of GDP)

Reduction in tax revenue

Other costs with impact on revenue

Financial transactions

2020

0.0

2021

0.0

2022

0.0

0.3

2023

0.0

2024

0.0

2025

0.0

2026

0.0

Source:

Annual Progress Report

Cost of ageing

Total age-related spending in Estonia remains stable overall, at around 17% of GDP

(see Table

A1.9). This aggregate stability results from a projected decrease in pension and education spending being

offset by rising expenditure on healthcare and long-term care. The decline in public pension spending of

about 1 pp of GDP by 2070 is situated mostly in the 2060s.

Public healthcare (

) and long-term care (

) expenditure remain below the EU average and are

set to remain mostly stable over the forecast horizon.

Public healthcare expenditure is projected at

5.1% of GDP in 2024 (below the EU average of 6.6%) and is expected to increase by 0.3 pps by 2040 and

by a further 0.3 pps by 2070. Public expenditure on long-term care is projected at 0.5% of GDP in 2024

(below the EU average of 1.7%) and is expected to increase by 0.2 pps of GDP by 2040 and by a further

0.4 pps of GDP by 2070.

Table A1.9:

Projected change in age-related expenditure in 2024-2040 and 2024-2070

age-related

expenditure

2024 (% GDP)

17.3

24.3

age-related

expenditure

2024 (% GDP)

17.3

24.3

change in 2024-2040 (pps GDP) due to:

pensions

-0.3

0.5

healthcare

0.3

long-term care

0.2

0.4

education

-0.5

-0.3

total

-0.2

0.9

age-related

expenditure

2040 (%GDP)

17.1

25.2

age-related

expenditure

2070 (%GDP)

-0.5

1.3

16.9

25.6

change in 2024-2070 (pps GDP) due to:

pensions

-1.1

0.2

healthcare

0.6

long-term care

0.6

0.8

education

-0.5

-0.4

total

Source:

2024 Ageing Report (EC/EPC).

(

) Key performance characteristics, recent reforms and investments are discussed in Annex 11. 

(

) The quality and the accessibility of the long-term care system are covered in Annex 9.

kom (2025) 0206 - Ingen titel

National fiscal framework

The Estonian Fiscal Council is a relatively small Independent Fiscal Institution (IFI) closely

attached to the central bank.

It performs the legally required activities of a euro area IFI (endorsement

of the macroeconomic forecast and assessment of compliance with the budget balance rule). It is involved

in the assessment of the budgetary plans but does not provide an endorsement. There is logistical support

from the Estonian central bank and the three economists also come from the central bank. While the

current set-up seems to be working, issues of independence may arise.

Table A1.10:

Fiscal Governance Database Indicators

2023

Country Fiscal Rule Strength Index (C-FRSI)

Medium-Term Budgetary Framework Index (MTBFI)

Estonia

13.65

0.72

EU Average

14.52

0.73

The Country Fiscal Rule Strength Index (C-FRSI) shows the strength of national fiscal rules aggregated at the country level based

on i) the legal base, ii) how binding the rule is, iii) monitoring bodies, iv) correction mechanisms, and v) resilience to shocks. The

Medium-Term Budgetary Framework Index (MTBFI) shows the strength of the national MTBF based on i) coverage of the

targets/ceilings included in the national medium-term fiscal plans; ii) connectedness between these targets/ceilings and the

annual budgets; iii) involvement of the national parliament in the preparation of the plans; iv) involvement of independent fiscal

institutions in their preparation; and v) their level of detail. A higher score is associated with higher rule and MTBF strength.

Source:

Fiscal Governance Database

kom (2025) 0206 - Ingen titel

ANNEX 2: TAXATION

This annex provides an indicator-based

overview of Estonia’s tax system.

It includes

information on: (i) the tax mix; (ii) competitiveness

and fairness aspects of the tax system; and (iii)

tax collection and compliance.

Estonia’s recent tax reforms will help the

government

generate

much-needed

additional revenue in light of its defence and

healthcare spending needs.

Overall, tax

revenues were equivalent to 33.7% of Estonia’s

gross domestic product (GDP) in 2023,

considerably below the EU average of 39% (see

Table A2.1). They increased to 35.5% in 2024. The

tax mix relies strongly on taxes on labour and

consumption, which accounted for 52.7% and

38.9% of total tax revenues respectively in 2023

(see Graph A2.1). In particular, the share of

consumption taxes was significantly above the EU

average of 26.9%, and may rise even further due

to the increase in the standard VAT rate from 20%

to 22% in January 2024 and the increase in the

reduced VAT rates for accommodation services

(from 9% to 13%) and press publications (from

5% to 9%) that came into effect in January 2025.

In addition, a ‘security surcharge’ will be levied

from July 2025, temporarily increasing the

standard VAT rate by a further 2 percentage points

to 24% for three years.

Graph A2.1:

Tax revenue shares in 2023

Tax revenue shares in 2023, Estonia (outer ring) and EU (inner ring)

8.5

businesses. At the same time, Estonia continues to

not levy corporate-income tax on reinvested or

retained earnings, encouraging businesses to

instead reinvest profits for growth rather than

distributing them, fostering innovation and

expansion. The forward-looking average effective

tax rate, which indicates the expected tax burden

for investment (

), was 15.7% in 2023, below the

EU average of 18.9%.

Revenues from environmental taxes as a

share of GDP are 0.6 percentage points

higher in Estonia than the EU average (2.6%

vs 2.0%), but have decreased over time.

Estonia levies relatively high excise duties on road

fuels, and has introduced a new vehicle tax that

came into effect in January 2025. On pollution

and resources taxes, Estonia has already

implemented four of the six main types of

pollution and resources taxes (i.e. taxes on NOx

emissions, waste landfilling, discharge of waste

into water, and plastic products). There may be

scope to expand waste disposal taxes, including

taxes on incineration. Estonia does not have taxes

on fertilisers and pesticides. The share of

environmental taxes in total revenues was 7.7% in

2023.

The personal income tax system remains

simple and predictable in Estonia, but it is

somewhat less progressive than that of

other Member States.

This is borne out by the

labour tax wedge(

), which is below the EU

average for single people with high incomes (see

Graph A2.2). The recent replacement of the

progressive basic exemption with a universal flat

exemption from tax of EUR 8 400 per year is likely

to reduce the progressivity of the tax system at

the upper end of the income spectrum even

further. On the other hand, Estonia has been

successful in increasing work incentives for low-

(

) Effective average tax rates measure the effect of taxation

on investment projects earning economic rents. This indicator

is based on a comparison of the net present value of pre-tax

and post-tax cash flows. It is used to analyse investment

decisions at the extensive margin, e.g. when a multinational

enterprise decides to locate a plant in one of many

jurisdictions (for the first time) or to make one of a number

of technology choices.

(

) The tax wedge is defined as the sum of personal income

taxes and employee and employer social-security

contributions net of family allowances, expressed as a

percentage of total labour costs (the sum of the gross wage

and social-security contributions paid by the employer).

21.9

51.2

38.9

26.9

52.7

Source:

Taxation Trends Data, DG TAXUD

Despite recent tax reforms, Estonia’s

corporate-tax system is likely to continue to

encourage business reinvestment.

A 2%

security surcharge will be levied on corporate

profits from January 2026 to December 2028.

This will come on top of the recent increase in the

corporate-tax rate from 20% to 22%, effective as

of January 2025. Together with the abolition of

the reduced 14% tax rate that applied to regular

dividends, this may somewhat diminish the

attractiveness of Estonia’s tax environment for

kom (2025) 0206 - Ingen titel

Table A2.1:

Taxation indicators

Median (EU-27)

Tax structure

2010

Total taxes (including compulsory actual social contributions) (% of

GDP)

Taxes on labour (% of GDP)

of which, social security contributions (SSC, % of GDP)

Taxes on consumption (% of GDP)

of which, value added taxes (VAT, % of GDP)

Taxes on capital (% of GDP)

Personal income taxes (PIT, % of GDP)

Corporate income taxes (CIT, % of GDP)

Total property taxes (% of GDP)

Recurrent taxes on immovable property (% of GDP)

Environmental taxes (% of GDP)

Effective carbon rate in EUR per tonne of CO

equivalents

Tax wedge at 50% of average wage (single person) (*)

Tax wedge at 100% of average wage (single person) (*)

Corporate income tax - effective average tax rates (1) (*)

Difference in Gini coefficient before and after taxes and cash social

transfers (pensions excluded from social transfers) (2) (*)

Outstanding tax arrears: total year-end tax debt (including debt

VAT gap (% of VAT total tax liability, VTTL) (**)

33.0

17.1

12.2

13.6

8.5

2.3

5.3

1.3

0.4

0.3

3.3

37.3

40.1

16.5

6.4

Estonia

2021 2022

33.8

17.3

11.6

13.4

9.1

3.1

6.8

1.5

0.3

0.2

2.6

76.9

31.5

38.2

15.7

7.9

5.5

1.5

32.8

17.0

11.3

13.1

9.1

2.7

6.3

1.6

0.3

0.2

2.5

32.3

39.1

15.7

6.7

4.9

4.4

2023

33.7

17.8

12.0

13.1

9.1

2.9

6.3

1.9

0.3

0.2

2.6

73.4

30.8

39.9

15.7

7.2

2024

35.5

2010

37.8

19.8

12.9

10.9

6.8

7.1

8.6

2.2

1.9

1.1

2.5

33.9

40.9

21.3

8.6

2021

40.2

20.5

13.0

11.2

7.3

8.5

9.6

2.9

2.2

1.1

2.4

86.0

31.8

39.9

19.3

8.2

35.5

EU-27

2022 2023

39.7

20.1

12.7

10.9

7.4

8.7

9.4

3.2

2.1

1.0

2.1

31.5

39.9

19.1

7.9

32.6

7.0

39.0

20.0

12.7

10.5

7.1

8.5

9.3

3.2

1.9

0.9

2.0

84.8

31.5

40.2

18.9

7.7

2024

By tax base

Some tax types

Progressivity &

fairness

31.4

40.6

31.8

40.3

Tax administration &

considered not collectable) / total revenue (in %) (*)

compliance

5.9

6.6

(1) Forward-looking effective tax rate (KPMG).

(2) A higher value indicates a stronger redistributive impact of taxation.

(*) EU-27 simple average.

(**) Forecast value for 2023. For more details on the VAT gap, see European Commission, Directorate-General for Taxation and

Customs Union, VAT gap in the EU - 2024 report,

https://data.europa.eu/doi/10.2778/2476549

For more data on tax revenues as well as the methodology applied, see the Data on Taxation webpage,

https://ec.europa.eu/taxation_customs/taxation-1/economic-analysis-taxation/data-taxation_en.

Source:

European Commission, OECD

income earners, which is reflected in the reduction

in the tax wedge for workers earning 50% of the

average wage from 37.3% in 2010 to 31.4% in

2024. Overall, however, the redistributive effect of

Estonia’s tax and benefits system remains

somewhat below the EU average. The reduction in

income inequality as measured by the Gini

coefficient was 7.2 points in 2023, which was

below the EU average of 7.7 points.

Graph A2.2:

Tax wedge for single and second earners,

% of total labour costs, 2024

Tax wedge, % of total labour costs

40.6

31.4

35.0

41.2

100

150

Earnings as % of the average wage

Single earner - EE

Second earner - EE

Single earner - EU average

Second earner - EU average

Estonia performs well on tax compliance and

tax administration, including digitalising the

tax administration.

Outstanding tax arrears

decreased in 2022 by 0.6 percentage points to

4.9% of total net revenue (in comparison with the

previous year). The amount of arrears that the

Estonian tax administration considers collectable

was rather stable between 2018 and 2022, at

around 87%. The VAT compliance gap (an indicator

of the effectiveness of VAT enforcement and

compliance) was estimated at EUR 152 million or

4.4% of the VAT total tax liability in 2022, an

increase of 2.9 percentage points compared with

2021. Nevertheless, with an EU average VAT

compliance gap of approximately 7.0%, Estonia

still ranked ninth among the EU Member States in

2022 (i.e. only eight EU Member States had a

lower VAT compliance gap). Between 2018 and

2022, the VAT compliance gap fell from 5.6% to

4.4%. In Estonia, the cost-of-collection ratio

(expressed as a percentage of total net revenue)

remained stable at below 0.5% during the period

2018-2022.

Estonia’s

digitalisation

the

tax

administration is well-advanced.

Estonia is one

of only seven EU countries which has both

launched and implemented: (i) a strategy for

digital transformation; (ii) a strategy to identify the

The tax wedge for second earners assumes a first earner at

100% of the average wage and no children. For the full

methodology, see OECD, 2016, Taxing Wages 2014-2015.

Source:

European Commission

kom (2025) 0206 - Ingen titel

skills required for a successful digital

transformation; and (iii) a strategy for building a

digital culture within the tax administration.

Estonia’s tax administration pre-fills

only personal-

income-tax files; corporate-income-tax and value-

added-tax returns remain not pre-filled.

Nevertheless, the percentage of e-filing stands at

above 95% for corporate-income-tax returns,

personal-income-tax returns and VAT returns

(100% of all three types of returns have been

submitted electronically since 2018).

Estonia scores well on dispute resolution.

The

number of mutual-agreement-procedure (

) cases

initiated in the year 2023 was only two (

). No

cases were pending from previous years.

(

) The Mutual Agreement Procedure (MAP) is an administrative

procedure between tax authorities of Member States

engaged in a tax dispute. During the MAP, national

authorities endeavour to resolve the dispute within 2 years,

or 3 years if the procedure is extended due to a justified

request.

(

) See page 4 in the following document: https://taxation-

customs.ec.europa.eu/document/download/6bab1a20-40a1-

4b97-852d-

29246fd11cae_en?filename=DRM_2023_Final.pdf

kom (2025) 0206 - Ingen titel

PRODUCTIVITY

ANNEX 3: INNOVATION TO BUSINESS

Estonia’s innovation system

now

performing slightly above the EU average,

but the progress made in the public science

base does not fully translate into

technological performance and business

innovation.

According to the 2024 European

Innovation Scoreboard(

), Estonia has rejoined the

group of ‘strong innovators’. In 2022, Estonia’s

performance in the Summary Innovation Index

was 98.6% of the EU average, while the figure

reached 104.8% in 2024. Estonia’s R&D

intensity (

) increased over the 2017-2O23

period: R&D intensity was 1.84% in 2023,

compared to 1.76% in 2022. While the country

possesses a dynamic R&D base, in particular in the

ICT sector, and good framework conditions for tech

start-up support for the innovativeness of

Estonia’s

economy,

its

performance

technological developments as captured by patent

data has declined in recent years. Innovation in

green technologies could be further strengthened.

Research and innovation (R&I) funding of data

science is lagging behind given the increasing pace

of developments in AI tools.

data science and informatics. While the new

national Applied Research Centre has health data

solutions among its five priorities, the Estonian

Research Agency has so far dedicated just a small

percentage of funding from its budget to

computer science and informatics (

). Investments

in AI research in the fields where Estonia has

developed scientific strongholds over the years

could allow it to exploit many underused or even

untapped opportunities. For instance, Estonia could

further capitalise on its extensive work on health

data and genome research.

Business innovation

The volume of business R&D activities has

expanded in recent years.

Many Estonian

businesses have increased R&D investments in

recent years, particularly by hiring researchers.

This is reflected in the researchers employed by

business per thousand of the active population.

Business enterprise expenditure on R&D reached

1.06% of GDP in 2023 compared to 0.59% in

2017. However, this is still well below the EU

average of 1.49% and only around half of the

expected 2% level. ICT is the core sector of the

Estonian R&I ecosystem: business expenditure in

the ICT sector accounts for 49.2% of total R&D

expenditure.

technology

developments

captured by patent data, Estonia’s patent

applications filed under the Patent Cooperation

Treaty per billion euro of GDP steadily declined

from 1.52 in 2017 and 1.02 in 2021 to 0.6 in

2022.

While the level of direct public support to

business R&D has increased in recent years,

the policy mixes beyond grant schemes are

less developed.

Support to business R&I has

been strengthened in recent years. Overall, direct

public support to business R&D increased from

0.056% of GDP in 2017 to 0.100% in 2022, in line

with the EU average of 0.100%. However, the

policies beyond grant schemes are less developed.

The corporate income tax system has no special

provisions to favour investment in R&D.

(

)

https://www.etag.ee/wp-

content/uploads/2022/01/Eesti_teadus_2022.pdf,

p. 72.

Science for innovative ecosystems

Estonia has a good quality public research

base, with stable funding.

The quality of

research outputs, as measured by the share of

scientific publications within the top 10% most

cited publications worldwide as a percentage of

total publications, is slightly above the EU average

(10.2% in 2021 vs 9.6%) and has increased over

the last decade (7.0% in 2012). Public expenditure

on R&D as a percentage of GDP is also just above

the EU average (0.76% vs 0.72%), remaining more

or less unchanged over the last few years.

R&I funding of data science is lagging behind

given the increasing pace of developments in

AI tools.

Estonia has established itself as a hub of

(

) 2024 European Innovation Scoreboard (EIS),

country profile

Estonia.

The EIS provides a comparative analysis of

innovation performance in EU countries, including the relative

strengths and weaknesses of their national innovation

systems (also compared to the EU average).

(

) Defined as gross domestic expenditure on R&D as a

percentage of GDP.

kom (2025) 0206 - Ingen titel

Cooperation between public research and

businesses remains limited, but the new

Applied Research Centre will help companies

to better exploit research results.

In 2022,

R&D activities commissioned by businesses to

universities and public research organisations

represented 6.8% of public R&D. This is an

improvement compared to 5.2% a year earlier and

reaches nearly the EU average of 6.96%. In 2024,

Estonia launched the national Applied Research

Centre, co-funded by the European Regional

Development Fund and partly also by the recovery

and resilience plan. However, it will take years to

develop a fully functional research technology

organisation that benefits a wide range of

businesses. The Applied Research Centre will help

Estonian businesses develop knowledge-intensive

products and services. Its fields of activity will be

health data, biorefining, drone technologies,

hydrogen technologies and autonomous vehicles.

Its first laboratories are expected to be established

in 2025, starting with a biorefining lab. Estonia is

strengthening R&I Centres of Excellence that are

also enablers of cooperation between academia

and business: in 2024, the Estonian Research

Agency launched 10 Centres of Excellence.

Business R&D that supports innovations in

green technologies could be further

strengthened.

According to the European

Innovation Scoreboard, the share of Estonian

patented inventions in environment-related

technologies dropped substantially in recent years.

As part of the recovery and resilience plan, the

Enterprise and Innovation Foundation supports the

development of new green and energy efficient

technologies by innovative start-ups through the

SmartCap investment funds. Moreover, as part of

the national Applied Research Programme, the

Estonian Business and Innovation Agency has been

managing a new clean-tech programme since

2024, including support in recycling materials and

developing sustainable technologies. Estonia has

launched several notable R&D projects co-funded

by Horizon Europe programmes in the field of bio-

based industry. However, implementation of the

bio-based solution by industry has been lagging.

Estonia has made considerable progress in

business digitalisation, but areas such as

data analytics still need attention to fully

align with its EU Digital Decade targets.

The

adoption of digital technologies by businesses in

Estonia

shows

mixed

progress.

Estonia

outperforms the EU average in cloud computing

adoption (52.6% vs 38.9%) but its performance in

data analytics (25.6% vs 33.2%) remains below

average. In 2024, AI adoption by Estonian firms

surpassed that of European ones (13.3% vs

12.6%), while small and medium-sized enterprises

(SMEs) with at least a basic level of digital

intensity accounted for 71.2%, slightly below the

EU average of 72.9%. To drive digital

transformation, Estonia has launched initiatives

under its recovery and resilience plan together

with national strategies such as European Digital

Innovation Hubs. The AI & Robotics Estonia Hub

provides businesses with assistance in testing and

validating innovative robotics, AI technologies and

algorithms.

The government’s commitment to digital

transformation and its supportive regulatory

environment further fuel the growth of the

digital sector.

Estonia has already demonstrated

its strong position in the digital economy, ranking

4th in EU in terms of its digital economy’s

contribution to gross value added. Estonia is a

front runner in providing key public services

digitally both for businesses and for citizens (

Nevertheless, in 2021 the Estonian Digital Agenda

2030 revealed three priorities: (i) developing

further digital public services; (ii) focusing on

cybersecurity; and (iii) improving connectivity

across the country. The Digital Agenda 2030

strategy is linked to far-reaching R&D

programmes aimed at establishing Estonia as a

centre of excellence for deep-tech start-ups.

Financing innovation

The venture capital level stabilised at above

0.3% of GDP in 2022 and 2023, the highest

level in the EU.

Venture capital intensity picked

up from 2018, quadrupling in five years. Estonia

has a well-established tech ecosystem that has

attracted investments of over 1% of GDP in the

last decade (

Alternative financing has gained traction in

the Estonian financial ecosystem thanks to

public-funded initiatives together with a

(

) Estonia 2024 Digital Decade Country Report.

(

)

‘State

of European Tech 24: The definitive take on European

tech’.

kom (2025) 0206 - Ingen titel

thriving ecosystem for start-ups and tech

businesses.

New private equity and venture

capital funds aimed at SMEs have largely

benefited from the support of national

promotional institutions (e.g. Enterprise Estonia)

and supranational organisations (European

Investment Fund, Baltic Innovation Fund, European

Bank for Reconstruction and Development) over

the past decade. They have played an essential

role in expanding alternative sources of funding

and creating a critical mass of investors. Initiatives

such as EstFund (established in 2016 by the

Estonian government and the European

Investment Fund) have encouraged the growth of

local private equity/venture capital funds. The

availability of venture capital has fuelled the

innovation ecosystem. Fundraising has benefited

significantly from the creation of the Baltic

Innovation Fund in 2012 and a five-year extension

of the initiative in July 2019. This public support

has been complemented by a range of

organisations that not only foster the

entrepreneurial spirit among Estonians, but also

seek to attract foreign founders and investors. The

business-friendly legislation and tax system

supports entrepreneurship.

universities had introduced or were implementing

entrepreneurship education. Nevertheless, further

efforts could be made in higher education to align

the entrepreneurship education curriculum with

labour market needs as practical entrepreneurial

experiences in higher education remain limited.

Innovative talent

The shortage of skilled workers affects

Estonia’s innovation capacity.

The number of

ICT graduates is one of the highest in the EU, but

the declining number of new graduates in science

and engineering is of particular concern. This

number has fallen several years in a row to 9.2

per thousand of those aged 25-34 in 2022,

compared to the EU average of 17.5. The decline

in engineering, construction, manufacturing and

maths

may

hinder

Estonia’s

innovation

performance in the long run (see Annex on

Education and Skills).

Entrepreneurship education in Estonia is high

quality and well developed in all educational

levels.

It is an important education policy priority,

and it has been anchored in the Education

Strategy 2035 and in national curricula. Between

2016-2023 a systematic entrepreneurship

education program,

Edu ja Tegu,

was run which

successfully developed and expanded this

educational area. As a result, by 2023, 43% of

kindergartens, 83% of schools and 94% of

kom (2025) 0206 - Ingen titel

Table A3.1:

Key innovation indicators

Estonia

Headline indicator

R&D intensity (gross domestic expenditure on R&D as % of GDP)

Science and innovative ecosystems

Public expenditure on R&D as % of GDP

Scientific publications of the country within the top 10% most cited publications

worldwide as % of total publications of the country

Researchers (FTE) employed by public sector (Gov+HEI) per 1000 active population

International co-publications as % of total number of publications

R&D investment & researchers employed in businesses

Business enterprise expenditure on R&D (BERD) as % of GDP

BERD performed by SMEs as % of GDP

Researchers employed by business per thousand active population

Innovation outputs

Patent applications filed under the Patent Coop. Treaty per billion GDP (in PPS €)

Employment share of high-growth enterprises measured in employment (%)

Digitalisation of businesses

SMEs with at least a basic level of digital intensity % SMEs (EU Digital Decade target by

2030: 90%)

Data analytics adoption % enterprises (EU target by 2030: 75%)

Cloud adoption % enterprises (EU Digital Decade target by 2030: 75%)

Artificial intelligence adoption % enterprises (EU target by 2030: 75%)

Academia-business collaboration

Public-private scientific co-publications as % of total number of publications

Public expenditure on R&D financed by business enterprises as % of GDP

Public support for business innovation

Total public sector support for BERD as % of GDP

R&D tax incentives: foregone revenues as % of GDP

BERD financed by the public sector (national and abroad) as % of GDP

Financing innovation

Venture capital as a % of GDP (calculated as a 3-year moving average)

Seed stage funding share (% of total venture capital)

Start-up stage funding share (% of total venture capital)

Later stage funding share (% of total venture capital)

Innovative talent

New graduates in science and engineering per 1000 population aged 25-34

Graduates in the field of computing per thousand population aged 25-34

2012

2017

2020

2021

2022

2023

2024

average

(1)

2.24

0.72

9.6

5.7

55.9

1.49

0.40

5.7

2.8

12.51

72.91

33.17

38.86

13.48

7.7

0.050

0.204

0.102

0.100

0.074

7.3

44.0

48.7

17.5

3.6

USA

2.10

0.88

7.0

4.6

50.6

1.21

0.40

2.1

0.7

11.48

6.4

0.026

0.116

0.000

0.116

0.033

14.2

76.8

9.0

13.6

3.03

1.25

0.65

8.0

4.5

59.0

0.59

0.29

2.4

1.5

10.94

8.7

0.032

0.056

0.000

0.056

0.024

13.8

48.1

38.1

10.7

3.72

1.73

0.75

8.8

65.8

0.95

0.50

3.2

1.2

12.71

8.7

0.049

0.091

0.000

0.091

0.104

23.5

22.0

54.4

9.51

4.19

1.75

0.75

10.2

4.5

67.8

0.98

3.5

1.0

50.52

2.77

8.8

0.039

0.097

0.000

0.097

0.231

19.4

38.7

41.9

9.75

5.50

1.76

0.76

4.7

67.7

0.99

0.50

4.3

0.6

66.95

8.5

0.052

0.100

0.000

0.100

0.343

14.8

47.8

37.4

9.18

4.9

1.84

0.76

4.9

69.8

1.06

4.3

25.57

52.6

5.19

8.6

0.335

15.3

46.1

38.6

71.2

13.89

3.45

0.64

12.3

39.3

2.70

0.30

8.9

0.020

0.251

0.141

0.110

(1) EU average for the last available year or the year with the largest number of country data

Source:

Eurostat, DG JRC, OECD, Science-Metrix (Scopus database), Invest Europe, European Innovation Scoreboard

kom (2025) 0206 - Ingen titel

ANNEX 4: MAKING BUSINESS EASIER

Estonian companies’ competitiveness has

suffered from the weak economic situation

and declining productivity of recent years.

Strong integration into the Single Market, high

business efficiency and a supportive regulatory

framework (especially in entrepreneurship) are

among the key strengths of the Estonian business

environment. Cost pressures and increasing

competition are some of the key challenges for

the industry and particularly for small and

medium-sized enterprises (SMEs).

The level of labour shortages is relatively

low, but the non-availability of skilled labour

remains an issue for Estonia.

75% of the

companies (in line with EU average) listed it as an

obstacle for investment in the 2024 EIB

investment survey (

) and 32% stated it as a

major obstacle (

). Shortages are particularly

prevalent in the STEM sector (see Annex 12). For

example, the European Centre for the

Development of Vocational Training estimates that

almost 14 000 new jobs will be created between

2025 and 2035 in computer programming. This is

over 10 000 more jobs than in any other sector,

demonstrating the changing skill requirements and

employee profile (

). The share of enterprises

providing ICT training in Estonia was still below EU

average in 2024 (

). However, Estonia’s recovery

and resilience plan (RRP) has measures to

facilitate access to transversal skills and Estonia

has reported significant progress in digital skills in

2023.

Estonia is performing above the EU average

in innovation (

However, fewer Estonian firms

reported innovation activity in the last financial

year than in the previous year (only 24% in 2024,

lower to 43% in 2023 and the 2024 EU average

32%) (

). Estonia generally underperforms in

business R&D investment and public support for

business R&D (

). Estonian firms also reported a

share of investment in intangible assets of 26%,

significantly lower than the EU average of 38% (

)

(see Annex 3).

SMEs make up a particularly large share of

Estonia’s industrial firms –

99.9% (

The

share of value added by SMEs in the non-financial

business sector (NFBS) was 81.7% in 2023, the

highest within EU. The share of SME employment

was 82.7%, significantly higher than the EU

average 65.2%, so Estonian SMEs are particularly

(

)

(

)

(

)

(

)

EIB Investment Survey 2024: European Union overview

EIB Investment Survey 2024 Country Overview: Estonia.

CEDEFOP Skills Forecast.

European Innovation Scoreboard 2024 Country Profile

Estonia

Economic framework conditions

GDP growth is expected to be moderate in

2025, but productivity is still weak.

Total

factor productivity declined by 1.3% in 2024 and

is expected to continue declining in 2025. Inflation

and cost pressures in Estonia remain among the

highest in the euro area and a large increase in

nominal labour costs is continuing to weigh on the

economy. Uncertainty about the future is the

greatest obstacle to investment in Estonia, with

88% of firms reporting it as an obstacle (

). The

share of firms investing has remained relatively

stable, but the share of firms expecting to increase

their level of investment dropped significantly in

2024 to a net balance of -12% (

Estonia performed relatively well in terms of

labour and material shortages in 2024.

Only

8.6% of firms faced constraints related to labour

shortages (EU average 20.2%), which was also

slightly lower than in the previous year when the

share had already considerably decreased (

Similarly, only 4.2% of firms faced material

shortages in 2024 (less than half the EU average

of 10%) (

). The vacancy rate has also been

decreasing since 2022(

), with unemployment

increasing in the last two years. Unemployment

reached 7.6% in 2024 and is expected to remain

at the same level in 2025.

(

)

EIB Investment Survey 2024: European Union overview

(

)

EIB Investment Survey 2024 Country Overview: Estonia

(

) ECFIN BCS

(

) ECFIN BCS

(

) Eurostat

(

)

European Innovation Scoreboard 2024 Country Profile

Estonia.

(

)

EIB Investment Survey 2024 Country Overview: Estonia

(

)

European Innovation Scoreboard 2024 Country Profile

Estonia

(

)

EIB Investment Survey 2024 Country Overview: Estonia.

(

)

SME Performance Review 2024 - Estonia country sheet

kom (2025) 0206 - Ingen titel

important

to Estonia’s competitiveness (

). Estonia

is also known for its start-ups and has produced

10 unicorn companies (

Estonian SMEs reported costs of production

and labour as their biggest challenge in

2023.

This was still slightly better than the EU

average and Estonia’s Baltic peers –

at 6.1 (on a

scale from 1 to 10; the EU average was 6.8,

Lithuania 6.3 and Latvia 6.5). Other significant

challenges are competition (where Estonia ranked

worse than the EU average) and the non-

availability of skilled staff and experienced

managers. Estonian SMEs reported a particularly

low level of challenges in access to finance and

regulation (

). The availability of skilled staff was

considered an obstacle to investment by a

particularly large share of micro and small

companies (78%) (

). In 2023, Estonia

experienced the worst decline in the value added

of SMEs (inflation-adjusted) among EU Member

States (minus 20.4%) (

). Estonia is also expected

to remain one of the worst performers in 2024 (

Regarding enabling business infrastructure,

Estonia performs well in logistics.

Estonia has

a good overall score in the World Bank’s Logistics

Performance Index and better than the scores of

its Baltic peers Latvia and Lithuania (

). However,

infrastructure is not Estonia’s

strongest

component within the index. Improvement is

needed in both physical and digital infrastructure,

but neither of these two areas was flagged up as

a significant obstacle to investment in Estonia

(fewer than 30% of respondents considered them

to be an obstacle) (

Estonia has strengthened its digital

infrastructure with significant advancements

in connectivity.

Fibre to the premises (FTTP)

coverage reached 76.9% in 2023

–

well above the

EU average of 64%

–

although rural areas still

(

)

SME Performance Review Annual Report 2023/2024.

(

)

why estonia - Startup Estonia.

(

)

SME Performance Review Annual Report 2023/2024.

(

)

EIB Investment Survey 2024 Country Overview: Estonia

(

) Annual growth rate of SME adjusted for inflation value

added in the NFBS in 2023 in the EU-27 and across EU

Member States

–

Estonia, available in

SME Performance

Review Annual Report 2023/2024

( )

SME Performance Review Annual Report 2023/2024

(

)

Logistics Performance Index (LPI).

(

)

EIB Investment Survey 2024: European Union overview

require substantial improvement (67.8% vs the EU

average of 52.8%). Very high capacity network

(VHCN) coverage stands at 76.9%, slightly below

the EU average of 78.9%. To address connectivity

challenges, Estonia has allocated EUR 24.3 million

through different initiatives under its RRP.

Estonia’s overall 5G coverage reached 87.5% in

2023, just below the EU average of 89.3%. Estonia

has demonstrated strong growth in 5G

deployment, with a 102% annual increase that is

significantly above the EU average of 10%.

However, 5G coverage in the critical 3.4-3.8 GHz

spectrum band remains at 43.7%

–

below the EU

average of 50.6%.

In terms of cybersecurity, Estonia has made

commendable strides in enhancing digital

resilience.

90.9% of enterprises deploy ICT

security measures

–

slightly below the EU average

of 92.8%. The number of enterprises in Estonia

that experienced ICT security incidents leading to

unavailability of ICT services due to attack from

outside increased slightly from 3.1% in 2022 to

3.6% in 2024, exceeding the EU average of 3.4%.

56.7% of Estonian SMEs experienced late

business-to-business payments in 2024.

This

was significantly higher than the EU average of

47.9%, showcasing payment issues in Estonian

businesses (

). In 2023, 54% of companies in

Estonia were affected by late payments. This was

the highest share in the last five years and well

above the EU average. These late payments

resulted in 44% of firms delaying their own

payments to their suppliers in 2023, triggering a

domino effect in late payments down the value

chain. 39% of firms indicated that late payments

were affecting their production and operations,

and 30% indicated that late payments were

delaying their repayments of loans or obliging

them to use additional financing (

). The share of

finance-constrained firms has more than doubled

since last year (according to the latest EIBIS),

mainly due to a greater share of firms being

rejected when applying for finance or thinking that

it was too expensive (see Annex 5).

(

) SAFE survey

(

)

EU Payment Observatory Analysis.

kom (2025) 0206 - Ingen titel

Graph A4.1:

Making Business Easier: selected

indicators.

(1) Regulatory

burden

Regulation as a major

obstacle to investment

24.5

14.9

41.6

EU Trade Integration

57.0

Material shortages as a

factor limiting production

4.2

peers (e.g. 61% for both in Latvia) (

). In addition,

Estonia is one of the best performers in the

OECD’s Product Market Regulation indicator, which

shows that Estonia has fewer regulatory barriers

in product markets than the OECD average.

However, Estonia could further simplify its

regulatory and administrative burden, particularly

in licensing where Estonia is ranked around the

OECD average. It could also further align itself

with best practices, for example by regularly

reviewing and updating the licences required to

start a business (

). The share of firms in Estonia

employing staff to deal with regulatory

compliance is above EU average (

Tax compliance costs for SMEs have

traditionally been relatively low in Estonia

compared to the EU average as well as its

Baltic peers.

While several recent tax reforms

may imply some adjustment costs for smaller

businesses, Estonia’s digitised tax system is likely

to ease the transition and help minimise

compliance burdens. In 2022, Estonia was at the

lower end for both total enterprise tax compliance

cost and corporate income tax (CIT). In terms of

value added tax (VAT) compliance cost, Estonia

was around the EU average in 2022 (

). The

recent tax reforms may make Estonia’s tax

environment less attractive for businesses, but the

corporate tax system is likely to remain favourable

(see Annex 2).

Estonia has taken steps to improve its

insolvency framework in recent years.

Previously, Estonia was considered to have an

average framework in place but scored relatively

low particularly in treatment of failed

entrepreneurs. This might have deterred aspiring

entrepreneurs. Improvement on this, for example

in relation to time to discharge, has taken place

already between 2016 and 2022 (

). However, the

personal cost of insolvency could yet be further

reduced in Estonia (

). In 2023, both business

registrations

and

bankruptcy

declarations

increased in Estonia, with bankruptcies growing by

(3) Shortages

(2) Single

Market

16.6

(4) Late payments

from public entities

47.9

from private entities

56.7

Share (%)

EU27

Share of (1) enterprises, (2) average intra-EU exports and

imports in GDP, (3) firms, (4) SMEs.

Sources:

(1) EIB IS, (2) Eurostat, (3) ECFIN BCS, (4) SAFE

survey.

The attractiveness of Estonia to foreign

investors has generally been quite high.

Estonia is outperforming its Baltic peers and

Finland on foreign direct investment (FDI). The

inward FDI stocks dropped significantly as a share

of GDP in 2022 but returned to almost the

previous level of around 100% in 2023 (97.7%).

This was higher than the EU average of 84.1% (

Regulatory and administrative

barriers

Regulation is less of an obstacle in Estonia

but further simplification is warranted.

48%

of firms see Estonia’s business regulations as an

obstacle to investment. 52% see labour

regulations as an obstacle. Both scores are better

than the average for the EU (66% for business

and 62% for labour regulations) and its Baltic

(

)

EIB Investment Survey 2024: European Union overview

(

)

OECD PMR country note Estonia.

(

)

EIB Investment Survey 2024 Country Overview: Estonia

(

)

Tax compliance costs for SMEs 2022.

(

)

OECD working paper Enhancing insolvency frameworks to

support economic renewal 2022.

( )

OECD Economic Surveys: Estonia 2024.

(

)

Eurostat.

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51.7% (the third fastest rate in the EU). This

increasing trend continued in 2024 (

Estonia is considered to have a supportive

national context for entrepreneurship.

Estonia

scored fifteenth (with a score of 5.4) in the Global

Entrepreneurship Monitor National Entrepreneurial

Context Index 2024/2025, which provides an

overview of how supportive the national context is

to start a new enterprise. Despite a good overall

score, Estonia’s score dropped significantly from

previous year largely due to declines in two

government policy conditions, ‘Support and

Relevance’ and ‘Taxes and Bureaucracy’ as well as

in the ‘Entrepreneurial Education Post-School’

condition. Estonia could improve in particular in

entrepreneurial education, with only 44.7% of

adults in Estonia (which ranked 45 out of 51

countries) considering themselves to have the

skills and knowledge to start a business (

). The

self-employment rate of 10% in Estonia was

below the EU average, particularly in terms of

female and youth self-employment (

fragmentation in those sectors (

). Estonia’s

services trade restrictiveness is generally below

the OECD average and is particularly low in the

insurance sector. However, architectural and legal

services are more restricted than the global

average, particularly for the movement of

professionals (

). This restrictiveness is less

reflected in the intra-EEA trade, Estonia having in

contrast a low level of intra-EEA trade restrictions

e.g. in legal services (

Estonia generally complies well with EU law.

Estonia’s single market transposition deficit was

just above the EU average in December 2024 and

was at the same level as the previous December

at 0.9%. This signals that some further work on

the timely transposition of directives into national

law could be warranted. The transposition of nine

single market directives was overdue (in December

2024) and the average delay in transposing those

directives was also higher than EU average. In

terms of the conformity deficit (the percentage of

wrongly transposed single market directives),

Estonia is performing better than the EU average

(it ranks 12). Estonia had 12 pending single

market infringement proceedings in December

2024, which was half the EU average of 24. This

was an increase on the previous year but Estonia

is still one of the best performers in the

infringement category this year. In 2024, Estonia

resolved 100% of the SOLVIT cases it handled as

lead centre (the EU average was 84.9%) (

Regulatory restrictiveness for professions is

generally lower than the EU average.

However, legal professions are subject to relatively

heavy regulation. Lawyers and notaries in Estonia

face particularly stringent entry and conduct

regulations (

). This can impact competitiveness in

the legal sector.

Single Market

Estonia is a small open economy and

continues to be well integrated into the

Single Market and to actively engage in

international trade.

74% of Estonian companies

engage in international trade (

) and Estonia

scored fifth in terms of EU trade integration,

demonstrating a high degree of EU trade

integration (measured using the percentage ratio

of trade volumes to GDP). This percentage

decreased slightly from last year, in line with a

general trend among EU Member States (57% in

2024, 60% in 2023) (

). However, a large majority

of Estonian exporters (88% vs the EU average of

60%) reported that they have to comply with

different standards and consumer protection rules

in different EU Member States. This share is

particularly high in the manufacturing and

construction sector (94% in 2024), indicating

(

) Eurostat

(

)

GEM Global Entrepreneurship Monitor 2024/2025

(

)

OECD report The Missing Entrepreneurs 2023.

(

)

EIB Investment Survey 2024 Country Overview: Estonia

(

) Eurostat

Public procurement

Estonia continues to have an average

performance in public procurement.

In single

(

)

EIB Investment Survey 2024 Country Overview: Estonia

(

)

OECD Services Trade Restrictiveness Index 2024 Estonia.

(

)

OECD Services Trade Restrictiveness Index 2024 Simulator.

(

)

Country data: Estonia | Single Market and Competitiveness

Scoreboard

(

)

OECD PMR country note Estonia.

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bids, Estonia scored around the EU average in

2024 with 27%, slightly decreasing from 26% in

the previous year. Despite an average

performance in general, Estonia was still among

the worst performers in direct awards in 2024 (the

percentage of public procurement negotiated

without any call for bids), with a score of 13% (

Estonia is making progress on strategic

public procurement.

In particular, Estonia is

taking steps in green public procurement, though

social and innovation procurement is lagging a bit

behind. On socially responsible public procurement,

Estonia has a comprehensive legal framework but

there are only a few good examples in practice,

and there is a general lack of awareness about the

possibilities it offers and how to apply it in

practice. One of the key factors hindering progress

in strategic public procurement is a lack of

professionalism. Estonia has launched (together

with the OECD) a project called ‘Promoting the

Uptake of Strategic Public Procurement in Estonia

through Professionalising the Public Procurement

Workforce’ (

). Completion of this project would

enable both Estonian enterprises and public

authorities to better leverage strategic public

procurement.

(

) Commission internal

(

)

Ministry of Finance, 2023.

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Table A4.1:

Making Business Easier: indicators.

Estonia

POLICY AREA

INDICATOR NAME

2020

Investment climate

Material shortage, firms facing constraints, %

Shortages

Labour shortage, firms facing constraints, %

Vacancy rate, vacant posts as a % of all

available ones (vacant + occupied)

Transport infrastructure as an obstacle to

investment, % of firms reporting it as a major

obstacle

Infrastructure

VHCN coverage, %

FTTP coverage, %

5G coverage, %

7.1

7.9

1.1

21.7

27.2

1.5

20.4

23.3

1.8

4.4

9.1

1.5

4.2

8.6

1.3

10.0

20.2

2.3

2021

2022

2023

2024

EU-27

average

6.7

2.8

73.4

18.3

5.5

76.3

43.3

8.6

76.9

87.5

8.3

13.4

78.8

64.0

89.3

Reduction of regulatory and administrative barriers

Impact of regulation on long-term investment,

Regulatory environment

% firms reporting business regulation as a

8.9

5.6

9.5

major obstacle

Payment gap - corporates B2B, difference in

15.0

13.9

13.2

days between offered and actual payment

Payment gap - public sector, difference in days

13.9

11.0

15.9

between offered and actual payment

Late payments

Share of SMEs

experiencing late

payments, %*

from public or private

entities in the last 6

months

from private entities

in the previous or

current quarter

from public entities in

the previous or

current quarter

14.7

14.9

24.5

15.3

18.1

53.7

15.6

15.1

37.8

48.4

45.2

56.7

47.9

9.0

16.6

Integration

Single Market

EU trade integration, % (Average intra-EU

50.3

imports + average intra EU exports)/GDP

EEA Services Trade Restrictiveness Index

Transposition deficit, % of all directives not

transposed

Conformity deficit, % of all directives

transposed incorrectly

SOLVIT, % resolution rate per country

Number of pending infringement proceedings

0.039

0.5

1.4

100

12.0

58.1

0.039

1.2

0.9

100

8.0

65.4

0.039

0.4

0.9

100

7.0

59.7

0.039

0.9

1.1

100

10.0

57.0

0.042

0.9

0.8

100

12.0

41.6

0.050

0.8

0.9

84.9

24.4

Compliance

Public procurement

Single bids, % of total contractors**

Competition and

transparency in public

procurement

Direct awards, %**

7.0

*Change in methodology in 2024: reporting late payments from public and private entities separately.

** Data on single bids for 2024 is provisional and subject to revision. Due to missing data, the EU average of direct awards data is

calculated without Romania.

Sources:

(1) ECFIN BCS, (2) Eurostat, (3) EIB IS, (4) Digital Decade Country reports, (5) Intrum Payment Report, (6) SAFE survey, (7)

OECD, (8) up to 2023: Single Market and Competitiveness Scoreboard, 2024: Public procurement data space (PPDS).

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ANNEX 5: CAPITAL MARKETS, FINANCIAL STABILITY AND ACCESS TO FINANCE

Estonian firms access only a part of the

above average savings of the country’s

households, also as direct retail participation

in capital markets is low.

Moreover, pension-

fund assets have been decreasing following a

policy change in 2021 that turned the ‘second

pillar’ of pensions into a voluntary savings scheme.

Apart from its very modest size, the country’s

institutional investor base also has a conservative

investment profile and mostly invests outside

Estonia. In addition, over 95% of companies in

Estonia are SMEs, which find it difficult to access

the capital markets and their opportunities. This

leaves internal financing as the main alternative to

bank funding for Estonian firms. Thanks to public

support initiatives, alternative funding through

private equity and venture capital has gained

traction in the country, boosting early-stage

entrepreneurial activity. Nevertheless, financing

gaps remain for companies in the later financing

stages.

Graph A5.1:

Net savings-investment balance

30 % of GDP

-5

-10

2017

2018

2019

2020

2021

2022

2023

Private investment, net

Private saving, net

Borrowing from the rest of the world

Lending to the government

Private saving, gross

Source:

AMECO.

Availability and use of domestic

savings

The Estonian economy invests part of its net

savings abroad.

Over the last decade, the private

savings ratio, net of fixed capital consumption,

fluctuated around its ten-year average of 10.1%

of GDP, reaching a maximum of 13.6% in 2020

(see Graph A5.1). The net private investment ratio,

which measures the net contribution of the private

sector to capital accumulation in the country,

exhibited a ten-year average of 7.3% of GDP and

reached a maximum of 11.1% in 2022. At the

same time, during the same period the

government balance was in regular surplus,

averaging 0.8% of GDP. Thus, except for the last

couple of years, the high positive balance between

net domestic savings and net investment, together

with the government surpluses, resulted in net

lending abroad by Estonia, averaging 0.7% of GDP,

with a peak of 5.4% in 2021. Hence, some of

Estonia’s net savings, i.e. after accounting for the

investments that are necessary to merely maintain

the existing capital structure of the economy, are

used to finance projects abroad, except over the

last couple of years.

The Estonian economy exhibits a negative

net international investment position.

Between 2009 and 2023 the NIIP has

strengthened almost every year, reflecting an

improvement in international competitiveness,

however remaining in negative territory (see Graph

A5.2). As of Q3-2024, total assets on foreigners

reached 172.1% of GDP, while liabilities to

foreigners stood at 185.8% of GDP, resulting in a

negative NIIP of 13.7% of GDP (see Graph A3.2).

The accumulated net portfolio investment, which

reached 38% of GDP as of Q3-2024, did not

suffice to counterbalance a negative net foreign

direct investment balance of -54.7%, together

with net other investments of -2.3%. The stock of

official foreign reserve assets amounted to 5.3%

of GDP. The Estonian economy thus appears to be

a net capital importer, notably mainly by means of

foreign direct investments in the country.

Graph A5.2:

International investment position

250

200

of GDP

150

100

-50

-100

-150

-200

-250

2017

2018

2019

2020

2021

2022

2023

2024-Q3

Foreign Direct Investment, Assets

Other investment, Assets

Foreign Direct Investment, Liabilities

Other investment, Liabilities

Portfolio Investment, Assets

Official reserve assets

Portfolio Investment, Liabilities

NIIP

Source:

ECB.

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Structure of the capital markets and

size of the financial sector

In terms of capital market development,

Estonia lags behind the rest of the EU.

Nevertheless, despite the similar economic

structure and size, stock exchanges of Estonia

have been able to achieve a somewhat higher

level of development than its neighbouring

countries. Whereas the market capitalisation of

listed stocks reached 5.9% in Lithuania and only

1.2% in Latvia, it amounted to 12.2% of GDP in

Estonia at the end of Q3-2024. In comparison, the

EU average is 69.3% of GDP. State and local

government-controlled companies account for

slightly more than a third of market capitalisation

in Estonia. The situation is similar in the debt

securities market: the corporate bond market is

very thin and activity there was very weak even

when low interest rates prevailed in financial

markets over the previous decade.

The

prospects

for

capital

market

development are limited by the low number

of listed enterprises.

Estonia has established a

good market infrastructure, as well as a regulatory

framework that meets international standards,

ensuring adequate market transparency and

investor protection. Nevertheless, local businesses

tend to rely on bank intermediation rather than

attracting investments through stock and bond

issues or from alternative sources. This results in

low interest from institutional and retail investors,

and thus few local opportunities to raise share

capital. As there is a relatively large share of

foreign-owned companies in Estonia, some

companies can borrow from their parent

companies. The small size of the local market also

leads large companies to borrow abroad to a

significant extent and to issue bonds in foreign

markets. Lacking market activity by institutional

investors creates conditions for weak demand for

corporate stocks and bonds. Furthermore, the

level of borrowing by the Estonian general

government is low, and so few government bonds

are issued. In terms of the international market,

projects developed in Estonia are relatively low

value, which makes them less attractive to

international investors. The relative lack of liquidity

in the market, which is reflected in the sluggish

trading activity and in the relatively large spreads

between bid and offer prices, even for the most

liquid shares, hampers attractiveness for short-

term investors and traders.

Over the course of 2024, the Minister of

Finance put together a strategy for the

Estonian capital markets.

In this respect, in

September 2024, for the first time, the state

issued bonds aimed at Estonian retail investors.

The offer was oversubscribed more than four

times. The bond has been listed on Nasdaq Tallinn

where it can be traded on the secondary market.

Moreover, the listing of state-owned companies

was discussed.

Estonia’s monetary financial sector is very

small compared with the EU average and

concentration is high.

At the end of Q3-2024,

banks’ total assets were equivalent to 108.7% of

GDP, significantly below the EU average of

248.1%. The banking sector is highly concentrated,

and borrowing costs are among the highest in the

EU in almost all lending segments. The top five

monetary financial institutions represent more

than 90% the sector, vs. an EU average of 54%.

Foreign presence is high and accounts for over

half of total assets. Notably, Swedbank (

) and

SEB Pank, which are the second and third largest

banks in Estonia, are Swedish owned. While in

2016 the share of domestic banks was still only

6.6%, this share had amounted to almost half of

the sector by end 2023, which is largely due to the

establishment of the Luminor head office in

Estonia in 2019, now the largest bank in terms of

assets, and currently majority owned by US

investment firm Blackstone. Luminor has branches

in Latvia and Lithuania and has sizeable loan

portfolios in these countries. At the end of 2023,

AS Luminor was the biggest entity in terms of

total assets (31%), followed by Swedbank AS

(27%), AS SEB Pank (16%) and then AS LHV Pank

(12%). The financial groups that own the biggest

banks in Estonia often also own the insurance

companies, fund managers and lease companies

with the largest market share through the banks.

Due to its integration with the Nordic banking

systems, the financial sector of Estonia depends

partly on developments in parent banks and their

strategic decisions.

(

)

In October 2021, the ownership of the subsidiary banks in

Estonia, Latvia and Lithuania was placed in the holding

company Swedbank Baltics AS which is wholly owned by

Swedbank AB, and which is under the supervision of the

European Central Bank.

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Graph A5.3:

Capital markets and financial

intermediaries in Estonia

120

100

Non-financial corporations

Insurance corporations

Investment funds

% of GDP

the drop in securities prices (

). According to Eesti

Pank, Estonia's three-pillar pension system saw

assets reach 22% of GDP again in Q3-2024,

driven by significant growth in third-pillar funds

and strong second-pillar returns.

MFIs

Other financials

Government

Financial corporations

Insurance and pension funds

Non-financial corporations

Resilience of the banking sector

Financial soundness indicators suggest that

Estonian banks have remained strong,

despite facing a challenging macroeconomic

environment.

Estonia’s banking sector has coped

relatively well with the multiple shocks in recent

years, from the pandemic crisis to Russia’s

aggression against Ukraine and the energy crisis.

Despite remaining high and still above the EU

average of 20.1%, capital adequacy of Estonian

banks has been steadily declining over time, from

30% in 2017 to 21.2% in Q3-2024 (see Table

A5.1). This ratio comes with heterogeneity across

banks: the two subsidiaries of Swedish banks rely

on internal ratings-based models for certain

segments of their loan portfolios, which

traditionally result in lower risk-weights and higher

capital ratios, even though in the last two years

these ratios have declined. The Common Equity

Tier 1 (CET1) ratio has exhibited a notable

downward trajectory, falling from 30% in 2017 to

19.9% in Q3-2024, however still above the EU

average of 16.6%. The decline reflects reforms to

corporate taxation, which have incentivized banks

to prioritize dividend payouts over profit retention,

but also growing bank leverage and the extension

of banks’ loan portfolios. Differences across

institutions are also significant; especially small

banks exhibit lower buffers.

Eesti Pank and Finantsinspektsioon have

both set additional requirements for the own

funds held by the banks in order to ensure

their resilience.

In response to rapid credit

growth over 2022, the countercyclical capital

buffer (CCyB) was tightened to 1% from

December 2022 and was further raised to 1.5%

effective since December 2023 on top of the base

requirement for own funds and the capital

conservation buffer. The four largest banks have

to hold an additional 2% in own funds for the

(

)

Eesti Pank, 2023, The Structure of the Estonian Financial

Sector.

MFIs

Listed equity

Bonds

Assets by sector

Source:

ECB, EIOPA, AMECO.

The Estonian insurance sector is very small.

The total value of assets of the insurance sector in

EU countries is equivalent to 54.8% of GDP on

average. By contrast, the figure for insurers

registered in Estonia was only 6.6% at the end of

Q3-2024. The small size of insurance-sector

assets in the country can be explained by the

underdevelopment of life insurance. Non-life

insurance has the largest share of the total

insurance market (86% at the end of Q1-2023). A

major role in the Estonian insurance sector is

played by mandatory insurance products that are

compulsory either by law or as a requirement of a

lender financing the purchase of an asset. This

structure is very different from that found in most

EU countries, where life insurance is often used as

a long-term savings product (e.g. to build up

pension pots). About half of all insurers operating

in the Estonian market are branches of foreign

insurance companies; several Estonian insurers

also operate in the Latvian and Lithuanian

markets.

Assets held by Estonian pension funds have

been decreasing following a policy change in

2021 that turned the second pillar pension

into a voluntary savings scheme.

The total

value of pension funds was equivalent to 12% of

GDP at the end of 2022, down from 19% in 2020.

Since the start of 2021, pension investors can exit

the second pension pillar before reaching

retirement age, which 20% of Estonian pension

savers did over 2021. More money was withdrawn

in subsequent waves of exits. In 2022, the value

of pension fund assets declined mainly because of

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systemically important institution buffer. The

internal ratings-based banks have to meet the

own funds requirement by applying a minimum

risk weight of at least 15% on average to the

mortgage-backed claims of Estonian residents.

The profitability of Estonian banks is high.

Over 2023 Estonian banks achieved a record-high

return on equity ratio of 18.5%, which fell back to

17.7% in Q3-2024, still significantly exceeding the

EU average (10%). The profitability of the banks

was mainly bolstered because current accounts

are a large share of total deposits and are

generally not remunerated in Estonia, which

contributes to quite large spreads between interest

income and interest expenses. The dominance of

floating-rate loans, together with the still resilient

quality of the loan portfolio and a relatively high

cost-efficiency have also contributed to a

significant increase in banks' profitability.

Banks’ balance sheets show improved asset

quality.

With an aggregate non-performing loan

(NPL) ratio of 1.2% in Q3-2024, which is below the

EU average of 1.9%, credit quality has improved

significantly over the past years. The level of

problem loans remains good taking into account

the extent of the decline in the economy. Although

problem loans have been growing slowly since the

start of 2023 as a share of the bank portfolios,

that share remains small compared to what was

seen in earlier episodes or in other EA countries.

The biggest deterioration in quality has been in

consumer loans, mostly at smaller banks. The

quality of the corporate loan portfolio is generally

good. Companies in real estate and construction

account for a large part of the loan portfolio of the

Estonian banking sector, but the share of those

loans that are overdue has remained small

throughout the recession. With 31.7% in Q3-2024,

banks’ aggregate coverage ratio of NPLs

by the

provisions made in Estonia remains short of the

EU average by almost 10 percentage points. Yet,

the statistics from the European Central Bank

show that the ratio of restructured, or forborne,

loans to NPLs in Estonia has been one of the

highest in the EA for the past couple of years,

which may indicate that the banks operating in

Estonia handle payment difficulties more

proactively and before the loans become non-

performing.

Funding risk remains low in general and

liquidity ratios remain at a good level.

The

banks get a lot of their funding from local

depositors, but those deposits are still not enough

to finance all of the lending activity of the banks:

the loan-to-deposit ratio was 101% in Q3-2024,

comparable to the EU average of 106.7%.

Alternatives to local deposits are intragroup loans

from foreign parent banks, deposits from other

countries including those taken through deposit

platforms, and covered bonds. Over 2024, the

liquidity coverage ratio increased to 203.6% in Q3-

2024, as demand deposits were partially replaced

by term deposits. As a result, banks’ funding costs

also rised, especially for smaller banks, as these

have lower shares of demand deposits.

Resilience of the non-bank financial

intermediaries

Estonian insurers have a relatively strong

exposure towards the banking sector.

At the

end of 2020 on average approximately 42% of

insurers’ total investment was concentrated

towards banks, according to EIOPA. Moreover, the

bank exposure was predominantly situated with

cross-border banks (65%) and in bank bonds

(mainly covered bonds). Estonian insurers hold

more liquid assets, above the EA median (57%).

Solvency is below the EU average, but significantly

above regulatory limits.

Sources of business funding and the

role of banks

Firms in Estonia rely less than the EU

average on funding from capital markets.

More specifically, the market-funding ratio (

) as

of end-2023 was only 15.8%, compared with an

EU average of 49.6%. At the end of 2023, bank

finance through loans accounted for 25% of all

funding sources for Estonian non-financial

corporations (NFCs), whereas listed shares and

bonds accounted for only 2.3% of funding. The

equivalent figures for the EU average are 27.2%

for bank funding and 23.8% for listed shares and

bonds. The small share of listed shares and bonds

in the capital structure of firms is compensated for

(

) i.e. the volume of corporate bonds and listed shares of NFCs

relative to the volume of those two and bank loans to NFCs.

kom (2025) 0206 - Ingen titel

by the high share of unlisted shares in Estonia,

which is 60% vs an EU average of 24.5%. At

214%, NFC funding as a share of Estonian GDP

more or less corresponds to the EU average of

230.3% of GDP (see Graph A.1).

Estonia has a large share of investment

funded internally.

The primary and most

significant source of funds for companies is equity,

or the internal funds from within that company.

These internal funds are primarily current cash

flows and financial buffers that were built up by

the country’s firms in previous years. This

favouring of internal funding is partly because of

the Estonian income tax system, under which

profits are not taxed until they are paid out as

dividends. It is also partly because Estonian

companies are generally small or medium-sized,

and external funding is more expensive for smaller

companies than it is for large companies.

According to the 2024 EIB Investment Survey (

74% of Estonian firms’ investment

needs are

covered by internal funding, compared with an EU

average of 66%. Moreover, the country has a high

share of finance-constrained firms (16% vs an EU

average of 6.9%).

At the same time, 23% of all Estonian firms

surveyed in 2024 believed that their

investment activities over the last three

years were not sufficient.

This is

–

together

with the other two Baltic countries (Lithuania and

Latvia)

–

one of the highest levels of self-reported

underinvestment among the EU (EU average of

14%), suggesting that there is a financing gap in

Estonia relative to investment demand, especially

for SMEs. Although firms have no major problem

accessing loans in Estonia, there has been a sharp

increase in the share of firms in the country that

are dissatisfied with the cost of finance (up from

5% in 2022 to 26% now). The level of

dissatisfaction among Estonian firms is higher

than in the EU overall (14%). The widespread use

of loan contracts with floating interest rates

means that the recent rise in interest rates has

almost entirely passed through into the loan costs

of Estonian companies, which has put Estonian

companies in a more difficult position than their

foreign competitors because the interest rates on

loans are higher in Estonia.

Although the rate of growth in borrowing by

Estonian companies and households slowed

down in 2023, it is still one of the highest in

the euro area.

Companies’ interest in increasing

their investments or taking loans has been

hampered by falling profits and a large part of

production capacity in the economy remaining

underutilised amidst unusually high interest rates.

Over the course of 2024, credit growth recovered,

as lending standards eased on the back of

expectations of monetary policy easing. However,

credit growth generally remains modest, with the

exception of the real estate and construction

sectors, which have again become the sectors with

the fastest growth in borrowing. For NFCs, annual

credit growth stabilised over 2024 reaching 6.5%

in November 2024. At the end of November 2024,

bank credit accounted for 26.6% of the total

corporate debt portfolio of Estonian firms.

Households have continued to borrow quite

actively despite the recession, as unemployment

has remained moderate while nominal wages have

grown. For households, the annual rate of credit

growth for adjusted loans gradually edged up

from 6.3% in mid-2023 to 7.5% in November

2024. The yearly growth in the stock of housing

loans has accelerated gradually and reached 7%

by the end of September 2024. As debt liabilities

increased at a similar rate to disposable income,

the debt burden of households did not change over

2024.

Graph A5.4:

Composition of NFC funding as % of GDP

250

200

% of GDP

150

100

Loans

Bonds

Trade credit and advances

Listed shares

Other equity

Unlisted shares

The sum of NFC liabilities only reflects the total for the NFC

liabilities considered. Reference period 2023.

Source:

Eurostat and FISMA E2 calculations.

(

)

EIB Investment Survey 2024 - Estonia.

kom (2025) 0206 - Ingen titel

Capital markets and the participation

of retail investors

The market capitalisation of Estonia’s stock

market expressed as a percentage of GDP is

among the lowest in the EU.

The equity market

is extremely small in terms of capitalisation

(equivalent to 12.2% of GDP vs an EU average of

69.3% as of 2024-Q3) and volumes traded. The

capital markets in Estonia have contracted in

recent years, partly due to the country's 2021

pension reforms, which enabled savers to

withdraw funds from pillar 2 pension schemes. In

addition, the start of Russia's war of aggression on

Ukraine has led to a decline in investor sentiment,

resulting in reduced trading and holding by

Estonian investors of international securities. The

small size and low liquidity of the equity markets

has prompted major index providers to continue to

classify Estonia, and also Latvia and Lithuania, as

‘frontier’ markets despite their sound macro-

economic and institutional frameworks.

The funding of NFCs via the capital markets

is very low in comparison with other EU

countries.

The market-funding ratio stood at

15.8% at the end of 2023, vs 49.6% for the EU on

average (

). Local businesses tend to rely on bank

intermediation and own funds rather than

attracting investments through stock and bond

issues or from alternative sources. As there is a

relatively large share of foreign-owned companies

in Estonia, some companies can borrow from their

parent companies. The small size of the local

market also leads large companies to borrow

abroad more often and to issue bonds in foreign

markets. Furthermore, the level of borrowing by

the Estonian general government is low, and so

few sovereign bonds are issued. This all results in:

(i) few local investment opportunities; (ii) low

interest from institutional and retail investors; and

thus (iii) few local opportunities to raise share

capital. The lack of market activity by institutional

investors further weakens demand for corporate

stocks and bonds.

In addition, most companies (over 95%) in

Estonia are SMEs, which find it difficult to

gain access to the capital markets and their

(

) CMU Dashboard indicators

opportunities.

Although Nasdaq’s Baltic First

North Market offers a trading facility with reduced

reporting requirements, targeting primarily smaller

cap issuances, SMEs and start-ups seeking to list

on Baltic First North face a significant challenge

due to the mandatory audit of their financial

statements every six months. Moreover, Estonia

cannot take advantage of this SME market

because there are no established SME growth

markets in Estonia, nor in the other Baltic states.

Graph A5.5:

Composition of household financial assest

per capita and as % of GDP

200

150

100

250

per capita (000 EUR) (lhs)

Currency and deposits

Investment funds

Listed shares

Other equity

% of GDP GDP (rhs)

Insurance and pension funds

Bonds

Unlisted shares

HH Debt (liability)

The sum of household assets only reflects the total for the

household assets considered. Reference period 2023.

Source:

Eurostat and FISMA E2 calculations.

Estonian households’ financial assets have

almost no exposure to bonds, listed shares,

pension funds, or insurance funds.

The saving

rate of Estonian households is relatively low and

they hold relatively few financial assets. In

particular, they hold very little in investment and

pension products. Since the country’s 2021

pension reforms, households’ financial assets held

in pension and insurance funds has fallen from the

equivalent of 21% of GDP in 2020 to perhaps

1.4% of GDP in 2023 (vs. 58.3% in the EU on

average in 2023), according to Eurostat data

(Graph A5.5).

Instead, households’ financial assets

held in investment funds has increased over the

last couple of years to 16% of GDP in 2023, (still

below the EU average of 21% of GDP in 2023). All

in all, the share of households’ total financial

assets held in pension funds, insurance funds or

directly in financial investment instruments was

equivalent to barely 17% in 2023, substantially

short of the EU average of 79%. Instead, the most

investment instrument most preferred by Estonian

households is private equity (unlisted shares),

followed by bank deposits. The government

introduced an investment account system in 2011,

kom (2025) 0206 - Ingen titel

but this has achieved only moderate success. One

reason for this is that certain popular investment

vehicles, such as equity crowdfunding, have been

excluded from the benefits of this system,

including the ability to defer income tax.

Recent policy initiatives aim to promote the

degree of retail participation in Estonian

financial markets.

In September 2024, the

Estonian

state

issued,

for

the

first

time, government bonds to retail investors. These

government bonds offer small investors a fixed

interest rate and the opportunity to trade those

bonds on the Tallinn Stock Exchange. The offer

was oversubscribed by more than four

times. Encouraging the build-up of universal

funded supplementary pension schemes would

positively contribute to (i) the sustainability and

adequacy of pension benefits; (ii) investment in

equity; (iii) access to finance; (iv) growth; and (v)

innovation.

majority of the insurance sector’s investments

are

made abroad.

Pension funds have contributed to the

development of the Estonian capital

markets, but their domestic investment

remains low.

Thanks to the Investment Funds Act

of 2016, pension funds in the country were given

more opportunities to invest in Estonia. However,

only about 11% of pension-fund assets are now

held in Estonian assets. One of the challenges of

developing the Estonian capital markets would

therefore be to incentivise the pension funds to

invest more domestically by creating the right

capital markets eco-system.

The participation of domestic institutional

investors in providing funding for start-ups

and venture-capital investors is increasing.

The three Baltic states (Estonia, Latvia and

Lithuania) and the European Investment Fund

have created the Baltic Investment Funds, a joint

‘fund of funds’ investing in private equity and

venture capital in the region. This has injected

significant momentum into the Estonian private-

equity market. This initiative has encouraged

pension funds and other private investors to enter

the market, investing in domestic private-equity

funds.

The role of domestic institutional

investors

Estonia’s institutional investor base remains

very small.

Total assets under the management

of domestically based pension funds, insurance

corporations and investment funds at the end of

2022 were equivalent to 22.4% of Estonian GDP,

one of the lowest levels in the EU (where the

average is equivalent to more than 100% of GDP).

Domestic institutional investors allocate only a

very small portion of their portfolio to domestic

financial assets.

Estonian insurers favour secure fixed-income

investment instruments and have a

relatively large exposure to the banking

sector.

The investment instruments most

preferred by insurance companies are fixed-

income securities (about 70%), mostly comprised

of corporate bonds (e.g. of banks) and (foreign)

government bonds. Estonian insurers hold another

15% in investment funds and equity. The

European Insurance and Occupational Pensions

Authority

calculated

that

average

approximately 42% of Estonian

insurers’ total

investment was concentrated in banks at the end

of 2020. These investments were predominantly in

the equity of cross-border banks (65%) and in

bank bonds (mainly covered bonds). The large

The depth of venture and growth

capital

Even though its venture-capital and private-

equity markets are very young, Estonia is

one of the leading private-equity/venture-

capital ecosystems in the EU.

According to the

CMU Dashboard, Estonia leads Europe in annual

venture-capital investments relative to GDP, with

new venture-capital investments equivalent to

0.44% in 2022, and 0.15% in 2023 (vs. an EU

average of 0.08% and 0.05% respectively).

Equally, the country leads in terms of annual

private-equity investments relative to GDP

(equivalent to 1.3% of GDP in 2022 vs and EU

average of 0.6%). Finally, Estonia also dominates

in terms of capital raised through IPOs, which was

equivalent to 1.5% of the country’s GDP in 2023,

vs an EU average of 0.1%. In the past eight years,

listed companies in Estonia have raised more than

EUR 1.2 bn through public share offerings.

Moreover, crowdfunding and peer-to-peer (P2P)

kom (2025) 0206 - Ingen titel

lending platforms have grown rapidly to offer

alternative debt-based funding. Nevertheless, gaps

have been identified in both: (i) the later financing

stages for companies, where capital requirements

are higher; and (ii) the very early stages, where

risk is too high for some investors. Nevertheless,

early-stage entrepreneurial activity in Estonia is

significantly higher than the EU average. The

country also has a high number of unicorn

companies, relative to its size (see annex on

Innovation to business).

Estonia has high ambitions to become a

major European hub for the finance sector

and for those developing pioneering financial

solutions.

In this regard, Finantsinspektsioon, the

country’s financial supervisory authority has taken

the initiative to create an innovation hub. In 2023,

Finantsinspektsioon also launched a regulatory

sandbox to help FinTech companies adapt their

technology to local regulatory requirements. The

government is also in the midst of creating a

FinTech strategy, as the country does not have one

yet, unlike Latvia and Lithuania. Furthermore,

Estonia’s high ambitions in the e-finance

domain

are underscored by new legislation introduced by

the Ministry of Finance that will set operational

and supervisory requirements for the FinTech

sector. The bill includes provisions to cover

crowdfunding platforms and platforms that

facilitate investment in crypto assets. Moreover,

the bill will require all virtual currency-service

providers licensed by the FSA to apply for activity

licences.

companies, the SmartCap Green Fund set up with

the EU money is now providing anchor

investments in two specialist green-tech venture-

capital funds and extending its direct investment

focus to take in companies ready to scale up. The

Green Fund was set up in 2022 by state-owned

fund-management company SmartCap, whose

main role is to act as a fund of funds, using public

money to attract in private investment. Estonia

also uses European Investment Bank finance and

EU cohesion policy funds to move faster towards a

carbon-neutral and more digital society.

Financial literacy

Financial literacy in Estonia is above the EU

average.

According to a 2023 Eurobarometer

survey (

), Estonians exhibit a higher level of

financial literacy than the EU average. Specifically,

23% of Estonians have a high level of financial

literacy, 61% a medium level, and 16% a low

level, outperforming the EU averages of 18%

(high), 64% (medium), and 18% (low). Financial

literacy is crucial for promoting retail-investor

participation in capital markets but also for

familiarising SMEs with alternatives to bank

financing.

Financing the green transition

Sustainable finance in Estonia is still in the

initial stages of development.

The average

issuance in the country over 2021-2023 of bonds

with environmental, social, and governance

objectives as a share of Estonia’s total bond

issuance was one of the lowest of all EU Member

States (

). However, Estonia is leveraging

EUR 100 mn from the NextGenerationEU recovery

fund to bolster venture capital for green

technology start-ups and scale-ups. After initially

offering direct investment to early-stage

(

) Source: AFME CMU Key Performance Indicators, Seventh

Edition, November 2024.

(

) Source:

Monitoring the level of financial literacy in the EU -

July 2023 - Eurobarometer survey.

kom (2025) 0206 - Ingen titel

Table A5.1:

Financial indicators

Total assets of MFIs (% of GDP)

Common Equity Tier 1 ratio

Total capital adequacy ratio

Overall NPL ratio (% of all loans)

NPL (% loans to NFC-Non financial corporations)

NPL (% loans to HH-Households)

NPL-Non performing loans coverage ratio

Return on equity

Loans to NFCs (% of GDP)

Loans to HHs (% of GDP)

NFC credit annual % growth

HH credit annual % growth

Stock market capitalisation (% of GDP)

Initial public offerings (% of GDP)

Market funding ratio

Private equity (% of GDP)

Venture capital (% of GDP)

Financial literacy (composite)

Bonds (as % of HH financial assets)

Listed shares (as % of HH financial assets)

Investment funds (as % of HH financial assets)

Insurance/pension funds (as % of HH financial assets)

Total assets of all insurers (% of GDP)

Pension funds assets (% of GDP)

11-17

18-24

25-27

1-3

4-10

Banking sector

2017

104.7

30.0

30.6

1.9

3.2

1.6

25.4

2018

99.1

30.3

31.0

1.3

2.2

1.3

25.0

2019

101.1

25.7

26.3

1.6

2.5

1.7

34.4

2020

123.4

27.0

27.8

1.6

1.9

1.6

30.9

2021

121.4

23.3

24.3

1.1

1.4

0.9

30.6

2022

104.7

20.9

22.0

0.8

1.2

0.6

32.9

2023

109.3

20.9

22.2

1.1

1.0

34.1

18.5

25.7

32.0

5.8

6.4

13.1

1.45

15.8

0.28

0.14

46.5

0.4

3.2

12.3

1.1

6.3

2024-Q3

108.7

19.6

21.2

1.2

1.3

1.1

31.7

17.7

25.6

32.6

4.2

7.0

12.2

6.6

248.4

16.6

20.1

1.9

3.5

2.2

42.1

10.0

30.0

44.5

0.8

0.7

69.3

0.05

49.6

0.41

0.05

45.5

2.7

4.8

10.0

27.8

54.8

23.4

9.2

9.8

8.3

7.4

9.5

10.9

28.8

27.7

25.6

27.4

26.3

25.3

33.6

32.9

32.5

35.0

32.9

31.5

5.8

4.7

2.7

3.4

6.8

11.7

7.1

6.6

6.4

5.1

7.9

11.1

10.8

9.9

9.8

11.1

17.1

12.8

0.21

0.84

0.00

0.02

0.84

0.23

23.1

24.5

24.1

22.3

22.5

20.5

0.04

0.67

2.41

1.27

1.60

1.26

0.02

0.12

0.09

0.10

0.47

0.42

0.2

0.3

1.5

1.4

1.6

2.0

3.4

2.8

1.4

1.2

1.3

1.4

11.9

10.4

14.5

14.3

15.4

1.5

1.1

7.3

7.2

7.0

7.3

7.2

5.9

16.7

19.0

Colours indicate performance ranking among 27 EU Member States.

Non-banks sector

Annualised data.

Credit growth and pension funds EU data refers to the EA average.

Source:

ECB, ESTAT, EIOPA,

DG FISMA CMU dashboard,

AMECO.

kom (2025) 0206 - Ingen titel

ANNEX 6: EFFECTIVE INSTITUTIONAL FRAMEWORK

Estonia’s institutional framework influences

its competitiveness.

While trust in the national

government and justice is above the EU average,

trust in regional and local authorities has

decreased recently. Overall, Estonia has a well-

established regulatory framework and a

productive civil service. Estonia has made

remarkable progress in digital public services,

surpassing EU Digital Decade targets for both

citizens and businesses (

) The country is

perceived as a good place for doing business, with

effective justice and relatively low administrative

burden.

Graph A6.1:

Trust in justice, regional / local authorities

and in government

0.9

0.8

0.7

administration (EU: 23%) (

). The perceived quality

of government has improved and stands above

the EU average (

). In 2022 the government

launched a pilot project for regional development

agreements with wider territorial scope. These

agreements bring together central, regional and

local administrations and non-governmental

organisations to agree on the design of sectoral

policies

and

measures

encourage

entrepreneurship and competitiveness.

Quality of legislation and regulatory

simplification

Overall performance in developing and

evaluating legislation is above the EU

average.

It has also remained broadly stable over

2021-2024. Performance in regulatory tools like

ex ante impact assessments and stakeholder

engagement is stronger than for ex post

evaluation of legislation. It is also stronger for

primary laws than for subordinate regulations.

There is scope for strengthening oversight and

quality controls of regulatory impact assessments

and ex post evaluation of legislation for both

primary and secondary legislation (Graph A6.2).

In 2023, the government prepared an open

government roadmap (

) to improve public

consultations

which

contained

recommendations for state institutions and local

governments. It also drew up a roadmap on public

engagement in EU affairs (

). One of the new

requirements is that all ministries will prepare an

annual public engagement plan and make this

available to stakeholders.

Estonia has mechanisms for simplifying

regulation and identifying administrative

burdens.

However, these typically apply to some

(and not all) primary laws. Additional practices,

such as conducting in depth reviews of specific

regulatory areas and public stocktakes of

(

)

Understanding Europeans’ views on reform needs

- April

2023 - - Eurobarometer survey

(

)

Inforegio

–

European Quality of Government Index

(

)

Open government roadmap (2023).

(

)

Public engagement roadmap in EU matters: sample

documents

0.6

0.5

0.4

0.3

0.2

0.1

Autumn

Summer

Autumn

Winter

Spring

Winter

Spring

2014 2015

2016

2017

2018

2019 2020 2022

2023

2024

Justice, legal system EU27

Justice, legal system EE

Regional or local public authorities EU27

Regional or local public authorities EE

Government EU27

Government EE

(1) EU27 from 2019; EU28 before

Source:

Standard Eurobarometer surveys

Public perceptions

Trust in national government and justice is

above the EU-27 average

(Graph A6.1). Trust in

regional and local authorities has decreased

recently. When asked about aspects that can

increase trust in Estonia’s public administration,

53% of citizens pointed to more transparency

about decisions and the use of public money (EU:

44%), 46% to less bureaucracy (EU: 52%) and

34% to more moral integrity in the public

(

) The Digital Decade Policy Programme sets out a pathway for

the EU’s digital transformation, including concrete

commitments from Member States to jointly achieve

objectives (e.g.

competitiveness, resilience, sovereignty)

and digital targets by 2030.

kom (2025) 0206 - Ingen titel

Table A6.1:

Estonia. Selected indicators on administrative burden reduction and simplification

Ex ante impact assessment of legislation

When developing new legislation, regulators are

required to …

Ex post evaluation of legislation

Is required to consider the consistency of regulations

and address areas of duplication.

Is required to contain an assessment of administrative

burdens.

Is required to contain an assessment of substantive

compliance costs.

Compares the impact of the existing regulation to

alternative options.

Periodic ex post evaluation of existing regulations is

mandatory.

Government uses stock-flow linkage rules when

introducing new regulations (e.g., one-in one-out).

A standing body has published an in-depth review of

specific regulatory areas in the last 3 years.

In the last 5 years, public stocktakes have invited

businesses and citizens to assess the effectiveness,

efficiency, and burdens of legislation.

Identify and assess the impacts of the baseline or

‘do nothing’ option.

Identify and assess the impacts of alternative non-

regulatory options.

Quantify administrative burdens of new

regulations.

Quantify substantial costs of compliance of new

regulations.

Assess macroeconomic costs of new regulations.

Assess the level of compliance.

Identify and assess potential enforcement

mechanisms.

Yes / For all primary laws

For major primary laws

For some primary laws

No / Never

(1) This table presents a subset of iREG indicators focusing on regulatory costs. The indicators refer to primary legislation.

Source:

OECD (2025), Regulatory Policy Outlook 2025 [https://doi.org/10.1787/56b60e39-en] and Better Regulation across the

European Union 2025 (forthcoming).

legislation

could

further

enhance

such

mechanisms (table A6.1). Reducing administrative

burden is closely linked to advancing digital

government in Estonia. Since 2020, the

government has launched a set of measures to

reduce reporting burden for companies by means

of data-sharing between agencies. The first phase

was aimed at sharing data from reporting on

wages, salaries and labour costs. The next phase

will focus on data relating to economic

transactions,

accommodation

and

the

environment ( ).

Estonia actively promotes innovation in

policymaking

(

). An innovation award funded by

the 2021-2027 EU cohesion policy encourages

projects that contribute to economic growth and

business development in Estonia, as well as

innovation procurement. One such example of

innovation procurement is a public sector

experimentation guide created for public sector

entities (

). Moreover, Estonia has committed in

the future to allocating 2% of the total public

procurement volume and 5% of total procurement

costs to innovation procurement (

Graph A6.2:

Indicators of Regulatory Policy and

Governance (iREG)

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0

Primary laws Subordinate Primary laws Subordinate Primary laws Subordinate

regulations

EE_Stakeholder

engagement

EE_Regulatory Impact

Assessment

EE_Ex-post evaluation of

legislation

Methodology

Transparency

2021

Systematic adoption

Oversight and quality control

EU-27

Source:

OECD (2025), Regulatory Policy Outlook 2025 and

Better Regulation across the European Union 2025

(forthcoming).

(

)

Data-based reporting | Statistikaamet

(

)

Public Sector Innovation Awards | Government Office

(

)

Innotiim esitleb avaliku sektori katsetamise juhendit |

Riigikantselei

(

)

Riigihangetes hakatakse hindama innovatsiooni | Majandus-

ja Kommunikatsiooniministeerium

kom (2025) 0206 - Ingen titel

Table A6.2:

Key Digital Decade targets monitored through the Digital Economy and Society Index

Estonia

2022

Digitalisation of public services

Digital public services for citizens

Score (0 to 100)

EU-27

2024

2023

2022

2024

2023

Digital Decade

target by 2030

EU-27

100

2030

100

2030

100

2030

2021

Digital public services for businesses

Score (0 to 100)

2021

2022

2023

Access to e-health records

Score (0 to 100)

2021

2022

2023

Source:

State of the Digital Decade report 2024

The OECD product market regulation

indicators show that Estonia’s licensing

system is slightly more burdensome than the

EU-27 average and could be further aligned

with best practices.

For example, although the

government keeps an up-to-date online inventory

of all permits and licences required/issued to

businesses by public bodies, there is no

requirement for the government to regularly

assess whether such licences and permits are still

required or should be withdrawn (see also

Annex 4). Moreover, the B-READY indicators (

)

show considerable potential for cutting the time it

takes to obtain building and environmental

permits. Unlike 19 other EU Member States,

Estonia does not have a dedicated institution for

promoting pro-productivity policies.

the Collective Agreements Act entered into force,

establishing criteria to extend collective

agreements. Prior to the legislative change, there

were altogether three sectoral (extended)

collective agreements in two sectors: one in health

care and two in transport (one covering freight

transport, the other covering passenger transport).

Strengthening social dialogue remains important in

order to increase collective bargaining coverage.

Technical Assistance allocates nearly EUR 1 million

to trade union and employers’ main organisations.

In addition, ESF+ currently supports social dialogue

with around EUR 400 000.(

)

Digital public services

Estonia is among the EU’s top performers in

terms of digital public services

(Table A4.2) It

is using AI to improve quality of digital public

services (

100

). Estonia has excelled also in terms of

access to e-health records. It achieved a score of

97.5 in 2023, compared to an EU average of 79.1.

Citizens can access all relevant health data online

through the national e-health portal which

integrates records from public and private

providers.

However,

accessibility

and

interoperability are hindered slightly by the

absence of an e-health mobile application.

(

) For an analysis of the involvement of

Estonia’s

social

partners at national level in the European Semester and the

Recovery and Resilience Facility, see Eurofound (2025),

National-level social governance of the European Semester

and the Recovery and Resilience Facility.

(

100

)

https://www.ria.ee/en/state-information-system/machine-

learning-and-language-technology-

solutions/burokratt#implementation

Social Dialogue

The involvement of social partners in

reforms and policies in Estonia has improved

in recent years but remains limited.

The main

challenges are related to the relatively low

collective bargaining coverage rate (only 19% in

2021) as well as the extremely low density of

trade union and employers’ organisations

(respectively 6% and 25% in 2019(

)). The last

measure concerning the social dialogue was

implemented in November 2021, when changes in

(

) World Bank. 2024. Business Ready 2024. Washington, DC:

World Bank. doi:10.1596/978-1-4648-2021-2.

(

) OECD/AIAS database on Institutional Characteristics of Trade

Unions, Wage Setting, State Intervention and Social Pacts

(ICTWSS)

kom (2025) 0206 - Ingen titel

Estonia is advancing towards seamless,

automated exchange of authentic documents

and data across the EU.

It has developed the

necessary infrastructure and is beginning the

process of connecting up the first authorities to

the Once-Only Technical System (

101

The proportion of e-government users

reached 94.7% in 2023

(EU 75%), while the

proportion of Estonians using eID reached more

than double the EU average (EE 89.4%; EU 41.1%)

(

102

). However, Estonia has not yet set up and

notified eID schemes for legal persons under the

eIDAS Regulation(

103

). This means that Estonian

businesses cannot authenticate themselves to

access public services provided by other Member

States, including those enabled by the Once-Only

Technical System(

104

), part of the EU Single Digital

Gateway.

Graph A6.3:

Participation rate of 25-64 year olds in

adult learning (%) by occupation

Civil service

A high level of skills among Estonian civil

servants has enabled a productive civil

service.

Estonia has a very high proportion of civil

servants with higher education qualifications (EE

72.2%; EU 54%(

105

)). The proportion of civil

servants pursuing continuous training is also far

above the EU average (Graph A6.3). Although the

average age of civil servants in Estonia is among

the lowest in the EU, the country has identified

several agencies where ageing may become a

concern. Workforce ageing is occurring faster at

local government level. In 2023, staff turnover

decreased to 14.2%, compared to 16.4% in 2022.

A major reason why civil servants are leaving their

jobs is an increase in the public administration’s

workload without a corresponding increase in

resources. Civil service restructuring is another

reason (

106

). In 2023, legal amendments reduced

salary growth for senior civil servants up until 1

April 2028.

Integrity

A lower percentage of companies than the EU

average consider corruption to be a problem.

In Estonia, only 36% of companies consider that

corruption is widespread (EU average 64%), while

only 10% consider that corruption is a problem

when doing business (EU average 36%) (

107

Moreover, 52% of companies believe that people

and businesses caught for bribing a senior official

are appropriately punished (EU average 31%) (

108

Some high-level corruption cases are ongoing,

including proceedings against a former minister.

However, there are no ongoing foreign bribery

cases. (

109

) Furthermore, only 7% of companies (EU

(

105

) Eurostat. Employees by educational attainment level, sex,

age.

(

106

) Civil Service Yearbook 2023, MoF (2024). Available at:

https://www.fin.ee/sites/default/files/documents/2024-

05/ATAR%202023.pdf

(Accessed on 05/01/2025).

(

107

) Flash Eurobarometer 543 on businesses’

attitudes towards

corruption in the EU (2024).

(

108

) Ibid.

(

109

) See the 2024 country-specific chapter for Estonia of the

Rule of Law Report, p. 10.

EU-27

2021

EU-27

2022

EU-27

2023

EU-27

2024

Public administration and defence; compulsory social security

High-skilled occupations

Unskilled occupations

Total economy

Medium-skilled occupations

Armed forces

Source:

European Commission, based on the Labour Force

Survey

(

101

) European Commission,

Once-Only Technical System

Acceleratormeter.

(

102

) European Commission.

Digital Decade 2024: Country reports

(

103

) European Commission,

eIDAS Dashboard.

(

104

) European Commission,

The Once Only Principle System: A

breakthrough for the EU’s Digital Single Market

kom (2025) 0206 - Ingen titel

average 27%) think that corruption has prevented

them from winning a public tender or a public

procurement contract in practice in the last three

years (

110

). Healthcare, the local government and

political party financing as well as obtaining

residence and work permits are considered to be

at high-risk of corruption (

111

Estonia has implemented a public register

for lobbyists and discussions were initiated

on introducing lobbying rules in Parliament.

As with most Member States, Estonia has

implemented rules on government. Moreover,

specific guidelines on ‘revolving doors’ are

currently being developed by the Public Ethical

Council and are expected in 2025. In addition,

political groups started discussions on possible

guidelines on lobbying also for Parliament, which

could foster transparency in corporate lobbying.

(

112

)

Justice

The justice system is performing efficiently.

The length of court proceedings in first instance

civil and commercial cases has increased (from

158 days in 2022 to 196 days in 2023). The

length of court proceedings in first instance

administrative cases has remained stable year-on-

year (166 days in 2022, 167 days in 2023). The

number of pending cases is among the lowest in

the EU. The quality of the justice system is

considered to be good overall. Estonia is among

the best performing Member States in terms of

digitalisation of justice. As regards judicial

independence, no systemic deficiencies have been

reported. (

113

)

(

110

) Flash Eurobarometer 543 on businesses’

attitudes towards

corruption in the EU (2024).

(

111

) See the 2024 country-specific chapter for Estonia of the

Rule of Law Report, p. 14.

(

112

) Ibid., p. 12.

(

113

) For more detailed analysis see the upcoming 2025 EU

Justice Scoreboard and the 2024 Rule of Law Report.

kom (2025) 0206 - Ingen titel

SUSTAINABILITY

ANNEX 7: CLEAN INDUSTRY AND CLIMATE MITIGATION

Estonia

faces

significant

challenges

regarding its clean industry transition and

climate mitigation,

specifically in transitioning

away from oil shale and increasing its net zero

technology

manufacturing

capacity

(with

commitments made to cease electricity production

from oil shale by 2035 and to phase out oil shale

in energy production by 2040), as relevant policy

frameworks and incentive schemes remain limited.

The country relies heavily on imports for critical

raw materials, posing a geopolitical risk. Its

greenhouse gas emissions reduction efforts in

transport lag behind targets. In the sustainable

industry domain, Estonia's circular economy

transition is hindered by low recycling rates and

underinvestment, requiring substantial policy and

financial commitments to improve resource

productivity and waste management. This annex

reviews the areas in need of urgent attention in

the areas of clean industry transition and climate

mitigation in Estonia, looking at different

dimensions.

manufacturing capacity.

A few relevant

incentive schemes are in place, targeting batteries

and storage technologies. Focusing on small to

medium-sized enterprises, Estonia provides grants

for the development of green technologies,

including net zero technologies, as part of its

recovery and resilience plan. In addition, the

Estonian clean tech association, representing over

130 clean tech companies, is working together

with the Ministry of Climate on a roadmap for the

clean technology sector (

116

One of the main challenges to Estonia’s

clean transition is the continued use of oil

shale, a particularly resource-intensive fossil

fuel.

In terms of resource productivity, measured

as gross domestic product (GDP) over domestic

material consumption (DMC), Estonia was among

the worst EU performers in 2023 (

117

). In domestic

extraction used, which is a significant component

within the domestic material consumption, fossil

fuels represent a large share for Estonia (almost

30%). Despite a decrease in 2023, the domestic

extraction of fossil fuels remains above the 2020

level at 8.1 tonnes per capita (7.4 tonnes in 2020).

(

118

). The country is however making progress in

reducing the production and use of oil shale (

119

The transition away from oil shale means that jobs

and skills needs are shifting too; increasing green

skills through reskilling and upskilling is

particularly important for Estonia (see Annex 12

on Education and Skills).

Transforming the car industry

Faster transition to electric vehicles would

advance decarbonisation in Estonia.

While

Estonia does not have a domestic car

manufacturing industry, it is among the five

countries with the highest motorisation rate in the

EU, with 630 cars per thousand inhabitants in

2023. In terms of car age, Estonia has one of the

oldest car fleets in Europe, with 32.3% of cars

being older than 20 years (

120

). For new cars

purchased in 2023, Estonia was among the

(

116

)

The Estonian Cleantech Association, 2024

(

117

)

Eurostat

(

114

) European Commission: Directorate-General for Energy, The

net-zero manufacturing industry landscape across the

Member 2025,

https://data.europa.eu/doi/10.2833/2181110.

(

115

)

European Commission

(

118

)

Statistics Estonia

(

119

)

Statistics Estonia, 2024

(

120

)

Eurostat

Strategic autonomy and technology

for the green transition

Estonia’s manufacturing capacity across all

net zero technologies remains modest, but

there is potential for innovative technologies

(

114

). Estonia hosts innovative wind turbine

companies such as Eleon, and focuses on research

and innovation within the industry. It plans to

establish a large, cutting-edge manufacturing base

and innovation platform for new-generation

offshore wind technology solutions. Estonia is also

home to advanced solutions in battery and storage

technologies and electrolysers. In hydrogen,

Estonia has an active industrial community, and

Estonian companies are involved in two Important

Projects of Common European Interest (IPCEIs) on

the hydrogen value chain (

115

Currently, Estonia has no policy framework

aiming at scaling up its net zero technology

kom (2025) 0206 - Ingen titel

countries with the highest share of petrol-powered

cars (75.5%). Only 6.3% of newly purchased

vehicles in 2023 in Estonia were fully electric,

which is slightly below both Baltic peers Latvia and

Lithuania and well below the EU average of 14.5%

(

121

in an environmentally friendly manner (

127

). In

addition, Estonia is in a position to become an

important player in magnet manufacturing. A plant

for the production of permanent rare earth

magnets, used for example in the manufacture of

electric vehicles, is expected to start operations in

2025 (

128

Critical raw materials

Estonia mines oil shale and peat but relies on

imports for critical raw materials.

The country

ranks 136th out of 183 countries in the Mining

Contribution Index (

122

). However, Estonia is home

to one of Europe’s largest phosphorite

deposits (

123

). A recent report by the Geological

Survey of Estonia showcases north Estonia’s

potential for critical raw materials and

recommends further studies (

124

). In terms of

import dependencies for critical raw materials,

Estonia import concentration is around the EU

average of 0.22, which indicates a moderate

degree of import dependency. The main critical

raw materials imported to Estonia from non-EU

countries in 2023 were titanium (Russia, Saudi-

Arabia) and rare earth elements (Russia) (

125

). This

indicates a particularly high degree of geopolitical

risk.

Aside from domestic primary production,

recycling and increased use of secondary

materials can help reduce dependency on

imports.

Estonia performs well in the circular use

of materials. In recent years it has been among

the top five EU performers, with a circular material

use rate of 21.4% in 2022 compared to the EU

average of 11.5%(

126

Estonia is taking a leading role in rare earth

metal separation.

Two ongoing studies of the

University of Tartu supported by the Just

Transition Fund focus on the extraction of rare

earth metals from raw materials (e.g. natural ores)

Climate mitigation

Industry decarbonisation

Manufacturing production in Estonia has a

low greenhouse gas emissions intensity, and

only accounts for a minor share of total

emissions.

Around 8% of Estonia’s total

greenhouse gas emissions come from industry,

among the lowest share in the EU (

129

). With

120 g CO2eq per euro of gross value added (GVA),

the emissions intensity of manufacturing in

Estonia only amounts to 44% of the EU average

(270 g) and is the fourth lowest in the EU.

Between 2017 and 2022, the emissions intensity

of Estonia’s industry

declined by 62%, significantly

more than in the EU overall where it declined by

20%. Emissions related to industry processes and

product use account for a relatively large share of

emissions from manufacturing, 51%. In the EU

overall, this is at 43%, with the rest related to

energy use.

The recent decline of the greenhouse gas

emissions

intensity

Estonia’s

manufacturing in both categories is due to

cleaner energy sources and energy efficiency

improvements.

Between 2017 and 2022, both

the energy- and non-energy-related emissions

intensity of manufacturing declined by around

(

127

)

Invest in Estonia, 2024

(

128

)

Invest in Estonia, 2023

(

129

) In 2023. Manufacturing includes all divisions of the

“C”

section of the NACE Rev. 2 statistical classification of

economic activities. In the remainder of this section, unless

indicated otherwise, data on manufacturing refer to the

divisions of the NACE section C excluding division C19

(manufacture of coke and refined petroleum products), and

the year 2022. The source of all data in this section is

Eurostat; data following the UNFCCC Common Reporting

Framework (CRF) are from the European Environment Agency

(EEA), republished by Eurostat.

(

121

)

European Environment Agency

(

122

)

Mining Contribution Index (MCI) 6th edition

(

123

)

The Geological Survey of Estonia, 2023; See also Annex 8.

(

124

)

The Geological Survey of Estonia, 2025

(

125

)

JRC RMIS Country Profile Estonia

(

126

)

Eurostat

kom (2025) 0206 - Ingen titel

60%, among the largest declines in the EU (

130

). In

the same period, the share of electricity and

renewables in final energy consumption of the

manufacturing sector increased by 9 percentage

points, to 61%, the fifth highest in the EU; the

energy intensity of manufacturing in Estonia

declined by 28%, from 1.4 GWh to 1.0 GWh per

euro of GVA. Estonian energy-intensive industries

have been particularly affected by high energy

prices, and in 2024 energy costs were reported as

an obstacle to investment by 73% of Estonian

companies (

131

Graph A7.1:

GHG emissions intensity of manufacturing

and energy-intensive sectors, 2022

3.5

sector, which emits 1 kg of greenhouse gases per

euro of GVA, Estonia’s energy-intensive

sectors

have very low emission intensities of production,

between 0.1 and 0.5 kg

CO2eq/€, well below EU

levels as a whole.

Estonia has started putting in place policies

to support the decarbonisation of the

industry.

It has adopted policies to deploy

renewables such as offshore wind and measures

to improve energy efficiency and support the

hydrogen economy as part of its long-term

development strategy

‘Estonia

2035’.

Reduction of emissions in the effort sharing

sectors

To attain its 2030 target for the effort

sharing sectors, Estonia needs to swiftly

specify and implement further climate

mitigation policies (

133

GHG emissions from

Estonia’s effort sharing sectors in 2023 are

expected to have been 2.8% below those of 2005.

By 2030, current policies are projected to reduce

them by 13.5% relative to 2005 levels; additional

policies currently considered by Estonia are

projected to achieve reductions of a further 3.9

percentage points. This results in a sizeable

shortfall against Estonia’s effort sharing target of

24%, of 6.6 percentage points (

134

). Swift and

steady adoption and implementation of further

climate mitigation measures will be critical. While

Estonia plans to use domestic flexibilities available

under the Effort Sharing Regulation, this would not

be sufficient to close the gap.

Swift action on decarbonising transport

appears particularly exigent in Estonia.

(

133

)The national greenhouse gas emission reduction target is

set out in Regulation (EU) 2023/857 (the Effort Sharing

Regulation), to align the action in the sectors concerned

with the objective of reaching the EU-level economy-wide

target of greenhouse gas reductions of at least 55%

relative to 1990 levels. The target applies jointly to the

sectors outside the current EU emissions trading system,

notably buildings (heating and cooling), road transport,

agriculture, waste, and small industry (known as the effort

sharing sectors).

(

134

) The emissions from effort sharing sectors for 2023 are

based on approximated inventory data. The final data will be

established in 2027 after a comprehensive review.

Projections on the impact of current policies (‘with existing

measures’, WEM) and additional policies (‘with additional

measures’, WAM) as

per Estonia’s

final updated national

energy and climate plan.

KG CO

eq / €

2.5

1.5

0.5

C-C19

C17

Estonia

C20

EU-27

C23

C24

Source:

Eurostat.

Estonia’s energy-intensive

industries (

132

) are

not large greenhouse gas emitters.

They

account for 8% of Estonia’s manufacturing GVA

(2022). Except for paper and paper products

(

130

) For the GHG emissions intensity of GVA related to energy use

and industrial processes and product use respectively, GHG

emissions are from inventory data in line with the UNFCCC

Common Reporting Format (CRF), notably referring to the

source sectors CRF1.A.2

–

fuel combustion in manufacturing

industries and construction and CRF2

–

industrial processes

and product use. The CRF1.A.2 data broadly correspond to

the NACE C and E sectors, excluding C-19. GVA data (in the

denominator for both intensities) are aligned with this

sectoral coverage. Therefore, they are not fully consistent

with the data referred to in other part of this section.

(

131

) See the

EIB Investment Survey 2024 Country Overview:

Estonia.

For a detailed analysis of energy prices, see Annex 8

on the affordable energy transition.

(

132

) Notably, the manufacture of paper and paper products

(NACE division C17), of chemicals and chemical products

(C20), “other” non-metallic

mineral products (C23; this

division includes manufacturing activities related to a single

substance of mineral origin, such as glass, ceramic products,

tiles, and cement and plaster), and basic metals (C24). To

date, these industries are energy-intensive

–

i.e. consuming

much energy both on site and/or in the form of purchased

electricity

–

and greenhouse gas emissions intensive, in

various combinations.

kom (2025) 0206 - Ingen titel

Between 2005 and 2023, greenhouse gas

emissions from road transport increased by 23%

in Estonia, while they decreased by 5% in the EU

overall. Speeding up climate mitigation in these

sectors would help protect households, businesses

and transport users in Estonia from the impact of

the forthcoming carbon price.

Graph A7.2:

Greenhouse gas emissions in the

effort sharing sectors, 2005 and 2023

MtCO2e

2005

Domestic transport (excl. aviation)

Agriculture

Waste

2023

Buildings (under ESR)

Small industry

Estonia, despite low municipal waste

generation per capita, struggles with

recycling and composting due to insufficient

systems

and

overcapacity in

waste

treatment facilities.

Although Estonia is one of

the Member States with the lowest municipal

waste generation per capita, its 33% rate of

preparing for reuse and recycling in 2022 put it

significantly below the estimated EU average of

49% in the same year (see Graph A7.3). In

addition, concerns have been raised about

Estonia’s

lack of a unified waste data

management system at the local level and about

the quality of the data provided. Estonia started

diverting municipal waste from landfilling by

putting in operation a mechanical biological

treatment plant. Finally, the share of composting

and digestion is rather low, at 5% in 2022, due to

an insufficient separate collection system and

uneven capacity for treating biowaste across

regions.

Graph A7.3:

Municipal waste treatment

600

500

Source:

European Environment Agency.

Sustainable industry

400

369

383

395

373

Circular economy transition

Despite some positive trends, Estonia still

lags behind on the circular transition.

Estonia’s circular

material use rate has been

increasing since 2014 (it reached 21.4% in 2022,

with a negative change in 2023 to 18.1%) and is

still above the EU average of 11.8%. Nevertheless,

Estonia remains one of the worst EU performers

for material usage and resource productivity. In

2023, Estonia generated EUR 0.63 per kg of

material against the EU average of EUR 2.23 (

135

The material footprint of 29.9 tonnes per capita in

2023 is the fourth highest value in the EU and

more than double the EU average of 14 tonnes per

capita, indicating an over-consumption of raw

materials.

Kg per capita

300

200

100

2019

2020

2021

2022

2023

Material recycling

Composting and digestion

Landfill/disposal

Total incineration (incl. energy recovery)

Waste treatment unspecified

EU-27 total waste per capita

Source:

Eurostat

(

135

) Resource productivity measures the total amount of

materials directly used by an economy in relation to GDP.

Improving resource productivity can help to minimise

negative impacts on the environment and reduce

dependency on volatile raw material markets.

There is scope for Estonia to implement additional

policies to increase circularity. In 2023, Estonia

adopted a white paper outlining the broad

objectives and framework for the transition to a

circular economy. In the same year, Estonia also

kom (2025) 0206 - Ingen titel

published a circular economy action plan (

136

)

under the recovery and resilience plan. The action

plan groups together 10 key actions for the

transition from across the policy landscape. Other

circular economy-related activities in the plan

include: support for the digitalisation of the

economy: reskilling of workers; and the adoption of

resource-efficient green technologies.

Current investment in the circular transition

is insufficient.

To meet its environmental

objectives for the circular economy and waste,

Estonia needs to increase circular economy

investments by an estimated EUR 54 million per

year, with an additional EUR 12 million needed for

waste management action. Combined, this

amounts to EUR 66 million per year, representing

0.18%

of Estonia’s GDP

(

137

). To close the circular

economy investment gap, EUR 14 million is

needed for recent initiatives, such as eco-design

for sustainable products, packaging and packaging

waste, labelling and digital tools, critical raw

materials recycling, and measures proposed under

the amendment of the Waste Framework

Directive. A further EUR 40 million in investment is

needed to unlock Estonia’s circular economy

potential.

Zero pollution industry

Air quality in Estonia is generally good, with

some exceptions.

The latest available annual

estimates (for 2022) by the European Environment

Agency for Estonia attribute 100 deaths each year

(or 880 years of life lost (YLL)) to fine particulate

matter (PM

2.5

); 10 deaths each year (or 180 YLL)

to nitrogen dioxide (NO

); and 30 deaths each year

(or 1 300 YLL) to ozone.

Estonia’s rate for pollutant releases to air is

around the EU average.

The emissions of

several air pollutants have decreased significantly

since 2005, while GDP growth has continued.

According to the inventories submitted under

Article 10(2) of the National Emission Reduction

Commitments (NEC) Directive in 2024, Estonia has

met its emission reduction commitments for

2020-2029 for air pollutants, NOx, non-methane

(

136

) Ministry of Climate, 2023,

Eesti taaste ja vastupidavuskava

raames sätestatud ringmajanduse tegevuskava,

Link.

(

137

) European Commission, DG Environment,

Environmental

investment needs & gaps assessment programme,

2025

update. Expressed in 2022 prices.

volatile organic compounds (NMVOC), sulfur

dioxide (SO

), ammonia (NH

) and PM

2.5

. According

to the latest projections submitted under

Article 10(2) of the NEC Directive, Estonia is on

track to meet its emission reduction commitments

for 2030 onwards for NO

, NMVOC, SO

, NH

and

2.5

. Estonia submitted its updated national air

pollution control programme to the Commission on

30 March 2023. To meet its environmental

objectives on pollution prevention and control

(towards zero pollution), Estonia needs to provide

an additional EUR 66 million per year (0.18% of

GDP), mostly related to measures on clean air (

138

(

138

) European Commission, DG Environment,

Environmental

investment needs & gaps assessment programme,

2025

update. Expressed in 2022 prices.

kom (2025) 0206 - Ingen titel

Table A7.1:

Key clean industry and climate mitigation indicators: Estonia

Strategic autonomy and technology for the green transition

Net zero industry

Operational manufacturing capacity 2023

- Solar PV (c: cell, w: wafer, m: module), MW

- Wind (b: blade, t: turbine, n: nacelle), MW

Automotive industry transformation

Motorisation rate (passenger cars per 1000 inhabitants), %

New zero-emission vehicles, electricity motor, %

Critical raw materials

Material import dependency, %

Climate mitigation

Industry decarbonisation

GHG emissions intensity of manufacturing production, kg/€

Share of energy-related emissions in industrial GHG emissions

Energy-related GHG emissions intensity of manufacturing

and construction, kg/€

Share of electricity and renewables in final energy consumption

in manufacturing, %

Energy intensity of manufacturing, GWh/€

Share of energy-intensive industries in manufacturing production

GHG emissions intensity of production in sector [...], kg/€

- paper and paper products (NACE C-17)

- chemicals and chemical products (NACE C20)

- other non-metallic mineral products (NACE C23)

- basic metals (NACE C24)

Reduction of effort sharing emissions

GHG emission reductions relative to base year, %

- domestic road transport

- buildings

2005

Effort sharing: GHG emissions, Mt; target, gap, %

Sustainable industry

Circular economy transition

Material footprint, tonnes per person

Circular material use rate, %

Resource productivity, €/kg

Zero pollution industry

Years of life lost due to PM2.5, per 100,000 inhabitants

Air pollution damage cost intensity, per thousand € of GVA

Water pollution intensity, kg weighted by human factors per bn € GVA

191

28.1

0.2

702

571

27.5

0.9

2018

30.6

13.8

0.6

6.2

Estonia

2019

28.7

15.3

0.7

2020

28.4

16.4

0.8

2021

26.9

20.0

0.9

2022

27.5

21.4

1.0

2023

29.9

18.1

1.0

0.70

0.17

3.96

0.22

0.62

0.17

3.60

0.20

2018

18.3

-11.5

0.72

0.17

3.91

0.17

2019

16.8

-19.1

0.94

0.13

0.67

0.18

2020

9.9

-23.2

0.95

0.14

0.30

0.11

2021

-7.6

13.2

-26.7

2021

5.7

2017

0.35

44.7

122.6

52.4

1.41

2018

0.33

52.4

122.1

53.4

1.41

Estonia

EU-27

50-100 (m)

2017

550

0.10

2017

2018

563

0.32

2018

23.4

2019

598

0.28

2019

24.4

- Electrolyzer, MW

- battery, MWh

2020

608

1.78

2020

26.7

2021

620

2.15

2021

30.4

2022

622

3.37

2022

25.3

2023

630

6.30

2023

19.2

Trend

2018

539

1.03

2018

24.2

2021

561

8.96

2021

22.6

Estonia

2019

0.33

50.5

120.3

47.2

1.27

2020

0.18

49.1

79.4

55.1

1.18

2021

0.11

41.2

54.3

57.8

1.04

2022

0.12

48.8

49.7

61.1

1.01

8.4

0.97

0.25

0.45

0.13

2022

-10.6

18.1

-41.9

2022

5.5

1.21

0.33

0.66

0.08

2023

-2.8

22.7

-32.0

2023

6.0

2023

0.14

50.8

63.9

1.02

EU-27

2017

0.34

44.8

158.4

43.3

1.29

2022

0.27

42.5

132.9

44.2

1.09

7.3

0.73

1.25

2.53

2.79

2018

1.4

21.4

0.68

1.26

2.24

3.49

2023

5.2

32.9

WAM

-6.6

Target

-24.0

Trend

WEM

-10.5

EU-27

2018

14.7

11.6

2.1

2021

15.0

11.1

2.3

Source:

Net zero industry:

European Commission:

The net-zero manufacturing industry landscape across Member States: final

report,

2025.

Automotive industry transformation:

Eurostat.

Critical raw materials:

Eurostat.

Climate mitigation:

See

footnotes in the "climate mitigation" section; reduction of effort sharing emissions:

EEA greenhouse gases data viewer;

European

Commission,

Climate Action Progress Report,

2024.

Sustainable industry:

Years of life lost due to PM2.5: Eurostat and EEA,

Harm to human health from air pollution in Europe: burden of disease status,

2024. Air pollution damage: EEA,

EU large industry

air pollution damage costs intensity,

2024. Emissions covered: As, benzene, Cd, Cr, Hg, NH3, Ni, NMVOC, NOX, Pb, dioxins, PM10,

PAH, SOX. Water pollution intensity: EEA,

EU large industry water pollution intensity,

2024. Releases into water covered from

cadmium, lead, mercury, nickel. Other indicators: Eurostat.

kom (2025) 0206 - Ingen titel

ANNEX 8: AFFORDABLE ENERGY TRANSITION

This annex outlines the progress made and

the ongoing challenges faced in enhancing

energy competitiveness and affordability,

while advancing the transition to net zero.

examines the measures and targets proposed in

the final (draft) updates to the national energy

and climate plans (NECPs) for 2030.

In 2024, Estonia has progressed towards a cleaner

energy system, has massively developed its

renewable electricity production, and has achieved

the synchronisation project with the European

continental grid. The most pressing challenges

revolve around high energy prices, and security of

supply linked with security of energy

infrastructure.

trends, with the exception a lower taxes and levies

component for non-household consumers (8.6%

compared to 15% for EU) and higher than average

gas network costs (17.8% in Estonia compared to

7.1% in the EU) also for non-household

consumers.

Graph A8.2:

Monthly average day-ahead wholesale

electricity prices and European benchmark natural gas

prices (Dutch TTF)

Energy prices and costs

Graph A8.1:

Retail energy price components for

household and non-household consumers, 2024

(i) the Title Transfer Facility (TTF) is a virtual trading point for

natural gas in the Netherlands. It serves as the primary

benchmark for European natural gas prices.

(ii) Baltics and CWE respectively provide average prices in the

Baltic market (Estonia, Latvia, and Lithuania) and central-

western European market (Belgium, France, Germany,

Luxembourg, the Netherlands, and Austria).

Source:

S&P Platts and ENTSO-E

(i) For household consumers, consumption band is DC for

electricity and D2 for gas. Taxes and levies are shown

including VAT.

(ii) For non-household consumers, consumption band is ID for

electricity and I4 for gas. Taxes and levies are shown

excluding VAT and recoverable charges, as these are typically

recovered by businesses.

Source:

Eurostat

Estonia retail energy prices in 2024 remained

consistent with 2023 levels,

still below the EU

average for households' electricity (-22%) and gas

(-34%) and industry electricity prices (-16%), but

above the EU average in the case of industry gas

prices (+7%). The share of the energy and supply

component for both gas and electricity prices

decreased between 2023 and 2024, following the

same trend as the EU average. Retail prices

components (energy and supply, network costs,

taxes and levies) shares in Estonia follow EU-wide

Estonia’s wholesale electricity prices were,

at an average of 86.5 EUR/MWh in 2024 (

139

on par with the other Baltic states but above

the EU average (81 EUR/MWh).

Prices in

Estonia declined early in the year amid falling

natural gas costs. They then surged during the

spring/summer, diverging from Central Western

European markets. Electricity consumption

decreased in Estonia compared with 2023, but the

650 MW Estlink 2 connection, which usually brings

cheaper electricity from Finland as well as limited

non-fossil flexibility, was out of service and this

created a supply-demand gap in the summer. This

gap was mainly covered by higher imports from

Latvia (increasing almost tenfold in summer

2024 (

140

) vs 2023) where not only hydropower

but also costly natural gas-fired generation were

ramped up (respectively +45% (

141

) and +13% in

summer 2024 vs summer 2023), especially during

peak demand hours. Consequently (and to a

(

139

) Fraunhofer (ENTSO-E data).

(

140

) June to August.

(

141

) ENTSO-E.

kom (2025) 0206 - Ingen titel

greater extent than in 2023), these conditions

drove concentrated price spikes in evening hours

(18h-21h), when solar output declined and

demand remained high. However, average daytime

hourly prices throughout the year were lower than

in 2023, probably due to the uptake of solar

output in Estonia (+28% in 2024) and in

neighbouring markets (

142

). Prices in Estonia and

the Baltic region then stabilised in the winter,

supported by stronger wind generation than in

2023 (

143

) and Estlink 2 returning to operation in

September, while Central Western European

markets faced strong price spikes due to the

Dunkelflaute (

144

Flexibility and electricity grids

Estonia is part of the Baltic capacity

calculation region (CCR) (

145

). It is connected to

Finland and Latvia and indirectly to Sweden via the

Estlink interconnectors and the Baltic transmission

network. In 2024, the regional electricity trade

continued to be influenced by the Baltic region’s

dependence on imports from the Nordic countries

(especially Finland). Congestion in the Estlink

interconnectors is hindering full price convergence

with Finland. Similarly, cross-border capacity with

Latvia is sometimes limited and this affects

market integration with the rest of the Baltic

region. Member States should ensure that a

minimum of 70% of technical cross-border

capacity is available for trading. Estonia’s

wholesale electricity market faces challenges due

to its small size and reliance on oil shale

generation, which frequently acts as the main

driver of prices (especially when renewable

generation is low).

The

EU Member States’ electricity interconnection

target is at least 15% by 2030, but Estonia’s level

of electricity interconnection is already 59.63%

and therefore four times higher than the EU

(

142

) Fraunhofer (ENTSO-E data).

(

143

) In November-December 2024, electricity generation from

wind power amounted to 0.07 TWh in Latvia (+73% vs the

same period in 2023), 0.37 TWh in Estonia (+210%) and

0.8 TWh in Lithuania (+53%).

144

( ) Yearly electricity data, Ember (generation and consumption

data throughout the paragraph).

145

( ) Estonia, Latvia, Lithuania, Poland, Finland and Sweden are

part of the Baltic capacity calculation region (CCR). A CCR is a

group of countries that calculate cross-border electricity

trade flows together.

target. This is an important basis for the

synchronisation of the Estonian electricity system

with the EU electricity system, which successfully

took place in February 2025. The investment part

of the synchronisation project has been

progressing well. It is crucial to speed up the

upgrades of Estlink 1 and Estlink 2, which have

suffered delays. Further attention should also be

paid to advancing the Estonian-Latvian offshore

Elwind project. Estonia has other important

projects to ensure the efficient functioning of the

energy market by improving cross-border

interconnections, such as EstLink 3 between

Estonia and Finland and the Estonia-Latvia

‘fourth

interconnection’ (both of these could be completed

by 2035). Price differentials between Finland and

Estonia and recent incidents affecting undersea

cables underscore the importance of these

projects. Estonia actively participates in the Baltic

Energy Market Interconnection Plan (BEMIP) High

Level Group to boost regional cooperation with

neighbouring countries.

Estonia is reforming its energy infrastructure

permitting processes to increase renewable

development.

Legislation was amended in 2024

streamline

planning,

permitting

and

environmental impact assessment processes for

wind energy projects, and to establish wind priority

development areas (1 000 MW total capacity). This

is part of Estonia’s recovery and resilience plan

(RRP).

No comprehensive data are available on

renewable energy sources (RES) curtailment

in 2024.

ACER (basing its calculations on ENTSO-E

data) observed 129 instances of negative prices in

Estonia in 2023.

Estonia is actively expanding its energy

flexibility

through

energy

storage

deployment, demand response solutions and

market integration.

Eesti Energia developped

Estonia’s

first large-scale

storage system, a

26.5MW BESS, with larger projects also in

development. Some renewable energy developers

have announced plans to construct battery energy

storage systems in Estonia (as stand-alone

systems or coupled with additional generation

capacity). These are expected to be operational in

2025.

Estonia has implemented a smart metering

system that gives 99% of consumers access to a

smart meter. Dynamic price contracts are offered

kom (2025) 0206 - Ingen titel

to household consumers, facilitated by the

availability of smart meters. The Estonian

government

did

not

implement

direct

compensation measures for household energy bills

in 2024 (as it had in previous years). The focus

instead shifted towards long-term strategies to

enhance energy security and stabilise prices.

Regarding energy communities, the concepts of

energy communities (ECs) and renewable energy

communities (RECs) are defined in legislation,

which also contains some rights and obligations.

According to the draft NECP, Estonia is planning to

promote individual and collective self-consumption

of renewable energy and RECs by issuing a

handbook for RECs. The draft NECP does not set

quantitative targets for self-consumption or for

ECs. The framework would generally benefit from

further improvements.

Electricity

accounted for 20.1% of Estonia’s

final energy consumption (FEC) in 2023

(slightly below the EU average of 22.9%) and

this share has slightly increased in the last

decade (

146

partly due to an unfavourable

electricity-to-gas

price

ratio

that

disincentivizes electrification and cost-

effective decarbonization.

Electricity accounts

for 19.9% and 45.5% of

households’ and

industry’s FEC respectively. The transport sector’s

FEC is negligible at 0.6%. Further progress in

electrification across sectors is required in order to

cost-effectively decarbonise the economy and

bring the benefits of affordable renewable

generation to consumers.

In 2024’s second

semester, Estonia had relatively low retail

electricity prices, but its household electricity-to-

gas price ratio reached 2.8. For this consumer

segment, while price differentials discourage

electrification, taxes and levies for electricity and

gas are similar, leaving little room for fiscal

adjustment. For energy-intensive industries on the

other hand, the electricity-to-gas price ratio was

below the EU average but still affected by a fiscal

burden skewed towards electricity. Taxes and

levies made up 8,5% of electricity costs and 5,1%

for gas, increasing the price ratio from 2.4 to 2.5.

(

147

)

Renewables and long-term contracts

Graph A8.3:

Estonia's installed renewable capacity

(left) and electricity generation mix (right)

“Other”

includes renewable municipal waste, solid biofuels,

liquid biofuels, and biogas.

Source:

IRENA, Ember

In 2024, renewable energy sources (RES)

accounted for 57% (vs 47% in the EU as a

whole), an increase on 50% in 2023 (

148

Renewable installed capacity in Estonia surged by

52% in 2024, from 1 456 MW in 2023 to 2 226

the following year. Estonia’s total wind capacity in

Estonia was 594 MW (+70%) in 2024 (all of this

was onshore). As regards the acceleration of solar

deployment, total installed capacity was 1326 MW

in 2024 (+63%). Estonia’s share of renewable

electricity is projected to reach 100% in 2030.

Wind power will become the main source of

renewable electricity (with a 73% share and

6.84 GW of installed capacity), followed by solar

PV (with a 11% share and 1 GW of installed

capacity).

Estonia’s framework is now moderately-to-

strongly aligned with the Commission’s

Recommendation on Permitting(

149

). The

(

147

) Analysis based on Eurostat data for the second semester of

2024. For household consumers, consumption band is DC for

electricity and D2 for gas, which refer to medium-sized

consumers and provide an insight into affordability. For non-

household consumers, consumption band is ID for electricity

and I4 for gas, referring to large-sized consumers, providing

an insight into international competitiveness (price used for

the calculation excludes VAT and other recoverable

taxes/levies/fees as non-household consumers are usually

able to recover VAT and some other taxes).

(

148

) Yearly electricity data, Ember.

(

149

) Commission Recommendation (EU) 2024/1343

(

146

)

The

CAGR (compound annual growth rate) was -0.3%

between 2013 and 2023. The minimum/maximum shares

were 20.1% and 24.3% respectively. Source: Final energy

balances, Eurostat.

kom (2025) 0206 - Ingen titel

Estonian authorities have taken several important

steps in this regard, including introducing

legislation that enables favourable permit-

granting procedures and streamlining offshore

permit-granting procedures. Estonia has developed

a comprehensive procedural manual for project

developers and municipalities. A single contact

point mediates exchanges between project

developers and relevant authorities. A single

unified application process for marine activities

has been introduced. The digitalisation of all

permit procedures has improved efficiency and

transparency. Environmental regulations are

characterised by clearly defined deadlines,

including maximum duration times for the entire

permitting process. More could be done (for

instance, by allowing sandboxing) because lack of

implementation may be delaying development of

more innovative research projects. Estonia’s RRP is

set to fund a project to strengthen the expertise of

local authorities in the area of renewable energy

by hiring specialists, but the results of this

measure remain to be seen.

Estonia has made a commitment to have

400 MW installed onshore wind capacity by

2026 as part of the Wind Pledges under the

European Wind Power Action.

According to the

draft NECP, Estonia will develop 1.3 GW of

onshore wind and 1 GW of offshore wind by 2030.

These goals are consistent with Estonia’s non-

binding agreement (as defined by the non-binding

goals in the 2023 EU Sea Basins agreements).

However, no new schedule on the expected

allocation of support for renewables has yet been

released on the Union Renewables Development

Platform. The Commission Recommendation(

150

)

that was issued following the adoption of the draft

plan underlines the importance of developing

comprehensive long-term planning for the

deployment of renewable energy (particularly

wind) in order to increase visibility for the EU’s

manufacturing industry and grid operators in line

with the European Wind Power Package.

In the draft NECP, Estonia refers to the use of

tenders to shift nearly half of the central

government’s electricity consumption to renewable

energy by means of power purchase agreements

(PPAs).

Energy efficiency

Estonia continues to make significant

progress towards the 2030 EU targets for

energy efficiency.

Primary energy consumption

(PEC) decreased by 12.9% to 4.11 Mtoe in 2023.

Final energy consumption (FEC) decreased by 5.9%

to 2.61 Mtoe. Compared with 2022, FEC decreased

in all main sectors: by 5.9% in industrial, by 2.9%

in residential, by 1.0% in transport and by 20.7%

in services. This progress is above the EU average

and highlights Estonia’s commitment to energy

efficiency. The recast Energy Efficiency Directive

requires Estonia to reach a PEC of 3.14 Mtoe and

a FEC of 2.53 Mtoe by 2030.

Estonia has not notified its comprehensive

heating and cooling assessment.

This

assessment should identify the potential for the

application of high-efficiency cogeneration and

efficient district heating and cooling, as required

by Article 25(1) of the recast Energy Efficiency

Directive. No estimate is available on when it will

be done.

Estonia needs to step up its efforts in the

residential sector if it is to make a

meaningful contribution to the 2030 building

decarbonisation milestone set in its latest

long-term renovation strategy (LTRS).

Residential FEC decreased between 2022 and

2023 but, from a medium-term perspective, it has

been stagnating or even slightly increasing since

2018 (when climate corrections are applied).

Heating and cooling represented more than

85% of Estonia’s FEC in 2022.

Approximately

20 000 heat pumps were sold in 2023 (a decrease

of 8% on 2022). Financial subsidies are available

for up to 70% of the cost of replacing an old boiler

with a heat pump or other environmentally

friendly alternatives. Estonia’s relatively high

of renewables in heating and cooling (66.67% in

2023) is mainly related to biomass use. Heat

pumps cover slightly more than 10% of this share.

Estonia continues to rely mostly on grant-

based funding schemes for energy efficiency

and the use of financial instruments remains

limited.

No new schemes were created for the

financing of energy efficiency in 2024, but several

previously implemented schemes remain in place

(e.g. the Green Fund and the Apartment Building

(

150

) Commission recommendation (EU) 2024/606

kom (2025) 0206 - Ingen titel

Reconstruction grant). As regards EU funds,

Estonia’s RRP, which was updated in 2023 to

address REPowerEU objectives, continued to drive

progress in 2024 (particularly through increased

investment in residential and service buildings).

measures accounted for the full volume.

Additionally, Estonia’s 2023 Effective Carbon

Rate(

154

)

averaged EUR 96.85 per tonne of CO₂,

above the EU weighted mean of EUR 84.80(

155

Security of supply and diversification

Estonia already banned imports and

purchases of Russian natural gas in 2022.

Estonia reduced its natural gas demand by 28%

between August 2022 and July 2024, but this was

well below the EU’s 15% target. Estonia accesses

natural gas via Lithuania’s ‘Independence’ floating

storage regasification unit (FSRU) in Klaipeda,

Finland’s Inkoo FSRU via the Balticconnector and

Latvia’s Inčukalns underground storage facility.

Estonia’s energy mix saw a notable shift

towards renewables from 27.7% in 2022 to

34.6% in 2023.

Domestically sourced oil shale

remained the main source, though its share did

decrease slightly from 60.5% to 58.2%. Natural

gas usage remained relatively stable, rising

marginally from 6.0% to 6.3%.

The Estonian governing coalition took a

decision in principle in 2024 to initiate a

special plan for the potential location of a

future nuclear power plant.

Estonia does not

currently have nuclear capacity.

Fossil fuel subsidies

In 2023, environmentally harmful(

151

) fossil fuel

subsidies without a planned phase-out before

2030 represented 0.11%(

152

)

of Estonia’s GDP(

153

below the EU weighted average of 0.49%. Tax

(

151

) Direct fossil fuel subsidies that incentivise maintaining or

increasing in the availability of fossil fuels and/or use of

fossil fuels.

(

152

) Numerator is based on volumes disclosed by the Estonian

authorities via the 2025 NECPR reporting. For all Member

States, it includes public R&D expenditures for fossil fuels as

reported by the IEA (Energy Technology RD&D Budgets) and

excludes, for methodological consistency, excise tax

exemption on kerosene consumed in intra-EU27 air traffic.

(

153

) 2023 Gross Domestic Product at market prices, Eurostat.

(

154

) The Effective Carbon Rate is the sum of carbon taxes, ETS

permit prices and fuel excise taxes, representing the

aggregate effective carbon rate paid on emissions.

(

155

) OECD (2024), Pricing Greenhouse Gas Emissions 2024

kom (2025) 0206 - Ingen titel

Table A8.1:

Key Energy Indicators

Estonia

2021

Household consumer - Electricity retail price (EUR/KWh)

Energy & supply [%]

Network costs

Taxes and levies including VAT

VAT

Household consumer - Gas retail price

Energy & supply

Network costs

Taxes and levies including VAT

VAT

Non-household consumer - Electricity retail price

Energy & supply

Network costs

Taxes and levies excluding VAT

Non-household consumer - Gas retail price

Energy & supply

Network costs

Taxes and levies excluding VAT

Wholesale electrity price (EUR/MWh)

Dutch TTF (EUR/MWh)

0.1631

46.8%

28.9%

24.2%

16.7%

0.0592

63.0%

13.9%

23.1%

16.7%

0.1058

56.3%

17.3%

11.6%

0.0409

63.7%

13.6%

7.1%

86.5

n/a

2023

0.2249

50.1%

27.6%

22.4%

16.7%

0.0945

69.1%

10.3%

20.6%

16.6%

0.1494

59.6%

16.6%

8.6%

0.0745

71.7%

10.3%

1.6%

91.0

n/a

2022

0.2353

56.1%

22.0%

21.9%

16.7%

0.1098

72.9%

7.0%

20.1%

16.7%

0.1906

67.7%

10.3%

6.5%

0.1098

76.0%

5.1%

2.6%

192.0

n/a

2024

0.2257

48.6%

28.2%

23.3%

18.0%

0.0738

58.3%

18.0%

23.7%

18.0%

0.1361

56.8%

18.1%

8.6%

0.0533

59.8%

17.8%

5.3%

87.0

n/a

2021

0.2314

36.6%

26.7%

36.7%

14.5%

0.0684

43.7%

22.5%

33.8%

15.5%

0.1242

43.0%

15.8%

30.4%

0.0328

66.2%

7.7%

12.5%

111.0

46.9

2022

0.2649

54.3%

25.3%

20.3%

13.4%

0.0948

61.0%

17.3%

21.7%

11.6%

0.1895

66.5%

10.7%

9.9%

0.0722

77.3%

3.8%

6.1%

233.2

123.1

2023

0.2877

55.6%

24.8%

19.6%

13.8%

0.1121

64.5%

17.1%

18.4%

10.2%

0.1971

63.0%

11.9%

11.2%

0.0672

77.3%

5.3%

7.3%

99.1

40.5

2024

0.2879

47.8%

27.2%

25.0%

14.6%

0.1128

53.9%

18.3%

27.8%

13.6%

0.1661

55.8%

15.5%

15.4%

0.0517

68.7%

7.1%

11.6%

84.7

34.4

2017

Gross Electricity Production (GWh)

Combustible Fuels

Nuclear

Hydro

Wind

Solar

Geothermal

Other Sources

Gross Electricity Production [%]

Combustible Fuels

Nuclear

Hydro

Wind

Solar

Geothermal

Other Sources

Net Imports of Electricity (GWh)

As a % of electricity available for final consumption

Electricity Interconnection [%]

Share of renewable energy consumption - by sector [%]

Electricity

Heating and cooling

Transport

Overall

13,160

12,397

723

94.2%

0.0%

0.2%

5.5%

0.1%

0.0%

-2,734

-35.3%

63.2%

17.6%

52.2%

0.4%

29.5%

2018

12,364

11,682

636

94.5%

0.0%

0.1%

5.1%

0.2%

0.0%

-1,897

-22.9%

69.0%

19.7%

53.7%

3.3%

30.0%

2019

7,616

6,836

687

89.8%

0.0%

0.2%

9.0%

1.0%

0.0%

2,157

26.1%

67.6%

22.0%

52.2%

6.2%

31.7%

2020

6,078

4,959

844

245

81.6%

0.0%

0.5%

13.9%

4.0%

0.0%

3,644

42.4%

67.6%

28.3%

58.8%

12.2%

30.1%

2021

7,204

6,095

733

354

84.6%

0.0%

0.3%

10.2%

4.9%

0.0%

2,629

32.5%

83.4%

29.2%

61.3%

11.2%

37.3%

2022

8,937

7,650

668

596

85.6%

0.0%

0.3%

7.5%

6.7%

0.0%

1,011

13.8%

85.8%

29.1%

65.4%

8.5%

38.5%

2023

5,745

4,317

683

721

75.1%

0.0%

0.4%

11.9%

12.5%

0.0%

3,304

47.2%

69.4%

31.8%

66.7%

9.1%

41.0%

2024

62.8%

2020

Import Dependency [%]

of Solid fossil fuels

of Oil and petroleum products

of Natural Gas

Dependency from Russian Fossil Fuels [%]

of Natural Gas

of Crude Oil

of Hard Coal

10.5%

391.8%

130.0%

100.0%

46.2%

0.0%

100.0%

2021

1.4%

95.2%

54.9%

100.0%

11.5%

0.0%

83.0%

2022

6.2%

95.8%

108.6%

100.0%

0.0%

66.7%

2023

3.5%

268.7%

81.2%

100.0%

0.0%

2020

57.5%

35.8%

96.8%

83.6%

41.0%

25.7%

49.1%

2021

55.5%

37.2%

91.7%

83.6%

40.9%

25.2%

47.4%

2022

62.5%

45.9%

97.8%

97.6%

20.7%

18.4%

21.5%

2023

58.3%

40.8%

94.5%

90.0%

9.3%

3.0%

1.0%

2017

Gas Consumption (in bcm)

Gas Consumption year-on-year change [%]

Gas Imports - by type (in bcm)

Gas imports - pipeline

Gas imports - LNG

Gas Imports - by main source supplier [%]

Latvia

Finland

Russia

0.5

-5.0%

0.5

0.0

0.0%

1.2%

98.4%

2018

0.5

2.9%

0.5

0.0

0.0%

99.8%

2019

0.5

-8.2%

0.5

0.0

0.0%

99.0%

2020

0.4

-8.2%

0.4

0.0

50.3%

0.0%

46.2%

2021

0.5

14.1%

0.5

0.0

82.8%

0.0%

11.5%

2022

0.4

-25.3%

0.4

0.1

84.2%

0.0%

2023

0.3

-14.2%

0.3

0.0

48.7%

51.3%

0.0%

Source:

Eurostat, ENTSO-E, S&P Platts

kom (2025) 0206 - Ingen titel

ANNEX 9: CLIMATE ADAPTATION, PREPAREDNESS AND ENVIRONMENT

Estonia faces major challenges in climate

adaptation such as the wide gap in climate

insurance

coverage

and

increased

vulnerability to extreme weather events.

has made some progress in implementing policy

measures on climate adaptation, but Estonia has

one of the three regions identified as hotspots of

climate risks most affected by climate change:

low-lying coastal regions. Estonia is vulnerable to

impacts of climate change such as rises in

temperature, rainfall and sea level and extreme

weather phenomena accompanied by coastal and

inland floods, wildfires and new pathogens. The

state of nature and ecosystems is also a cause for

concern in Estonia, reducing the country’s climate

resilience.

due to extreme heat in northern Europe(

157

). The

trend increases over time, posing a risk to public

health, especially for vulnerable populations.

Estonia has implemented in the last years

several national policy measures related to

adaptation and preparedness.

In 2017, it

adopted a national adaptation strategy and a plan

on climate change adaptation (NAP). Since then,

Estonia has strengthened its adaptation

governance structures. In 2023, the establishment

of a Climate Ministry gave further emphasis to

climate change mitigation and adaptation issues.

However, Estonia has limited capacity for

conducting systemic risk assessments, which may

hinder progress. Estonia is also preparing a climate

law expected to take effect in 2025, to improve

climate change adaptation. The law sets national

climate change adaptation goals, mainstreams

climate adaptation in sectoral development plans,

and requires regular assessments of climate risks

and action plans prepared at both national and

local levels. This aligns with the European Climate

Law recommendations (

158

Many local authorities in Estonia are

developing local energy and climate plans.

Approximately 41.7% of the population live in

areas covered by the Covenant of Mayors for

Climate and Energy. Five of the main local

authorities participate in the EU mission on

adaptation to climate change to enhance their

work on climate adaptation.

Climate adaptation and resilience

Estonia is vulnerable to the impacts of

climate change.

The impacts for Estonia include

rises in temperature, rainfall and sea level,

extreme weather phenomena such as coastal and

inland floods, wildfires and new pathogens.

Coastal regions and inland water bodies are at risk

of more frequent flooding due to rising sea levels

and increased precipitation. In the past, an

unexpected emergence of Vibrio infections in the

Baltic Sea coincided with warming sea surface

temperature patterns. Heatwaves are expected to

become more frequent and intense, posing a

public health threat, and droughts will increase in

frequency and severity, affecting agriculture and

water resources. Storms are a hazard to the

electricity grid

especially in rural areas. Estonia’s

RRP includes an investment to strengthen the

electricity grid and protect it against storms at the

same time.

The climate risks pose significant threats to

Estonia’s economy and society.

Between 1980-

2023, Estonia suffered economic losses estimated

at EUR 332 million due to weather- and climate-

related extreme events. The overall insurance

coverage over this period only covered 15% of the

economic losses (

156

). Estonia also recorded one of

the highest number of deaths per 100 000 citizens

Water resilience

Despite Estonia having sufficient water

resources, measures are needed to tackle

deteriorating chemical water quality, boost

resilience and narrow the annual investment

gap.

The Water Exploitation Index Plus (WEI+)

reached 2.2 in 2022, having stabilised after

peaking at 8.5 in 2018, with no indication of

serious overuse of water resources. Nevertheless,

there has been a deterioration in the ecological

status of surface water bodies, and a steep

reduction in the share of surface water bodies in

good chemical status. The assessment of the third

(

157

) ibid.

(

158

) C(2023) 9602.

(

156

) EEA, 2024,

Economic losses from weather- and climate-

related extremes in Europe,

Link.

kom (2025) 0206 - Ingen titel

river basin management plan shows that the

ecological status/potential of surface water bodies

has deteriorated since the second plan, with 53%

reported as having good ecological status/potential

against the EU average of 37%. The most

significant pressure identified is diffuse pollution.

More precisely, the problem is nutrient pollution

affecting 93% of water bodies. The situation

regarding chemical status has not improved since

the second plan, with only 9.7% of surface water

bodies classified as having good chemical status

(EU average 31%). The status of 83% of surface

water bodies remains unknown, even though the

Water Framework Directive entered into force over

20 years ago.

None of the 16 coastal waters reach good

ecological nor good chemical status. Failure to

achieve good chemical status is mainly due to two

specific substances: mercury and polybrominated

diphenyl ethers. Both pose significant threats to

humans and to the aquatic environment, and are

in the group of ubiquitous, persistent, bio-

accumulative and toxic substances. Water

abstraction is one of the main forms of pressure

on groundwater bodies in Estonia. According to the

third plan, 26% of groundwater bodies are

reported as having poor chemical status. Failure is

mostly due to mining of oil shale, industry and

agriculture. Other reasons are deteriorating quality

in drinking water protected areas and saline or

other intrusion, which might be linked to excess

abstraction of groundwater bodies adjacent to the

coast.

Untreated urban waste water in Estonia

significantly impacts water quality, affecting

nearly all coastal waters and half of the

country’s rivers.

The Urban Wastewater

Treatment Directive (UWWTD) aims to protect

human health and the environment from the

effects of untreated urban waste water. An

infringement proceeding was opened against

Estonia in February 2024 for failure to meet the

Directive’s requirements on discharges of

industrial waste water into urban wastewater

treatment plants. The third river basin

management plan reports that water quality is

affected by urban wastewater discharges. In

particular, discharges undermine the water quality

in 94% of coastal waters and 50% of Estonia’s

rivers.

Estonia needs to invest more each year in

water, primarily in wastewater management.

Water investments in Estonia are estimated to be

around EUR 73 million per year (in 2022 prices) in

the 2021-2027 period (see Graph A9.2). Of this,

EUR 21 million is for wastewater management,

EUR 17 million for drinking water and around

EUR 34 million for the other aspects of the Water

Framework Directive (water management and

protection). To meet the environmental targets

under the Water Framework Directive and the

Floods Directive, Estonia has an investment gap of

EUR 65 million per year (0.18% of GDP), with most

related to waste water (EUR 59 million per year).

Drinking water measures require an additional 7

million per year.

Biodiversity and ecosystems

The state of nature and ecosystems is a

cause for concern in Estonia, reducing the

country’s climate resilience.

Estonia is host to

60 habitat types and 96 species covered by the

Habitats Directive (

159

). In 2022, 17.9% of land in

Estonia was covered by the Natura 2000 network

(EU coverage 18.6%). Including other nationally

designated protected areas, a total of 21% of land

is protected. Estonia protects 18.7% of its marine

waters, exceeding the EU average of 12.1%. The

share of species reported as having good

conservation status in 2018 is 56.2%, a 2.7%

increase on the 53.5% reported in the previous

reporting period. The share of assessments for

species in bad or poor conservation status slightly

increased to 36% (from 35% in the previous

period). The common farmland bird index, too,

indicates a downward

trend in species’

conservation status. It fell from 74.1 in 2018 to

69 in 2020 and below the EU average of 74.6 in

the same year. Estonia’s

2030 environmental

development plan contains several measures that

aim to improve biodiversity in agricultural

ecosystems, including enhancing the biodiversity

of agricultural landscapes, with a particular focus

on pollinators and farmland birds.

Nature degradation creates significant risks

to the economy and to competitiveness.

40%

of Estonia’s gross value added is very highly

and

directly dependent on ecosystem services. Several

(

159

) EEA, 2019, Number of habitats and species per Member

State,

Link.

kom (2025) 0206 - Ingen titel

sectors such as agriculture, forestry, fisheries,

construction, mining and metals, water utilities and

healthcare (see Graph A9.1) are particularly

dependent on ecosystem services. 100% of the

gross value added generated by these sectors is

directly dependent on ecosystem services. In

addition, Estonia has a particularly high degree of

dependency on ecosystem services in its

economy’s downstream value chain, with 50% of

gross value added being highly dependent. This

means that failure to maintain the capacity of

ecosystems to deliver services could entail

significant costs, or even stop production in these

sectors. Protecting and restoring key ecosystems

would

help

maintain

the

long-term

competitiveness of these sectors.

Graph A9.1:

Direct dependency(1) on ecosystem

services(2) of the gross value added generated by

economic sector in 2022

Agriculture

Forestry

Fishery and acquaculture

Mining and metals

Construction

Water utilities

Healthcare delivery

Aviation travel and tourism

Food beverages and tobacco

Supply chain and transport

Public services and others

Electricity

Chemical and materials industry

Electronics

Oil and gas

Real estate

Heat utilities

Automotive

Retail consumer goods and…

Information technology

Banking and capital markets

Insurance and asset…

Digital communications

High

Medium

Low

To meet the environmental objectives concerning

the protection and restoration of biodiversity and

ecosystems and other related horizontal

measures, Estonia has an investment gap

estimated at around EUR 0.6 billion per year,

corresponding to 1.63% of its GDP (see Graph

A9.2).

Graph A9.2:

Investment needs and gaps in EUR million,

in 2022 constant prices

800

700

600

500

400

300

200

20%

40%

60%

80% 100%

100

Biodiversity

Baseline

Water

Gap

Source:

European Commission, DG Environment,

Environmental investment needs & gaps assessment

programme, 2025 update.

Sustainable agriculture and land use

Estonia’s carbon removals are in line with

the 2030 target for land use, land-use

change and forestry (LULUCF).

In 2014, net

carbon removals turned into net emissions and

have remained above zero since then. Since 2020,

however, LULUCF emissions have fallen. As

recommended in the previous European Semester,

continued improvements in forest management

and action to restore wetlands could help Estonia

continue to reverse the decline in net carbon

removals from the atmosphere. To meet its 2030

LULUCF target, additional carbon removals of -0.4

million tonnes of CO

equivalent (CO

eq) are

needed (

160

). The latest available projections show

a surplus compared to the target of -0.4 million

(

160

) National LULUCF targets of the Member States in line with

Regulation (EU) 2023/839.

(1) Dependency based on the sector’s own operations,

excluding value chain operations within countries and across

international value chains. A high dependency indicates a high

potential exposure to nature-related shocks or deteriorating

trends, which means that the disruption of an ecosystem

service could cause production failure and severe financial

loss.

(2) Ecosystem services are the contributions of ecosystems to

the benefits that are used in economic and other human

activity, including provisioning services (e.g. biomass

provisioning or water supply), regulating and maintenance

services (e.g. soil quality regulation or pollination), and cultural

services (e.g. recreational activities).

Source:

Hirschbuehl et al., 2025,

The EU economy's

dependency on nature,

Link.

kom (2025) 0206 - Ingen titel

tonnes of CO

eq for 2030 (

161

). Therefore, Estonia

is on track to meet the 2030 target.

Although Estonia’s overall greenhouse gas

emissions from agriculture are relatively

moderate, Estonia’s agriculture is still a

source of emissions and continues to have an

impact on air, water and soils.

In 2022,

agriculture generated 1.6 million tonnes of CO

eq,

accounting for around 11% of the country’s total

emissions (excluding LULUCF). This includes

856 000 tonnes of CO

eq from livestock. Pesticide

levels have exceeded the set thresholds in 20% of

surface water monitoring stations (

162

). Peat

extraction has destroyed approximately 30 000 ha

of raised bogs in Estonia, with around 20 000 ha

still in use. Drained peatlands are among the

country’s largest source of greenhouse gas

emitters. The drainage of bogs increased Estonia’s

total emissions by 2.3-2.7 times compared to their

natural state. Restoring these degraded areas is

crucial, both for biodiversity protection and for

climate change mitigation.

Estonia is transitioning to a more

sustainable food system by fostering

sustainable farming practices and raising

agronomic standards, in particular by

encouraging

organic

farming

and

environmental training for farmers.

23.4% of

Estonia’s land is under organic farming. This is the

second highest result in the EU and well above the

EU average of 10.5%. Estonia is contributing

substantially to achieving the target to have 25%

of the

EU’s agricultural land under organic farming

by 2030. Forests cover around 50% and

agricultural land covers some 25% of the country.

Agricultural land is mainly cultivated with

extensive

techniques.

Estonia’s

common

agricultural policy (CAP) strategic plan uses around

EUR 456 million (68%) of its total CAP budget to

support environmental and climate objectives. The

focus is on carbon sequestration, biodiversity and

valuable grasslands, as well as increasing

knowledge about sustainable production. Farmers

can receive additional payments if they commit to

adopting certain agronomic practices that are

beneficial for the environment and climate.

Estonia’s CAP strategic plan implements enhanced

(

161

) Climate Action Progress Report 2024, COM/2024/498.

(

162

) EEA, 2024, Pesticides in rivers, lakes and groundwater in

Europe,

Link.

standards for good agricultural and environmental

conditions,

which

contribute

greater

environmental and climate ambitions and applies

to almost all utilised agricultural land. For

example, the plan sets a requirement for increased

soil cover during the sensitive winter period in

order to protect soils across the whole country. For

the same purpose, over 23% of utilised

agricultural land receives support for practising

organic farming, which contributes to a reduced

use of pesticides, improved water and soil quality,

and carbon sequestration. In order to maintain

good agri-environmental conditions, it is also

important to continue to raise environmental

awareness. Therefore, in many cases, one of the

basic conditions for farmers to receive support is

to attend training on environmental topics.

kom (2025) 0206 - Ingen titel

Table A9.1:

Key indicators tracking progress on climate adaptation, resilience and environment

Climate adaptation and preparedness:

Drought impact on ecosystems

[area impacted by drought as % of total]

Forest-fire burnt area

(1)

[ha, annual average 2006-2023]

Economic losses from extreme events

[EUR million at constant 2022 prices]

Insurance protection gap

(2)

[composite score between 0 and 4]

Heat-related mortality

(3)

[number of deaths per 100 000 inhabitants in 2013-

2022]

Sub-national climate adaptation action

[% of population covered by the EU Covenant of Mayors

for Climate & Energy]

Water resilience:

Water Exploitation Index Plus, WEI+

(4)

[total water consumption as % of renewable freshwater

resources]

Water consumption

[million m

]

Ecological/quantitative status of water bodies

[% of water bodies failing to achieve good status]

Surface water bodies

Groundwater bodies

Biodiversity and ecosystems:

Conservation status of habitats

(6)

[% of habitats having a good conservation status]

Common farmland bird index

2000=100

Protected areas

[% of protected land areas]

Sustainable agriculture and land use:

Bioeconomy's added value

(7)

[EUR million]

Landscape features

[% of agricultural land covered with landscape features]

Food waste

[kg per capita]

Area under organic farming

[% of total UAA]

Nitrogen balance

[kg of nitrogen per ha of UAA]

Nitrates in groundwater

(8)

[mgNO

/l]

Net greenhouse gas removals from LULUCF

[Kt CO

-eq]

21.0

4.8

(9)

(5)

Estonia

2018

31.46

2019

7.84

2020

2021

9.07

0.88

2022

4.73

2023

15.55

0.63

EU-27

2018

6.77

2021

2.76

24 142

62 981

Estonia

2018

2.6

2019

1.1

2020

1.0

2021

1.7

2022

2.2

2023

EU-27

2018

4.5

2021

4.5

498

409

357

411

483

Estonia

47%

EU-27

59%

93%

2018

56.7

74.1

2019

74.7

2020

69.0

2021

2022

2023

2018

14.7

72.2

2021

74.4

Estonia

2018

1 762

2019

1 878

2020

1 927

2021

2 293

2022

2023

EU-27

2018

634 378

2021

716 124

22.3

5.0

3 279

125

22.4

5.5

1 243

128

23.0

5.2

812

134

23.4

339

7.99

256 077 -

240 984

3 471

(1) The data show the average for the timespan 2006-2023 based on EFFIS - European Forest Fire Information System.

(2) Scale: 0 (no protection gap)

–

4 (very high gap). EIOPA, 2024, Dashboard on insurance protection gap for natural catastrophes.

(3) van Daalen, K. R. et al., 2024, The 2024 Europe report of the Lancet Countdown on health and climate change: unprecedented

warming demands unprecedented action. The Lancet Public Health.

(4) This indicator measures total water consumption as a percentage of the renewable freshwater resources available for a given

territory and period. Values above 20% are generally considered to be a sign of water scarcity, while values equal or greater than

40% indicate situations of severe water scarcity.

(5) European Commission, 2024, 7th Implementation Report from the Commission to the Council and the European Parliament on

the implementation of the Water Framework Directive (2000/60/EC) and the Floods Directive (2007/60/EC) (Third River Basin

Management Plans and Second Flood Risk Management Plans).

(6) For this indicator, the EU average includes figures for the UK under the previous configuration, EU-28.

(7) European Commission, 2023, EU Bioeconomy Monitoring System dashboards.

(8) Nitrates can persist in groundwater for a long time and accumulate at a high level through inputs from anthropogenic sources

(mainly agriculture). The EU drinking water standard sets a limit of 50 mg NO

/L to avoid threats to human health.

(9) Net removals are expressed in negative figures, net emissions in positive figures. Reported data are from the 2024

greenhouse gas inventory submission. 2030 value of net greenhouse gas removals as in Regulation (EU) 2023/839

–

Annex IIa.

Source:

Eurostat, EEA.

kom (2025) 0206 - Ingen titel

FAIRNESS

ANNEX 10: LABOUR MARKET

Despite the recession, in 2024 the Estonian

labour market remained resilient.

The

employment rate remained high, above the 2030

national target for the third consecutive year and

ranking among the highest in the EU. However,

signs of strain are emerging, with the

unemployment rate rising since 2022 and

sustained labour shortages in key sectors. Russia’s

war of aggression against Ukraine has negatively

impacted the economy, adding to structural

challenges such as persistent regional disparities,

labour market inequalities, skills mismatches and

shortages impacting Estonia’s competitiveness and

potential economic growth.

Employment remained strong in 2024 even

as unemployment increased.

After rising to

historically high levels in 2023, the employment

and activity rates remained high in 2024 at 81.8%

and 88.3%, making the country one of the ‘best

performers’ in the EU

(75.8% and 80.4%

respectively). This high employment rate, already

above the national 2030 target of 81.3%, is even

more remarkable against the background of the

very large influx of Ukrainian refugees living in

Estonia (equal to about 2.6% of the Estonian

population) (

163

). Ukrainians are well integrated

into the labour market, with 57% of temporary

protection beneficiaries (20-64 years old)

employed, and the share of Ukrainians among all

registered unemployed people declining from

12.5% in November 2022 to 6.8% in September

2024. In 2024, Estonia had one of the highest

employment rates (75.7%) among older workers

(in the age group 55-64), significantly higher than

the EU average (65.2%). The employment rate of

older workers has been rising steadily, largely

because of the gradual increase in the retirement

age and the strong motivation to continue working

due to low pensions relative to wages. However,

the unemployment rate has been rising from 5.6%

at the onset of the recession in 2022 to 6.4% in

2023, and even further to 7.6% in 2024 (EU:

5.9%). It is expected to remain around 7% in 2025

due to prolonged expectations of weak economic

activity and demand. Long-term unemployment

rose considerably in 2024, reaching 1.8% and

almost equalling the EU average of 1.9%.

Graph A10.1:

Key labour market indicators

2014

2021

2012

2013

2015

2016

2017

2018

2019

2020

2022

2023

Activity rate 20-64 (rhs)

Unemployment rate 15-74 (lhs)

Long-term unemployment rate 15-74 (lhs)

Youth unemployment rate 15-24 (lhs)

NEETrate 15-29 (lhs)

Activity rate and Employment rate (% of population), total,

ages 20-64

Unemployment rate and long-term unemployment rate (% of

labour force), total, ages 15-74

Youth unemployment rate (% of labour force), total, ages 15-

NEET: Not in employment, education or training (% of

population), total, ages 15-29

Source:

Eurostat, LFS

Regional differences are considerable, with

higher unemployment rates in rural areas.

2023, the unemployment rate reached 10.1% in

the north-east of the country compared to

unemployment rates between 6% and 7.5% in

other regions. This can be partly explained by the

predominance in the north-east region of the

industrial sector (particularly the oil shale sector).

This sector was most affected by the recession,

which also led to expectations of a higher

unemployment rise among men. Many other socio-

economic indicators are considerably worse than

average in the border regions both in north-east

and south-east Estonia, with significant variations

in GDP per capita between Põhja-Eesti and the

remaining regions (see Annex 17).

Despite efforts to improve young people’s

labour market outcomes, challenges persist.

The youth unemployment rate (15-24) increased

in 2024 and is higher than the EU average (19.1%

vs EU: 14.9%) and significantly above the rate for

the general population. It also remains

significantly above pre-pandemic levels. Youth

(

163

) Statistics Estonia (data from Jan 2024).

2024

kom (2025) 0206 - Ingen titel

employment and labour force participation stood

at 35.4% and 43.7% in 2024, respectively, slightly

above the EU average. After steadily decreasing in

the last decade, the share of young people not in

employment, education and training (NEET) rose to

11% in 2024, above pre-COVID-19 levels and in

line with the EU average. Young people not in

education or training face more difficulties in

finding a job in rural areas, also due to lower

educational outcomes and higher early school

leaving, regional gaps, and language barriers for

the Russian-speaking population. To help NEETs

transition into employment, the Estonian

government adopted the reinforced Youth

Guarantee action plan in 2022. The action plan

focuses on increasing youth employment, which

includes preventing young people from ending up

in a NEET situation and supporting young people

who do experience such a situation. As part of its

recovery and resilience plan (RRP), Estonia is

implementing the ‘My First Job’ scheme, which

helps get young people into employment by paying

a wage subsidy to the employer and reimbursing

them the training costs.

Graph A10.2:

Labour market outcomes of young people

(15-24)

Vulnerable groups, including adults with

lower-level qualifications and persons with

disabilities, also face barriers to labour

market integration.

Employment outcomes in

Estonia are closely tied to educational attainment

(see Annex 12). The employment rate for people

with less than lower-secondary educational

attainment, at 65.7%, was more than 23

percentage points (pps) lower than for those who

have post-secondary educational attainment in

2024. After rising sharply in 2022, the disability

employment gap narrowed by 6 pps in 2023 and

stabilised in 2024, below the EU average (20.8 pps

vs 24 pps in 2024). Estonia set the target for the

employment rate of persons with disabilities at

52% by 2030. Despite this, the risk of poverty and

social exclusion among persons with disabilities is

one the highest in the EU (see Annex 11). Targeted

measures would help to better integrate

underrepresented groups and those outside the

labour market as well as help them retain an

adequate standard of living.

Nominal wage growth was strong in 2024,

coupled with reduced inflation rates,

allowing for real wages to rebound.

Nominal

wages growth in Estonia is expected to slow to

5.8% in 2024 after reaching 8.2% in 2023 (

164

above the EU average in both years (5.9% in 2023

and 5% in 2024). Real wages have only partly

recovered from the losses in 2022 and 2023, with

a projected increase of 2.3% in 2024 on the back

of decreasing inflation, and they remain below

2021 levels. Unit labour costs are projected to

grow by 5.7% in 2024, significantly less than in

2023 (15.2%). Labour productivity continued to

decline, with the country’s

productivity per hour

worked falling to 67.9% of the EU average in

2023, the lowest in over five years. Gross

disposable household income per capita remained

under pressure in 2023, falling again to 126% of

the 2008 value from 130.5% in 2022 (EU: 111.1%

in 2023, up from 110.5% in 2022, 2008=100),

reflecting rising living costs and the eroded

purchasing power. Minimum wages will rise by 8%

in nominal terms and reach EUR 886 in 2025,

outpacing both inflation and average wage growth,

and thereby improving the purchasing power of

(

164

) European Commission,

European Economic Forecast. Autumn

2024.

For nominal wages, pay per employee includes: i)

wages and salaries payable in cash or in kind; and ii) social

contributions payable by employers. For real gross wages,

the deflator used is the Harmonised Index of Consumer

Prices (HICP).

2011

2015

2022

2009

2010

2012

2013

2014

2016

2017

2018

2019

2020

2021

Unemployment rate (lhs)

NEET(lhs)

Employment rate (rhs)

Unemployment ratio (lhs)

In education, training (rhs)

Employment rate (% of population), total, ages 15-24;

Youth in education and training (% of population), total, ages

15-24

Youth unemployment rate (% of labour force), total, ages 15-

Youth unemployment-to-population ratio (% of population),

total, ages 15-24

NEET: Not in employment, education or training (% of

population), total, ages 15-24

Source:

Eurostat, LFS

2023

kom (2025) 0206 - Ingen titel

low-income earners. However, they remain among

the lowest in the EU. In-work poverty continues to

be high, at 10.2% in 2024 (EU: 8.2%), potentially

indicating further scope to improve the adequacy

of minimum wages (see Annex 11).

Social

dialogue

could

further

strengthened

increase

collective

bargaining coverage.

The share of collective

bargaining in Estonia is particularly low (

165

), while

the share of low-wage earners is among the

highest in the EU (

166

). The involvement of social

partners in reforms and policies in Estonia has

improved in recent years but remains limited. The

2023 agreement on the minimum wage

framework (on top of the regular yearly minimum

wage negotiations) sets out the minimum wage

growth rate until 2027, when it should reach 50%

of the average salary.

The gender pay gap remains high, although

the situation is slowly improving.

After rising

to 21.3% in 2022, the unadjusted gender pay gap

fell to 16.9% in 2023. While it is still among the

highest in the EU (EU: 12.7% in 2022), it has

decreased significantly in the long term, falling by

12.9 pps since 2013. At the same time, Estonia is

among the best performers as regards the gender

employment gap (1.7% vs 10% in the EU in 2024).

According to national statistics (

167

), the largest

salary differences between men and women were

reported in the fields of wholesale and retail trade,

motor vehicle and motorcycle repair (25.5%),

information and communication (25.1%), and

financial and insurance activities (24.9%). Under

the RRP, steps have been taken to reduce the

gender pay gap, including the development of a

digital tool prototype (

168

) to help employers

analyse the wage gap in their company and take

informed wage decisions.

Labour shortages have decreased, but some

sectors and occupations face significant

challenges.

The job vacancy rate remains

relatively low (1.5% in Q4-2024), below both its

pre-pandemic level (1.9% in Q4-2019) and the EU

average (2.3% in Q4-2024), continuing its decline

since peaking in Q1-2022. However, significant

shortages are reported in ICT, financial and

insurance activities, public administration, defence,

education and healthcare. According to CEDEFOP-

EURES data (

169

), the most requested occupations

were teachers, sales workers, personal service

workers, metal and machinery workers and

construction workers (

170

). Labour shortages are

expected to be further exacerbated by an ageing

workforce, with the share of those aged 65+ rising

to 20.5% in 2024 (EU: 21.6%), a 4.1 pps increase

over the last decade. The ageing of teachers and

high retirement rates are already creating

shortages in the education system (see Annex 12),

with healthcare and education also impacted by

the difficult working conditions. In October 2024,

the share of employers expecting labour shortages

to limit their production was relatively low in

industry (8.9%), construction (8.5%), and services

(6.1%) (

171

), compared to both the EU averages

and pre-pandemic levels. On the other hand,

unmet demand for employment as measured by

the labour market slack (

172

) increased to 12.8% in

2024, slightly above the EU average (11.7%).

Skills shortages and mismatches persist.

2024,

Estonia’s

macroeconomic

skills

173

mismatch ( ) slightly increased to 15.8% from

15.4% in 2023, but it remained below the EU

average of 19.2%. Despite a slight increase in

2024, the overqualification rate in Estonia has

been on a declining trend since 2013, with 22.2%

of higher education graduates employed in

occupations not requiring such qualifications in

2024 (EU: 21.5%). On the opposite side, 12% of

workers are underqualified according to the OECD,

and 23% report that some of their skills are lower

than what is required for their job (OECD average:

(

169

)

EURES - Countries and occupations | CEDEFOP..

(

170

) From Jan to Sept. 2024.

(

171

) Commission, DG ECFIN Business and consumer surveys.

(

172

) Labour market slack refers to all unmet needs for employment, or

the extent to which labour supply exceeds labour demand in the

short run. It has four components: underemployed people working

part-time, unemployed people, people seeking work but not

immediately available, and those available to work but not seeking.

(

165

) OECD/AIAS database on Institutional Characteristics of Trade

Unions, Wage Setting, State Intervention and Social Pacts

(ICTWSS); EE’s

collective bargaining coverage:

19.1% in

2021.

( ) European Commission,

Economic inequalities in the EU.

166

(

167

) Statistics Estonia’s and Eurostat’s methodologies for

calculating the gender wage gap differ. Eurostat’s wage gap

does not take into account companies and institutions with

less than 10 employees, or the fields of agriculture, forestry

and fishing, public administration and defence.

(

168

) A digital tool for analysing the gender pay gap, known as the

‘Palgapeegel’

(‘Pay Mirror’) platform:

Palgapeegel |

Majandus- ja Kommunikatsiooniministeerium.

(

173

)

The macroeconomic skills mismatch indicator measures the

dispersion of employment rates across skill groups (proxied by

qualification levels, with ISCED 0-2 low; 3-4 medium and 5-7 high).

kom (2025) 0206 - Ingen titel

10%) (

174

). Improving the labour market relevance

of education and training can help further address

labour shortages and skills mismatches, by

improving career guidance, addressing the gender

pay gap, increasing reskilling and upskilling

opportunities, and better anticipating skills needs.

These efforts would help Estonia maintain its

employment rate in line with the national target of

81.3% and make progress towards achieving the

2030 adult learning target of 52.3%.

Attracting talent can help address Estonia’s

workforce shortages.

According to the Estonian

Qualifications Authority, annual labour demand

will exceed the number of new entrants in the next

years (See Annex 12), making employment

increasingly reliant on higher labour force

participation and migration (

175

). While the

integration of foreign workers has grown, it is still

not always aligned with evolving labour market

needs. Exceptions exist for start-ups, ICT

specialists, and other categories, but many sectors

struggle to attract skilled workers without high-

end salaries (

176

). Better anticipation of skills needs

through expanded use of the OSKA system and

accessible pathways for skilled foreign labour in

sectors facing persistent shortages will contribute

to sustaining Estonia’s competitiveness.

The workforce is adapting to the green and

digital transitions, with a growing need for

skilled workers in emerging sectors.

Estonia

has a large and growing pool of digital experts and

strong digital skills across the population. In 2024,

ICT specialists made up 7.2% of the workforce (EU:

5%). In particular, as regards women working as

ICT specialists, Estonia is performing very well with

27.6%, well above the EU average of 19.5%. The

share of the general population with at least basic

digital skills exceeds the EU average (62.6% vs

55.6%), as does the share of workers with these

skills (71% vs EU: 64.7%). However, 67% of

Estonian companies struggle to recruit ICT

specialists, highlighting that a skills gap still exists.

Under the RRP, Estonia is taking measures to

strengthen the capacity of businesses to foster the

digital transition, through upskilling and retraining

in ICT, as well as through a better recognition of

(

174

)

Survey of Adults Skills 2023: Estonia | OECD.

(

175

) OSKA general forecast 2022-2031

(

176

) Foreign workers are exempted from the migration quota if

their salary is at least 1.5 times the national average wage

skills acquired outside formal learning. To ensure

that basic digital skills are widespread among its

population, Estonia is implementing measures to

‘educate the educators’ supported by the European

Social Fund. The green transition had a sizeable

impact on the Estonian labour market, with

employment in energy-intensive industries

declining from 2.8% in 2020 to 1.7% in 2024.

Upskilling and reskilling in these industries is

growing (see Annex 12), with the share of workers

taking part in education and training rising from

8.7% in 2015 to 19.6% in 2023 (EU: 10.9%).

Investments under the RRP and Just Transition

Fund include measures to mitigate the social and

employment impact of this transition, including

retraining and upskilling programmes for workers

in the oil shale industry and effective job transition

measures. The European Social Fund Plus will

integrate the development of green skills into

labour market, education and training measures,

which helps increase the attractiveness and

people’s awareness of study fields related to

green and digital change.

kom (2025) 0206 - Ingen titel

ANNEX 11: SOCIAL POLICIES

Despite recent improvements, Estonia

continues to face significant challenges

related to poverty and social exclusion,

particularly among vulnerable groups and in

rural areas.

Although inflation levels have

stabilised after the peaks in recent years, some

households, older people especially, struggle to

meet their essential needs. Income inequalities

also persist, partially related to low minimum

wages and the limited redistributive impact of the

tax and benefits system. The limited capacity of

the social protection system and uneven access to

quality long-term care services also pose risks for

Estonia’s sustainable and inclusive growth.

Addressing these challenges will support more

inclusive growth and strengthen competitiveness.

Poverty and social exclusion risks remain

high, especially for some groups and in rural

areas.

After peaking at 25.2% in 2022, when it

reached its highest level in nine years, the at-risk-

of-poverty or social exclusion (AROPE) rate

decreased significantly in the last two years,

falling to 24.2% in 2023 and to 22.2% in 2024.

This improvement was mainly driven by the at-

risk-of-poverty

(AROP)

rate

falling

2.3 percentage points (pps) to 20.2% in 2024.

While the AROPE and AROP rates are now back to

2021 levels, they remain higher than the EU

averages (21% and 16.2% in 2024). Persistent

poverty risks are driven by a combination of

factors, including limited economic opportunities

and employment support, and are aggravated by

insufficient access to healthcare and social

services, especially in rural areas. For older people

and persons with disabilities, the AROPE rates

(39.4% and 39.1%) fell considerably in the last

two years, dropping by 13.1 and 8.7 pps

respectively, but remain among the highest in the

EU due partly to the relatively low adequacy of

pensions and the social protection system (see

below). In 2024, 71.5% of older people living alone

and 50.2% of single-person households

experienced poverty. There are significant regional

differences in the social situation in Estonia (see

Annex 17), with relative poverty being more than

twice as high in the counties of Ida-Viru (35%) and

Lääne-Viru (29.2%) than in Harju (15.5%) and

Rapla (14.1%). Many other socio-economic

indicators are considerably worse than average in

the north-east and south-east border regions.

Further targeted support aimed at strengthening

social cohesion and resilience in these regions

could

considered.

Addressing

these

vulnerabilities will help Estonia move towards its

national 2030 target of reducing the number of

people at risk of poverty or social exclusion by

39 000 compared to 2019, as so far this number

has declined by only 9 000.

Graph A11.1:

At-risk-of-poverty or social exclusion rate,

age groups

% of

population

2019

2021

2015

2016

2017

2018

2020

2022

2023

Children (<18y)

Elderly (65+)

Working age (18-64)

AROPE: At-risk-of-poverty or social exclusion rate (% of total

population).

Source:

Eurostat, EU-SILC [ilc_peps01n]

The risk of poverty or social exclusion among

children is relatively low, but disparities

persist.

After an increase in 2023, the AROPE rate

for children fell by 1.8 pps to 16.5% in 2024,

remaining below the EU average of 24.8% in

2023. The poverty or social exclusion risk for

children is highly dependent on the education level

of their parents, spanning from 10.1% for parents

with higher education to 45.6% for children of

parents with a low level of education. Single-

parent households face a higher poverty risk

(35.3%). To mitigate the impact of poverty on

children, Estonia is also implementing the

European Child Guarantee (ECG) as part of its

2022 action plan. While considerable progress has

been made in the provision of the key social

services covered under the ECG, more work is

needed to target the most vulnerable groups and

to achieve the national 2030 target of reducing

the number of children in poverty by 13 000.

2024

kom (2025) 0206 - Ingen titel

Graph A11.2:

In-work-poverty rate, groups

% of

employed

Total

Part-time

Temporary

Self-employed

In-work-poverty rate (% of employed). Employed who have an

equivalised disposable income below 60% of the national

equivalised median income.

Source:

Eurostat, EU-SILC

Despite recent efforts, Estonia continues to

face high in-work poverty risks.

In 2024, in-

work poverty in Estonia remained above the EU

average (10.3% vs 8.2%), with a high AROP rate

among part-timers (27% vs 14.3% for the EU in

2023), the self-employed (29.6% vs 20.7% for the

EU) and quasi-jobless households (75.9% vs

61.2% for the EU). Household income declined

further in 2023 (see Annex 10) and, while inflation

eased considerably in 2024, prices have increased

around 40% over the last three years (

177

). As a

result, 7.7% of the population, or approximately

104 700 people, experienced material and social

deprivation in 2024. Estonia has raised minimum

wages in recent years to reduce in-work poverty,

but they remained among the lowest in the EU in

2024 at EUR 820 per month, barely above the

AROP threshold (EUR 807 per month). In 2025, the

minimum wage will increase by 8% in nominal

terms, outpacing both projected inflation and

average wage growth (see Annex 10). The

minimum wage framework, drawn up with social

partners in 2023, sets the growth rate trajectory

until 2027, when the minimum wage should reach

50% of the average salary.

(

177

) Statistics Estonia. This indicates the increase in the cost of a

basket of consumer goods; it does not, however, reflect all of

the increase in the cost of living. Namely, Estonia’s consumer

price index does not include an interest rate component.

The social protection system still has

adequacy and coverage gaps.

Estonia’s social

protection benefits expenditure is one of the

lowest in the EU (15.4% vs 26.8% of GDP in 2023)

and in the Baltics. The current geo-political

situation and increased public spending on defence

calls for efficient and well-targeted funding that

will slowly but steadily continue to improve social

protection. The impact of social transfers

(excluding pensions) on poverty reduction

increased from 27.7% in 2023 to 31.5% in 2024,

below the EU average of 34.4%, pointing to

further scope for increasing both the efficiency

and effectiveness of social benefits. The low

coverage and restrictive eligibility criteria of

unemployment benefits, especially for people in

non-standard forms of work and the self-

employed, contribute to higher poverty risks. The

self-employed are not covered by unemployment

insurance and can only access the non-

contributory unemployment allowance (under the

same conditions as employees). There are also

gaps in sickness benefits, where the self-employed

only have access to voluntary coverage. With the

self-employed and part-time workers accounting

for a growing share of total employment

–

rising

from 9% to 12% and from 11.7% to 15.7%

respectively in the last decade (

178

)

–

it is crucial

that Estonia proceeds as planned with reforming

its unemployment insurance system by 2026 and

proposing legislation in 2025 to extend the

coverage of the unemployment insurance benefits

system to people in non-standard forms of work.

The subsistence benefit (Estonia’s minimum

income scheme) is relatively low (41.4% of the

poverty threshold vs 55.6% for the EU; 41.4% of

the income of a low-wage earner vs 46.1% for the

EU) (

179

Inequalities are relatively high, exacerbated

by economic and structural factors that

impact lower-income groups.

Income inequality,

as measured by the income quintile share ratio,

fell in 2024 , when the income of the richest 20%

of the population was around 5 times that of the

poorest 20%. Wealth inequalities in Estonia are

among the highest in the euro area, with the

richest 10% holding 59% of net wealth (euro area

average: 53.4%). The income share of the bottom

40% is below the EU average, but it rose back to

(

178

) Estonian Central Bank,

‘Job

Market Review 2, 2024’.

(

179

) SPC benchmarking exercise on minimum income - Income

2022.

2016

2017

2018

2019

2020

2021

2022

2023

2024

kom (2025) 0206 - Ingen titel

2020 levels in 2024. Estonia has one of the

smallest middle classes in the EU, with 55% of

households in the medium-income bracket (

180

). It

has one of the largest low-income classes in the

EU, with 33% of households in this category.

Inequalities are mainly driven by the low adequacy

of the social safety net and the weak income

redistribution system. The impact of taxes (see

Annex 1) and transfers in reducing income

inequality (measured by the S80/S20 ratio) is

weak (40% vs 48% for the EU) (

181

). Other

significant factors include the high percentage of

low-wage earners, leading to high in-market

income inequality, and the low coverage of

collective bargaining (21%). Several tax reforms

(see Annex 12) in 2025 are not expected to reduce

income inequality (

182

). The

Estonia 2035

development strategy, adopted in 2021, sets

modest strategic goals for reducing inequality and

poverty, but acknowledges the importance of

addressing regional, gender and age-based

inequalities in the job market.

Pension adequacy remains a challenge, with

low replacement rates and demographic

pressures.

Pensions increased sharply in recent

years, growing by 10.6% in 2024 due to

indexation and rising social tax revenues. However,

they remain among the lowest in the EU relative to

work incomes and a main driver of old-age

poverty, with an aggregate replacement ratio of

50% in 2024 (vs 61% in the EU) and a relative

median income ratio of 61% for those aged over

65 in 2024 (EU: 90% in 2024) (

183

). The adequacy

of minimum pensions (EUR 372 as of April 2024)

remains an issue. The 2021 pension reform, which

introduced the option to opt out from the statutory

funded pension scheme, risks further undermining

pension adequacy and increasing long-term

poverty risk for retirees (

184

). By the end of 2022,

(

180

) Eurofound (2024):

Developments in income inequality and

the middle class in the EU | European Foundation for the

Improvement of Living and Working Conditions,

p. 63.

(

181

) Source: European Commission calculations based on

Eurostat.

(

182

) Euromod analysis (2024).

(

183

) The aggregate replacement ratio is defined as the ratio of

the median individual gross pension of people aged 65-74

to the median individual gross earnings of people aged 50-

59., while the relative median income ratio compares the

median equivalised disposable income of individuals aged

65 and over to that of all individuals aged below 65.

(

184

) Ministry of Finance and Ministry of Social Affairs: Estonian

Pension System Sustainability Analysis (2022):

Eesti

214 000 people had opted out of the scheme,

taking out around 30% of the total funding

(EUR 1.8 billion) (

185

). Recent adjustments, an

income tax exemption up to EUR 776 (

186

) and

allowances for pensioners living alone can help

reduce old-age poverty. Demographic trends are

likely to put financial pressure on the pension

system, which is increasingly relying on longer

working lives to maintain its adequacy and fiscal

sustainability. The share of the population aged 65

and over is projected to rise from 20.4% in 2022

to 27.1% in 2050, with the old-age dependency

ratio increasing from 32.3% to 46.2%.

Estonia continues to face challenges with

long-term care and healthcare provision, as

quality and availability vary significantly

across municipalities.

Despite falling sharply in

2024, self-reported unmet needs for medical care

remain among the highest in the EU, at 8.5% (EU:

2.5%) (see Annex 14). It remains roughly twice as

high for persons with disabilities compared to

others, mostly related to regional income

inequalities. Estonia’s long-term

care (LTC)

services are severely underfunded, with one of the

lowest public expenditure levels in the EU (0.4% of

GDP vs 1.7% in 2022). The lack of quality services

is exacerbated by staff shortages. In 2019, only

10.3% of people aged 65 and over used home

care services (EU: 28.6%), and in 2022 only 2.9%

of those aged over 65 received public home care,

compared to 4.3% in 24-hour residential care. In

2023, home services recipients were significantly

less than those utilising residential care (

187

pointing to an insufficient supply of home care

services. Supply has increased in the last 10 years,

but significant regional differences remain due to

reliance on municipal funding. Access to social

services varies significantly depending on the

municipality, driven by inequalities in supply and

pricing. While quality assurance measures exist,

such as recommended guidelines for service

providers and municipal supervisors, enforcement

of these measures is weak. The insufficient

availability of care services often shifts caregiving

responsibilities to relatives, particularly women,

limiting their job market participation and reducing

pensionisüsteemi jätkusuutlikkuse

analüüs_sotsiaalministeerium.pdf.

(

185

)

2024 Ageing Report Estonia - Country Fiche

(

186

) As of January 2025.

(

187

) According to the Ministry of Social Affairs.

kom (2025) 0206 - Ingen titel

Estonia’s competitiveness. With demand for

healthcare and LTC growing due to demographic

changes, ensuring sufficient funding for both is

warranted.

Estonia has made progress in addressing

healthcare and LTC challenges, supported by

EU funds.

Initiatives include community-based

service places (including for the elderly) and

integrated centres for social and welfare services

supported by the European Regional Development

Fund. Several reforms included in the Estonian

recovery and resilience plan were adopted to help

improve LTC access, such as legislation defining

long-term care and requiring local authorities to

prioritise home-based care with quality services.

An action plan was also introduced to integrate

social and healthcare services. The European

Social Fund Plus (ESF+) is financing accessible,

high-quality social services to support carers and

persons with disabilities in accessing the job

market and society. A major step in LTC provision

was the care reform which entered into force in

July 2023. It provided additional financial

resources to local governments to help them

organise LTC, reducing out-of-pocket payments for

general care services. Challenges remain in

ensuring the adequate financing, quality and

availability of care services in all municipalities.

Better coordination between social security,

healthcare systems and municipalities, along with

prioritisation of home and community-based care

and assistive technologies, could improve the

quality of these services.

Energy and transport poverty remain

relatively low.

In 2024, 3.6% of households were

unable to keep their homes adequately warm and

5.7% faced arrears on utility bills, both below the

EU averages (9.2%. and 6.9%). Estonia addresses

energy poverty mainly through social welfare

measures and financial assistance for low-income

households, aiming to improve building energy

efficiency and provide support for energy bills.

Other structural measures will be supported by the

Social Climate Fund in the coming years. As

regards transport poverty, the share of people who

could not afford a car stood at 7.2% in 2024 (EU:

5.6%), with vulnerable income groups experiencing

fewer difficulties than their EU counterparts.

House prices have been trending upwards at

a fast pace, almost doubling since 2015.

After

increasing by 15.1% and 22.2% in 2021 and 2022

respectively, the growth rate slowed by 5.9% in

2023. In Q3-2024, house prices were still growing

at 6.4% year-on-year. They are estimated to be

overvalued by around 10% as at end-2024.

Mortgage rates increased from 2.7% in 2022 to

5.5% in 2023, moderating mortgage issuance

slightly. Building permits decreased significantly in

2022 and 2023, returning to the lower level of

2015, implying that housing supply will drop and

house prices will continue to increase. However,

the number of permits started increasing again in

2024.

Overall

housing

affordability

has

deteriorated over the past decade.

House

prices have increased more rapidly than household

income in the last ten years and the house price-

to-income ratio has grown by around 10% since

2015. House price levels compared to incomes

remain one of the highest in the EU. Taking into

account the cost of mortgage funding, the

borrowing capacity of households worsened over

the past decade as well since an average

household now needs a higher share of its annual

income for mortgage payments. While the rental

market is very small, the ratio of new rents to

incomes decreased over the last decade.

Despite

recent increases, Estonia’s housing

cost overburden is still relatively low.

2024, 8.6% of the population faced housing costs

above 40% of their total disposable household

income (EU: 8.2%), up 3.7 pps from 2022. Among

those at risk of poverty, the housing cost

overburden rate rose by 10.7 pps to reach 29.6%

(vs 31.1% for the EU), driven by limited access to

affordable housing. As a result, the percentage of

households living in overcrowded accommodation

rose to 18.4% in 2024, 5.7 pps higher than in

2020. The latest partial homelessness count took

place in 2021 when just over 1 000 people were

reported as homeless. Home ownership in Estonia

remains much higher than the EU average (80.7%

vs 69.2% for the EU in 2023), with a smaller share

of the population renting (19.3% vs 30.2% for the

EU).

kom (2025) 0206 - Ingen titel

ANNEX 12: EDUCATION AND SKILLS

Estonia provides its young people with high-

quality basic education, but skills shortages

and mismatches risk limiting the country’s

competitiveness.

However, inequalities have

been widening slightly over the past decade, and

teacher shortages pose a risk to the quality of

education, especially in science, technology,

engineering and maths (STEM) fields. Estonia does

not fully capitalise on its high-performing basic

education system as the share of young people

leaving the education system with lower

secondary education or less is still relatively high.

To tackle early leaving from education, skills

shortages and mismatches, the country extended

obligatory learning until age 18 and is

restructuring

vocational

upper

secondary

education. In many sectors of the economy, skills

shortages and mismatches hamper productivity

and innovation. Against the backdrop of a

shrinking workforce and low resource and labour

productivity, the education and training system is

under pressure to ensure a sufficient supply of

highly skilled graduates in fields relevant to the

labour market, especially in upper secondary

vocational and higher education.

A recent reform of early childhood education

and care (ECEC) aims to improve quality and

participation.

Participation in ECEC of children

aged three to the start of compulsory education

(seven years) stood at 91.2% in 2023, somewhat

below the EU average of 94.6% and the EU target

of 96% by 2030. The rate was 37.8% for children

under the age of three, close to the national

Barcelona target of 40.5% and in line with the EU

average (37.5%). While municipalities are legally

required to provide a place in childcare to every

child from 18 months onwards, some struggle to

do so due to a shortage of places. A new ECEC law,

which will take effect in September 2025, is

expected to help alleviate these shortages and

further improve quality by integrating childcare

services and preschool education into a single

system and standardising requirements (e.g. on

staff qualifications). Integrated ECEC systems, like

the one to be fully established through the reform,

are in line with EU policy recommendations (

188

While Estonia is one of the EU’s top

performers in basic skills, educational

inequalities have slightly increased over the

(

188

)

Council Recommendation of 22 May 2019 on High-Quality

Early Childhood Education and Care Systems.

last decade.

The 2022 OECD Programme for

International Student Assessment (PISA) confirmed

that the country has the smallest share of low-

achieving pupils in the EU (only 15% of pupils

have a low performance in mathematics, 13.8% in

reading and 10.1% in science). However, the

performance gap between advantaged and

disadvantaged pupils has slightly widened (4.5 pps

in mathematics, 4.7 pps in reading and 5.1 pps in

science), but the increase was below the EU

average

(7.4 pps,

8.2 pps

and

7.4 pps,

respectively). This widening socio-economic gap

risks exacerbating educational inequalities. These

inequalities have negative implications later in life,

limiting the participation of disadvantaged young

people in higher education and of adults who are

less qualified in lifelong learning. In turn, this

impacts these vulnerable young people’s labour

market prospects and career opportunities.

Graph A12.1:

Teacher shortages (2015-2022)

2015

2018

Estonia

2022

(1) % of students in schools where principals report that a

lack of teaching staff hinders instruction

Source:

OECD (2023), PISA 2022 results (Volume II)

Persistent teacher shortages pose a risk to

the quality of education.

The 2022 PISA survey

shows a significant increase in the number of

pupils who study in schools where school leaders

perceive the shortage of teachers (73% vs 44% in

2018) or of qualified teachers (51% vs 33% in

2018) as an obstacle to teaching (see Graph

A10.1). Shortages remain particularly severe in

science and mathematics and for support

specialists. The shortages of fully qualified

kom (2025) 0206 - Ingen titel

teachers (

189

) are exacerbated by: (i) an ageing

teacher population (

190

); (ii) high dropout rates of

entry-level teachers (

191

); and (iii) the new

requirements for Estonian language proficiency to

manage the transition to Estonian as language of

instruction in all public schools. A recent audit

warned that the share of qualified teachers is

moving away from the 2026 target of 90% (

192

The reasons for teacher shortages relate to: (i)

high workloads, flat career structures and below-

average pay for tertiary-educated workers; (ii) a

lack of recognition for the teaching profession; (iii)

insufficient preparation for the job, especially for

novice teachers; and (iv) varying levels of school

management quality. As Estonia’s workforce is

shrinking, competition from other sectors further

exacerbates teacher attrition, particularly in

subjects linked to STEM (

193

Policies to attract and retain more teachers

target initial education, career structure, pay

and working conditions, but funding

constraints may be a challenge.

As admissions

to initial teacher education programmes have

increased in recent years (partly due to

scholarships), teacher retention is a key issue. This

starts with graduates from initial teacher

education who do not work as teachers,

constituting a teacher reserve that could reduce

the shortage of qualified teachers (

194

). The 2022-

2026 teacher action plan sets out measures to

make the teaching profession more attractive (

195

The Education Ministry plans to extend the plan

beyond 2026. There are, however, no publicly

available progress reports on the action plan.

Teacher pay still lags behind the pay of similarly

educated workers (

196

)). After pay rises of 23.9% in

(

189

) The share of fully qualified teachers (teaching certificate and

master’s degree) decreased from 87% to 81%

between

2017 and 2022.

(

190

) educ_uoe_perp01: in 2022, 37.1% of teachers were over 55,

well above the EU average of 24.8%.

(

191

) In 2022, 55% of teacher training graduates had worked as a

teacher for five consecutive years after graduation.

(

192

) National Audit Office, 2024,

Õpetajate vastavus

kvalifikatsiooninõuetele ja ainepädevus.

(

193

) Leijen et.al. (2024)

The shortage of teachers in Estonia,

European Journal of Teacher Education.

(

194

) Arenguseire Keskus (2024).

Õpetajate reserv Eestis

(

195

) Estonian Ministry of Education and Research. (2021).

Õpetajate järelkasvu tegevuskava

(Action Plan for the Next

Generation of Teachers).

(

196

) OECD (2024) Education at a Glance, Figure D3.1.

2023 and 6.6% in 2024, no funding for further

increases is included in the 2025 state budget and

in the government-approved fiscal strategy for the

next four years (

197

)). The government has

developed a four-stage career model with

potential salary increases per level, but its

implementation depends on the availability of

state funding.

Graph A12.2:

Employment rate by educational

attainment (annual)

100

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

population

20-64

High skilled

Medium skilled

Low skilled

Employment rates of people aged 20-64 (% of population)

Source:

Eurostat, LFS [lfsa_ergaed]

Early school leaving and dropping out from

higher education result in an insufficient

supply of skilled graduates.

More than 1 in 10

young people leave the education and training

system with very low or no qualifications (11% in

2024), and boys are more likely to do so than girls

(13.3% vs 8.6%). While this is close to the EU

average (9.3%), the early leaving rate has not

significantly decreased in the last decade. Early

school

leavers

have

significantly

lower

employment rates (see Graph A12.2) and higher at

-risk-of-poverty-and-social-exclusion

(AROPE)

rates (Estonia has one of the highest AROPE rates

in the EU, see Annex 10). In 2024, 42.7% of

Estonians aged 25-34 held a university degree

(EU: 44.2%), but the dropout rate from higher

education is relatively high, as is the gender gap

(21.6 pps vs an EU 11.2 pps difference in favour

of women in 2024). While women tend to have

(

197

) Ministry of Finance (2024): 2025 state budget

2025. aasta

riigieelarve seletuskiri_final.pdf.

kom (2025) 0206 - Ingen titel

higher educational attainment than men, they are

often hired for less prominent positions, limiting

the full use of their skills. Estonia’s gender pay gap

remains high despite the country’s strong

performance in the gender employment gap (see

Annex 10). Early school leaving remains higher for

persons with disabilities (24.9% vs 8.9% for

people with no disability in 2024), indicating the

need for stronger inclusion efforts.

To reduce early school leaving, the

government raised the compulsory education

age to 18 in 2024 (previously 16 years).

The

reform will require ninth grade pupils in the

2025/2026 academic year to stay in formal or

non-formal education until 18, unless they

complete their education earlier. It aims to ensure

that less than 5% of pupils leave education and

training early and that all young people acquire

upper secondary education or vocational skills. Its

effectiveness will depend on implementation and

adequate funding.

An ambitious reform aims to boost the

attractiveness of vocational education.

2023, 43.4% of pupils in medium-level education

attended vocational education and training (VET)

programmes (EU: 52.4%) (

198

). VET graduates’

exposure to work-based learning fell to 79.8% in

2025 (EU: 65.3%). The new reform aims to better

integrate vocational education with other

educational levels by bridging formal and non-

formal learning and strengthening links between

general, vocational and applied higher education.

The reform: (i) promotes work-based learning; (ii)

brings in new curricula focused on general

competencies; (iii) proposes vocational secondary

education as a viable alternative to general upper

secondary education; and (iv) puts in place career

counselling and flexible study arrangements to

retain students and reduce dropout rates. The first

pilots of the new curricula will be implemented in

2025/2026, with all VET curricula updated by

2027. Employment rates of VET graduates have

fluctuated

–

dropping from 77% before the

COVID-19 pandemic to 72% in 2020 and 2021,

then rising to 84.7% in 2023. This highlights the

need for the VET system to better respond to

labour market demands and improve the flexibility

of VET provision (

199

Estonia performs well in adult skills and

digital literacy, but skills shortages and

mismatches remain.

Estonian adult skills exceed

the OECD average, although older adults are

significantly less proficient in all areas (

200

). In

2023, 62.6% of the population had at least a

basic level of digital skills (vs 55.6% in the EU).

However, skills shortages and mismatches remain,

with over 18 000 additional workers needed every

year according to OSKA projections (

201

)

–

with half

of these requiring higher education and a third

requiring vocational skills. According to the OECD,

23% of workers report that they have lower skills

than required for their job (OECD: 10%). On

qualifications, almost 40% of workers are

overqualified or underqualified (

202

). Mismatches

can also be a driver of unemployment when

unemployed persons are inefficiently matched

with job vacancies. Depending on the region and

industry, the contribution of mismatch to the level

of unemployment is roughly 5-8%, a study

found (

203

). In 2022, 41.8% of adults participated

in education and training over the last 12 months,

exceeding the EU average of 39.5%. Participation

is higher among young people (49.5% for 25-34-

year-olds vs 31.2% for 55-64-year-olds) and

considerably lower for adults with lower levels of

education at 18.9%, in line with the EU average.

Estonia aims to further strengthen adult learning,

targeting an annual participation rate of 52.3% by

2030 to support upskilling and labour market

adaptability. In addition, a project funded by the

EU’s Technical Support Instrument, running

between 2024 and 2026, aims to help Estonia

improve its skills forecasting and governance.

Estonia is making educational pathways

more flexible to better reach under-

represented groups.

The rise in varied and

flexible learning and career pathways gives new

(

199

) Cedefop & ReferNet (2023) VET developments in line with

national and European priorities.

(

200

) OECD (2024),

Survey of Adult Skills 2023: Estonia.

(

201

) The Estonian Qualification Authority (OSKA):

OSKA

üldprognoos 2022-2031 | OSKA uuringud.

(

202

) OECD (2024),

OECD Economic Surveys: Estonia 2024.

(

203

) Ferraro, S., & Kommer, P. (2023). Is there a labour market

mismatch in Estonia? Measuring regional, occupational and

industrial labour market mismatch.

Baltic Journal of

Economics, 23(2),

200–228.

(

198

) European Commission,

Education and Training Monitor 2024.

kom (2025) 0206 - Ingen titel

opportunities to different societal groups to

participate in learning. Efforts focus on recognising

skills acquired in different contexts and boosting

transparency for learners, employers and other

specialists through a digital skills profile tool.

Micro-credentials, or

‘micro-qualifications’ in

Estonia, are a flexible tool for adult learners to

gain partial or full qualifications. To regulate this

emerging field and extend the micro-qualifications

system to vocational education and adult training

institutions, amendments to the Adult Education

Act were adopted in July 2024 and will enter into

force in 2025. These lay down micro-qualifications

and set out principles for providing them and a

quality assurance mechanism. Nevertheless, it is

challenging to ensure that these new opportunities

cater to the varied learning needs of different

groups (e.g. low-skilled adults, older adults, people

with little learning experience).

EU funds support large scale programmes

that aim to shape the development of adult

learning opportunities.

The ongoing professional

qualifications system reform (

204

), financed by the

European Social Fund (ESF), improves the system’s

flexibility and responsiveness to market changes.

If implemented effectively, it can improve adult

education and career and training planning. In

2023, EUR 70 million was allocated under the

European Social Fund Plus (ESF+) to open up adult

learning opportunities, including by supporting the

development of professional and general skills.

As part of the broader need for upskilling

and reskilling the current workforce,

developing green skills is particularly critical

for Estonia’s green transition.

The country is

facing economic restructuring to decrease its

dependence on oil shale. 40% of the biggest

employers registered in the Ida-Viru County (in

North-East Estonia) are oil shale companies. The

shift from oil shale for energy production

threatens around 16 000 jobs, posing broader

economic risks in the region. In 2024, Estonia

reported labour shortages in occupations requiring

specific skills related to the green transition,

including plumbers and pipe fitters, electricians,

and industrial and production engineers (

205

). 31%

of small and medium-sized enterprises recognise

(

204

)

ESF project ‘Reform of Estonian professional qualifications

system’

- OSKA.

(

205

) European Labour Authority,

EURES Report on labour

shortages and surpluses 2024,

2025.

the growing importance of green skills (EU: 42%).

Estonia is expanding upskilling and reskilling

efforts in energy-intensive industries. Among

those, investments under the Just Transition Fund

aim to mitigate the social and employment impact

of the transition, including through reskilling and

upskilling programmes for workers in Ida-Viru’s oil

shale industry and job transition measures. In

addition, Estonia supports the green skills relevant

to VET and adult education under its recovery and

resilience plan.

Estonia has a high share of tertiary ICT

graduates but faces a shortage of specialists

in STEM fields due to rising demand.

Among

young people (16-24), basic digital skills

proficiency is among the highest in the EU (86.8%

vs 69.6% on average). The share of STEM tertiary

graduates is slightly higher than the EU average

(27.5% vs 26.6% in the EU in 2022), and the share

of ICT graduates is one of the highest (9.6% vs

4.5% in the EU). Among pupils in medium-level

VET, 49.2% were enrolled in STEM fields in 2022

(36.2% in the EU). However, the supply is

insufficient to meet the growing demand as the

green and digital transitions require more STEM

specialists than are currently projected to graduate

(

206

). Computer programming will have by far the

highest number of job openings in the next 10

years (see Annex 3), and the lack of computer and

software skills is the main gap identified among

under-skilled Estonian workers (

207

The country promotes teaching and learning

STEM subjects at all types and levels of

education.

From primary school to upper

secondary education, VET, adult education and

non-formal learning, programmes and initiatives

aim to raise interest in STEM, update learning

content and improve teaching quality. Student

enrolment has increased in ICT but declined in

technology and engineering. This has resulted in

setting up ICT and engineering academies, funded

partly by EU cohesion policy (

208

). Closing the

supply gap for STEM professionals will largely

depend on these measures.

(

206

) OSKA. (2020a).

Eesti tööturg täna ja homme 2019-2027

(Estonia’s labour market today and tomorrow 2019-2027).

(

207

) OECD (2024):

Survey of Adult Skills 2023: Estonia

(

208

) Education and Youth Board;

IT Akadeemia programm,

Inseneriakadeemia.

kom (2025) 0206 - Ingen titel

ANNEX 13: SOCIAL SCOREBOARD

Table A13.1:

Social Scoreboard for Estonia

Adult participation in learning (during the last 12 months, excl. guided on

the job training, % of the population aged 25-64, 2022)

Early leavers from education and training

(% of the population aged 18-24, 2024)

Equal opportunities and

access to the labour market

Share of individuals who have basic or above basic overall digital skills

(% of the population aged 16-74, 2023)

Young people not in employment, education or training

(% of the population aged 15-29, 2024)

Gender employment gap

(percentage points, population aged 20-64, 2024)

Income quintile ratio

(S80/S20, 2024)

Employment rate

(% of the population aged 20-64, 2024)

Dynamic labour markets

and fair workingconditions

Unemployment rate

(% of the active population aged 15-74, 2024)

Long term unemployment

(% of the active population aged 15-74, 2024)

Gross disposable household income (GDHI) per capita growth

(index, 2008=100, 2023)

At risk of poverty or social exclusion (AROPE) rate

(% of the total population, 2024)

At risk of poverty or social exclusion (AROPE) rate for children

(% of the population aged 0-17, 2024)

Impact of social transfers (other than pensions) on poverty reduction

(% reduction of AROP, 2024)

Social protection and

inclusion

Disability employment gap

(percentage points, population aged 20-64, 2024)

Housing cost overburden

(% of the total population, 2024)

Children aged less than 3 years in formal childcare

(% of the under 3-years-old population, 2024)

Self-reported unmet need for medical care

(% of the population aged 16+, 2024)

Critical situation

To watch

Weak but improving Good but to monitor

On average

Better than average

Best performers

41,8

11,0

62,6

11,0

1,7

5,03

81,8

7,6

1,8

126,0

22,2

16,5

31,5

20,8

8,6

36,8

8,5

(1) Update of 5 May 2025. Members States are categorised based on the Social Scoreboard according to a methodology agreed

with the EMCO and SPC Committees. Please consult the Annex of the Joint Employment Report 2025 for details on the

methodology (https://employment-social-affairs.ec.europa.eu/joint-employment-report-2025-0).

Source:

Eurostat

kom (2025) 0206 - Ingen titel

ANNEX 14: HEALTH AND HEALTH SYSTEMS

Estonia’s

health system faces challenges

that need to be addressed if the country is to

improve the health of its population and

social

fairness,

while

boosting

the

competitiveness of its economy.

These

challenges include: (i) limited access to care and

low life expectancy, the latter linked to high

treatable mortality; (ii) suboptimal funding and

cost-effectiveness of the health system; (iii)

shortages of healthcare workers; and (iv) an

uneven geographical distribution of healthcare

resources.

Life expectancy at birth in Estonia rebounded

to its pre-COVID-19 level but remains among

the lowest in the EU.

There are striking gender

gaps in health outcomes. While women can expect

to live nine years longer than men, they can only

expect to live about 2.6 years longer than men in

good health. Treatable mortality remains among

the highest in the EU (126.2 per 100 000

population in 2022 vs an EU average of 89.7),

suggesting that the health system is not as

effective as it should be. Diseases of the

circulatory system (‘cardiovascular diseases’) and

cancer remain the leading causes of death, with

mortality

rates

higher

than

the

average. Estonia participates in several joint

actions funded by EU4Health, which address

treatable mortality, particularly caused by cancer.

Estonia’s

suicide rate is one of the highest in the

EU. In 2025, Estonia launched its first Suicide

Prevention Action Plan for 2025–2028, aiming to

comprehensively reduce the number of suicides. In

2022, a mental health action plan for 2023–2026

was adopted. It focuses on improving mental

health services, promoting mental well-being, and

reducing stigma associated with mental health

issues.

Graph A14.1:

Life expectancy at birth, years

81.3

Graph A14.2:

Treatable mortality

per 100 000 population

133.5

129.4

123.9

135.6

126.2

91.3

89.2

91.7

93.3

89.7

2018

2019

Estonia

2020

2021

2022

Age-standardised death rate

(mortality that could be

avoided through optimal quality healthcare)

Source:

Eurostat (hlth_cd_apr)

80.4

80.1

80.6

81.4

79.0

78.9

77.2

78.1

2022

79.1

2019

2020

Estonia

2021

2023

Health expenditure in Estonia is low, as is the

share of health costs supported by public

funds.

In 2022, health spending per inhabitant

(adjusted for differences in purchasing power) was

one of the lowest in the EU and only 75% of it was

publicly funded (see Annex 1). The country

therefore has a high level of out-of-pocket

payments for healthcare (23.2% in 2022 vs an EU

average of 14.3% (

209

)). Accordingly, Estonia

received a country-specific recommendation in

2024 to ‘improve access to and financing of

healthcare and long-term

care’ (see Annex 16).

Out-of-pocket payments went predominantly

towards outpatient medical goods, followed by

dental care, long-term care and outpatient

specialist care. Estonia is gradually increasing

dental care benefits and reducing co-payments for

medical goods. Starting in 2025, the Medicines

and Medical Devices Reimbursement Act will

reduce co-payments for medicines, medical

devices, and inpatient nursing care, with additional

compensation measures taking effect in May

2025. In 2023, spending on public health

increased, primarily driven by rising wages of

healthcare professionals. The government is

currently conducting an analysis of Estonia’s

healthcare financing and exploring potential

solutions. Several options to make the financing of

healthcare more sustainable have been proposed

by experts, but a final decision has not been taken

yet. Historically, investment levels have been low,

with a marked increase in recent years. In 2022,

investment in health capital formation as a share

of total health expenditure was higher than the EU

average (

210

). Through its recovery and resilience

(

209

) OECD/European Commission (2024),

Health at a Glance:

Europe 2024 - State of Health in the EU Cycle,

pp.186-187.

210

( ) see Health at a Glance Europe 2018, 2020, 2022 and 2024.

Source:

Eurostat (demo_mlexpec)

kom (2025) 0206 - Ingen titel

Table A14.1:

Key health indicators

2019

Cancer mortality per 100 000 population

Mortality due to circulatory diseases per 100 000 population

Current expenditure on health, purchasing power standards, per capita

Public share of health expenditure, % of current health expenditure

Spending on prevention, % of current health expenditure

Available hospital beds per 100 000 population**

Doctors per 1 000 population*

Nurses per 1 000 population*

Mortality at working age (20-64 years), % of total mortality

Number of patents (pharma / biotech / medical technology)

Total consumption of antibacterials for systemic use,

daily defined dose per 1 000 inhabitants****

279.5

570.3

1 739

74.5

3.6

402

3.5

6.2

18.6

11.8

2020

265.0

560.2

1 901

77.1

4.9

397

3.5

6.4

19.0

10.5

2021

265.8

599.4

2 058

76.1

8.8

389

3.4

6.5

17.6

10.1

2022

246.7

575.0

2 014

74.8

5.7

374

3.5

6.6

17.8

12.4

2023

n.a.

76.1

n.a.

18.3

12.7

EU average*

(latest year)

234.7 (2022)

336.4 (2022)

3 684.6 (2022)

81.3 (2022)

5.5 (2022)

444 (2022)

4.2 (2022)*

7.6 (2022)*

14.3 (2023)

29 (2023)***

20.0 (2023)

*The EU average is weighted for all indicators except for doctors and nurses per 1 000 population, for which the EU simple

average is used based on 2022 (or latest 2021) data except for Luxembourg (2017). Doctors’

density data refer to practising

doctors in all countries except Greece, Portugal (licensed to practise) and Slovakia (professionally active). Density of nurses: data

refer to practising nurses (EU recognised qualification) in most countries except France and Slovakia (professionally active) and

Greece (hospital only). **‘Available hospital beds’ covers somatic care, not psychiatric care. ***The EU median is used for patents.

Source:

Eurostat database; European Patent Office; ****European Centre for Disease Prevention and Control (ECDC) for 2023.

plan (RRP), Estonia is investing EUR 72 million to

address health-related challenges. This is

complemented by EUR 1.4 million under the

cohesion policy funds for 2021-2027 (

211

Spending on disease prevention is close to

the EU average, yet preventable mortality

remains high.

In 2022, spending on prevention

accounted for 5.7% of

Estonia’s

total health

expenditure, close to the EU average of 5.5%. The

rate of preventable mortality is among the highest

in the EU, linked to a high prevalence of

behavioural risk factors. These include tobacco

smoking/vaping, dietary risks, alcohol consumption

and low levels of physical activity. Estonia has

introduced several policies to address these

challenges, including its national health plan for

2020-2030. It aims at increasing life expectancy

by promoting healthy choices and addressing risk

factors.

The “Estonia 2035" strategy

focuses on

innovation, a sustainable economy, and an

inclusive society. In 2019, amendments to

Estonia’s

Tobacco Act banned displays of tobacco

products, flavoured e-cigarette liquids and remote

tobacco sales.

Access to healthcare is limited, as Estonia’s

health system is under resourced.

In 2024, the

proportion of the Estonian population reporting

unmet needs for medical care remained among

the highest in the EU (8.5% vs an EU average of

2.5%) (see Annex 11). Long waiting times are the

main reason for these unmet needs, with lower

income groups affected the most. Access to

(

211

) The EU cohesion policy data reflect the status as of

13 May 2024.

healthcare is particularly low in rural areas (see

Annex 17). A range of measures under the RRP

and the cohesion policy aim to improve the

accessibility of the health system. The Estonian

RRP envisages investments to: (i) improve health

infrastructure (construction of a county hospital

and health centre in Vijandi); (ii) implement

organisational reforms; (iii) strengthen primary

healthcare; and (iv) support the health workforce.

A Hospital Network Development Roadmap has

been prepared, with a view to enhancing the

Estonian healthcare system. Furthermore, with the

help of the cohesion policy funds, Estonia

improves healthcare by setting up multidisciplinary

healthcare centres and offering complex services

via multiprofessional teams and investing in

integrated care. Estonia also participates in the

Joint Action CIRCE-JA(

212

) funded by EU4Health

aimed at transferring good practices in primary

care between EU countries.

Shortages of health staff limit the

availability of care.

Estonia faces persistent

shortages in its health workforce. In 2022, Estonia

had fewer doctors (3.5 per 1 000 population) and

nurses (6.7 per 1 000 population) than the EU

average (4.2 and 7.6 respectively). The number of

new medical graduates in Estonia plateaued

between 2010 and 2022 and remained

significantly below the EU average. A high

proportion of doctors and nurses are aged 55 and

over, raising concerns about the long-term

accessibility of health services. There is an acute

shortage of family doctors and medical staff,

particularly outside the major cities of Tallinn and

(

212

) https://circeja.nfz.gov.pl/

kom (2025) 0206 - Ingen titel

Tartu. Working conditions are a major deterrent to

entering the profession, particularly low pay. The

government has taken steps to address these

challenges, including by increasing the minimum

hourly wages of doctors and nurses as of

1 April 2023. The Hospital Network Development

Roadmap includes measures to train the workforce

on teamwork, task shifting between specialists and

using digital solutions. The government has also

approved a Strategic Framework for addressing

health workforce shortages as part of the Estonian

RRP. The RRP also includes measures to improve

the reimbursement system for doctors, nurses and

pharmacists as well as to incentivise health staff

to work in remote areas. It is also addressing the

low graduation levels of nurses by increasing

admissions to nursing training by 5%. Estonia

participates in the Joint Action HEROES (

213

) funded

by EU4Health, aimed at sharing expertise among

EU countries on health workforce planning.

The Estonian health system’s potential to

drive innovation and foster industrial

development in the EU medical sector

remains largely untapped.

Estonia is among the

EU countries with the lowest levels of public

spending on health research and development.

This is reflected in the low number of European

patents granted: 4 in 2023 in the combined areas

of pharmaceuticals, biotechnologies and medical

devices (vs an EU median of 29 (

214

)). Clinical trial

activity in Estonia is also limited (

215

) (see Annex

4).

Estonia aims to scale up the digitalisation of

its health system, with support from EU

programmes.

The shares of people accessing

their personal health records online and using

online health services (excluding phone) instead of

in-person consultations are well above the EU

average, despite a slight drop between 2022 and

2024. However, there is still room for

improvement. Measures to boost the digital

transformation of

Estonia’s

health sector set out in

its RRP include updating the governance

framework for e-health and coordinating the

development of e-health services. Legislative

amendments are also planned to improve access

to specialised care in primary care settings by

(

213

) JA HEROES | Health workforce planning project

(https://healthworkforce.eu/the-project/).

214

( ) European Patent Office,

Data to download | epo.org.

(

215

) EMA (2024),

Monitoring the European clinical trials

environment,

p. 9.

expanding e-consultation to include remote

consultations with specialists. Estonia also

participates in joint actions and direct grants under

EU4Health aimed at improving the interoperability

of health data and facilitating the implementation

of the European Health Data Space.

kom (2025) 0206 - Ingen titel

health

HORIZONTAL

ANNEX 15: SUSTAINABLE DEVELOPMENT GOALS

This Annex assesses Estonia’s progress on

the Sustainable Development Goals (SDGs)

along the dimensions of competitiveness,

sustainability,

social

fairness

and

macroeconomic stability.

The 17 SDGs and their

related indicators provide a policy framework

under the UN’s 2030 Agenda for Sustainable

Development. The aim is to end all forms of

poverty, fight inequalities and tackle climate

change and the environmental crisis, while

ensuring that no one is left behind. The EU and its

Member States are committed to this historic

global framework agreement and to playing an

active role in maximising progress on the SDGs.

The graph below is based on the EU SDG indicator

set developed to monitor progress on the SDGs in

the EU.

Estonia is performing well and improving on

one SDG on

competitiveness

(Quality

education, SDG 4) but the country still needs

to catch up with the EU average on SDG 9

(Industry, innovation and infrastructure).

Graph A15.1:

Progress towards the SDGs in Estonia

Furthermore, Estonia is falling behind and

needs to catch up with the EU average on

SDG 8 (Decent work and economic growth).

The country is performing well and improving on

adult learning (SDG 4; participation in learning in

the past four weeks is up from 19.6% of the

active population aged 25-64 in 2019 to 23.3% in

2024; EU average of 13.3%). While gross domestic

expenditure on R&D (SDG 9) increased from 1.4%

of GDP in 2018 to 1.8% in 2023, it is still below

the EU average of 2.2%. The share of buses and

trains in passenger transport (SGD 9) fell from

19.8% of inland passenger-km in 2017 to 14.4%

in 2022, to below the EU average of 16.6%. The

share of households with high-speed internet

connection (SDG 9) increased from 57.4% of

households in 2019 to 76.9% in 2023 (the EU

average: 78.8%). The Estonian recovery and

resilience plan (RRP) includes significant reforms

and investments to boost innovation and digital

transition in businesses. However, there is still

room for improvement in addressing the

For detailed datasets on the various SDGs, see the annual Eurostat report ‘Sustainable

development in the European Union’;

for

details on extensive country-specific data on the short-term progress of Member States:

Key findings

–

Sustainable development

indicators - Eurostat (europa.eu).

A high status does not mean that a country is close to reaching a specific SDG, but signals that it

is doing better than the EU on average. The progress score is an absolute measure based on the indicator trends over the past

five years. The calculation does not take into account any target values, as most EU policy targets are only valid for the aggregate

EU level. Depending on data availability for each goal, not all 17 SDGs are shown for each country.

Source:

Eurostat, latest update of 28 April 2025. Data refer mainly to the period 2018-2023 or 2019-2024. Data on SDGs may

vary across the report and its annexes due to different cut-off dates.

kom (2025) 0206 - Ingen titel

remaining challenges.

While Estonia performs well and is improving

on several of the SDGs related to

sustainability

(SDGs 2, 6, 7 and 15), the

country needs to catch up with the EU

average on SDGs 9, 12, 13 and 14.

Furthermore, Estonia performs well but is

moving away from SDG 11 (Sustainable

cities and communities).

The area under organic

farming (SDG 2) increased from 20.0% of utilised

agricultural area in 2017 to 23.4% in 2022 (the

EU average: 10.5). The country is also performing

well and has made progress on most of the

affordable and clean energy indicators (SDG 7),

including on the share of renewable energy in

gross final energy consumption, from 30.0% in

2018 to 41.0% in 2023 (EU average 24.6%).

However, while Estonia’s material footprint

(SDG 12) decreased from 30.6 tonnes per

inhabitant in 2018 to 29.9 in 2023, it is still above

the EU average of 14.2 tonnes per inhabitant.

Similarly, while the country’s air

emissions

intensity of fine particulate matter from industry

(SDG 9) has fallen from 0.37 grams per euro in

2017 to 0.14 in 2022, it is still above the EU

average of 0.06 grams per euro. On the other

hand, population living in households suffering

from noise (SDG 11) increased from 8.6% of

population in 2018 to 9.6% in 2023 (EU average:

18.2%).

Estonia is moving away from and still needs

to catch up on three SDG indicators (1, 3 and

8) related to

social fairness.

But the country

is improving on SDG 5 (Gender equality) and

performs well and is also improving on three

other

fairness-related

SDG indicators (4,

7and 10).

Estonia is moving away from the SDGs

and needs to catch up with the EU average on

poverty reduction (SDG 1), including on people at

risk of poverty or social exclusion (up from 23.6%

of the population in 2018 to 24.2% in 2023; EU

average: 21.3%). While there is an improvement

on the self-reported unmet needs for medical care

(SDG 3), falling from 16.4% of the population

aged 16 or over in 2018 to 12.9% in 2023, this is

still above the EU average of 2.4%. The in-work

at-risk-of-poverty rate (SDG 8) increased from

9.3% of the population aged 18 or over in 2018 to

10.3% in 2023 (EU average: 8.3%). Furthermore,

Estonia still needs to catch up on some gender

equality indicators (SDG 5). The average gross

hourly earnings of women went from being 21.8%

lower than men in 2018 to 16.9% lower in 2023

but this is still above the EU average of 12.0%.

However, compared to 2019, tertiary educational

attainment (SDG 4) increased from 40.6% of the

population aged 25 to 34 to 42.7% in 2024 (EU

average: 44.2%). Similarly, EU/non-EU citizenship

gap for employment rate (SDG 10) decreased

from 6.8 pp difference (% of population aged 20

to 64) in 2018 to 6.6 pp difference in 2024 (EU

average: 12.5). The Estonian RRP includes

measures to address challenges in primary

healthcare and long-term care.

Estonia is moving away from SDGs and still

needs to catch up on one SDG indicator

related to

macroeconomic stability

(SDG 8).

But the preforms well and is improving on

SDG 17 (Partnerships for the goals).

Real GDP

per capita (SDG 8) has declined (contracted from

EUR 21 650 in 2019 to EUR 21 020 in 2024) and

remains below the EU average of EUR 33 530.(

216

)

The general government gross debt (SDG 17) grew

from 9.0% of the GDP in 2019 to 23.6% of the

GDP in 2024, but it remains below the EU average

of 81.0%. The general government total

expenditure on law courts (SDG 16) has also

increased from EUR 58.2 per capita in 2018 to

EUR 81.3 in 2023 but remains below the EU

average of EUR 121.7.

As the SDGs form an overarching framework, any

links to relevant SDGs are either explained or

depicted with icons in the other annexes.

(

216

) Adjusted for inflation using a chain-linked methodology and

with 2020 serving as the reference point.

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ANNEX 16: CSR PROGRESS AND EU FUNDS IMPLEMENTATION

Estonia faces structural challenges in a wide

range of policy areas, as identified in the

country-specific recommendations (CSRs)

addressed to the country as part of the

European Semester.

They refer, among other

things, to the accessibility and affordability of

healthcare and long-term care, research and

innovation, access to finance for SMEs, labour

productivity and skills, energy efficiency,

investment into renewable energy and storage,

bio-based innovation, sustainable transport,

increasing social protection including broader

coverage of unemployment benefits.

The Commission has assessed the 2019-2024

CSRs considering the policy action taken by

Estonia to date and the commitments in its

recovery and resilience plan (RRP).

At this

stage, Estonia has made

at least ‘some progress’

on 91% of the CSRs (

217

)

, and ‘limited progress’ on

9% (Table A16.2).

EU funding instruments provide considerable

resources

Estonia

supporting

investments and structural reforms to

increase competitiveness, environmental

sustainability and social fairness, while

helping to address challenges identified in

the CSRs.

In addition to the EUR 953 million

funding from the Recovery and Resilience Facility

(RRF) in 2021-2026, EU cohesion policy funds (

218

)

are providing EUR 3.4 billion to Estonia (amounting

to EUR 5.2 billion with national co-financing) for

2021-2027 (

219

) to boost regional competitiveness

and growth. Support from these instruments

combined represents around 11.3% of 2024 GDP

(

220

). The contribution of these instruments to

different policy objectives is outlined in Graphs

A16.1 and A16.2. This substantial support comes

on top of financing provided to Estonia under the

(

217

) 11% of the 2019-2024 CSRs have been fully implemented,

15% substantially implemented, and some progress has

been made on 65%.

(

218

) In 2021-2027, cohesion policy funds include the European

Regional Development Fund, the Cohesion Fund, the

European Social Fund Plus and the Just Transition Fund. The

information on cohesion policy included in this annex is

based on the adopted programme with the cut-off date of 5

May 2025.

(

219

) European territorial cooperation (ETC) programmes are

excluded from the figure.

(

220

) RRF funding includes both grants and loans, where

applicable. GDP figures are based on Eurostat data for 2024.

2014-2020 multiannual financial framework,

which financed projects until 2023 and has had

significant benefits for the economy and Estonian

society. Project selection under the 2021-2027

cohesion policy programme is advanced, while

implementation of selected projects has also

gained

momentum,

enabling

substantial

investment.

The Estonian RRP contains 28 investments

and 17 reforms to stimulate sustainable

growth, enhance social fairness and support

the green and digital transitions of the

economy.

Implementation is well on its way with

66% of the funds disbursed. At present, Estonia

has fulfilled 49% of the milestones and targets in

its RRP (

221

). Efforts are needed to ensure

completion of all RRP measures by 31 August

2026. Public investment is hampered by the

difficulties of investing in outlying and Eastern

border regions where skills may be lacking, and

the limited availability of private finance makes

public investment all the more important.

Estonia also receives funding from several

other EU instruments,

including those listed in

table A16.1. Most notably, the common

agricultural policy (CAP) provides Estonia with an

EU contribution of EUR 1.4 billion under the CAP

strategic plan for 2023-2027 (

222

). Furthermore,

operations amounting to EUR 101.3 million (

223

)

have been signed under the InvestEU instrument

backed by the EU guarantee, improving access to

financing for riskier operations in Estonia.

(

221

) As of mid-May 2025, Estonia has submitted 3 payment

requests.

(

222

)

An overview of Estonia’s formally approved strategy to

implement the EU’s common agricultural policy nationally

can be found at:

https://agriculture.ec.europa.eu/cap-my-

country/cap-strategic-plans/estonia_en

(

223

) Data reflect the situation on 31.12.2024.

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Graph A16.1:

Distribution of RRF funding in Estonia by

policy field

Green transition

Digital transformation

Smart, sustainable and

inclusive growth

Social & territorial cohesion

Health & resilience

Next generation

forecasted skills demand on the labour market.

Adults with low education or skill level are able to

continue their studies in non-stationary formal

education. It is estimated that nearly 62 000

adults will participate in non-formal learning

supporting upskilling and reskilling.

Other

funds

are

contributing

competitiveness in Estonia, for instance

through open calls.

The Connecting Europe

Facility has financed strategic investments in rail

transport such as the Rail Baltica, the development

of alternative fuel infrastructure in the air and

maritime sectors, the integration of the energy

market including the synchronisation of the Baltic

States with the EU’s electricity system and in 5G

connectivity along transport corridors, along Via

Baltica. Horizon Europe has supported research

and innovation, from scientific breakthroughs to

scaling up innovations, with Climate, Energy and

Mobility as top priorities in Estonia. The Technical

Support Instrument (TSI) in Estonia is focused on

the development of a national strategy for critical

entities and enhancing capabilities for managing

crisis and on promoting the uptake of strategic

public procurement.

Estonia’s RRP also contains ambitious

measures

improve

the

business

environment and competitiveness.

As part of

the measures covered by payment requests

submitted over the past year, Estonia supported

the digitalisation of companies, focusing on small

and medium-sized enterprises as well as training

programmes to reinforce the digital skills of ICT

experts and managers. In addition, Estonia took

steps to improve the competitiveness of Estonian

companies in the foreign markets.

Estonia

adopted a new legislation that streamlines

planning, permitting and environmental impact

assessment processes for wind energy projects. To

help Estonia implement its RRP, in 2024 the TSI

assisted with measures to strengthen the skills

governance system.

EU funds are playing a significant role in

promoting environmental sustainability and

green transition in Estonia during the current

seven-year EU budget (multiannual financial

framework).

The JTF is instrumental in

supporting: (i) efforts to phase out oil shale in the

energy sector, essential for reducing greenhouse

gas emissions in Estonia; and (ii) the creation of

job opportunities in the mining region of Ida-

Virumaa. Cohesion policy funds also make a

(1) Each RRP measure helps achieve the aims of two of the

six policy pillars of the RRF. The primary contribution is shown

in the outer circle, while the secondary contribution is shown

in the inner circle. Each circle represents 100% of the RRF

funds. Therefore, the total contribution to all pillars displayed

on this chart amounts to 200% of the RRF funds allocated.

Source:

European Commission.

Graph A16.2:

Distribution of cohesion policy funding

across policy objectives in Estonia

Smarter Europe

Greener Europe

Connected Europe

Social Europe

Europe closer to citizens

JTF specific objective

Source:

European Commission

Cohesion policy funds aim to increase the

productivity and competitiveness of Estonian

firms and improve the business environment.

For example, the European Regional Development

Fund (ERDF) and the Just Transition Fund (JTF) will

provide support to over 12 000 businesses,

focusing on boosting innovation and ERDF will

enable nearly 800 businesses to invest in new

skills relevant for smart specialisation, industrial

transition and entrepreneurship. ESF+ allocates

EUR 132 million to better match vocational and

higher education with labour market needs, with a

focus on labour market gaps and including digital

skills. Alongside furthering digital skills, ESF+

actions focus on key competencies, future skills,

science, technology, engineering and mathematics.

Interventions also include EUR 82.2 million in

support of high-quality flexible non-formal

upskilling and reskilling that takes into account the

kom (2025) 0206 - Ingen titel

substantial contribution to improving energy

efficiency, improving separate waste collection

and promoting clean transport. For example, the

funds are supporting the electrification of 450 km

of TEN-T railway track and solutions for clean

urban transport. The CAP strategic plan allocates

40% of its rural development budget (EUR 174

million) to environmental and climate objectives,

and 28% of its direct payments budget (EUR 279

million) to eco-schemes. This support is focused on

carbon sequestration, biodiversity and valuable

grasslands, and increasing knowledge about

sustainable production.

Estonia’s RRP, including the REPowerEU

chapter, has a comprehensive set of reforms

and investments for the green transition.

Green technologies Development Programme has

been set up by Estonia to support the development

and uptake of green technologies by businesses.

Works have been progressing towards expanding

the electricity network and increasing its capacity

by 160 megawatts. Moreover, Estonia has been

supporting the increase in production capacity of

biomethane thus accelerating the integration of

renewable energy in the system.

Promoting fairness, social cohesion and

improving access to basic services are

among the key priorities of EU funding in

Estonia.

For instance, the ERDF supports the

integration of healthcare and social services

through the setting-up of integrated service and

wellbeing centres. In addition, ESF+ supports the

development of a comprehensive long-term care

system that prevents, reduces and helps address

care needs, promotes independent living and

livelihoods, and supports carers. Over EUR 43

million are dedicated to measures that improve

access to long-term care. It is estimated that 70%

of participating care givers will benefit from a

reduced care burden. ESF+ also supports active

inclusion with a view to promoting equal

opportunities, non-discrimination and active

participation, and improving employability, in

particular for disadvantaged groups. Over

EUR 33.5 million will be spent on addressing child

poverty. Interventions for children and young

people focus on improving access services,

supporting integrated active inclusion measures

and preventing risk-taking behaviour through the

involvement of local communities and civil society.

Estonia’s RRP contains several reforms and

investments related to fairness and social

policies.

Reforms aiming at reducing the gender

pay gap include the roll out of a digital tool

supporting employers to implement the principle

of equal pay. Furthermore, reforms in the health

sector are bearing fruit: a new reimbursement

system has been established for nurses to

incentivise them to work in remote areas covering

advanced practice nurses, in primary health care

and hospitals. This is complemented by a further

increase of the admissions to nursing training. To

help Estonia implement its RRP, in 2024 the TSI

assisted with measures to improve the primary

health system.

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Table A16.1:

Selected EU funds with adopted allocations - summary data (million EUR)

Instrument/policy

RRF grants (including the RepowerEU allocation)

RRF loans

Allocation 2021-2026

953.2

Disbursed since 2021 (1)

627.1

Disbursed since 2021 (3)

(covering total payments to the

Member State on commitments

originating from both 2014-

2020 and 2021-2027

programming periods)

2 107.7

1 095.8

587.2

282.1

142.6

50.7

Instrument/policy

Allocation 2014-2020 (2)

Allocation 2021-2027

Cohesion policy (total)

European Regional Development Fund (ERDF)

Cohesion Fund (CF)

European Social Fund (ESF, ESF+)

Just Transition Fund (JTF)

Fisheries

European Maritime, Fisheries and Aquaculture Fund (EMFAF)

and the European Maritime and Fisheries Fund (EMFF)

Migration and home affairs

Migration, border management and internal security - AMIF,

BMVI and ISF (4)

The common agricultural policy under the CAP strategic

plan (5)

Total under the CAP strategic plan

European Agricultural Guarantee Fund (EAGF)

European Fund for Agricultural Development (EAFRD)

3 702.1

2 051.2

1 061.5

589.3

3 369.3

1 701.6

779.7

534.2

353.9

97.4

101.0

68.7

Allocation 2023-2027

1 448.7

1 008.6

440.1

91.4

34.0

Disbursements under the

CAP Strategic Plan (6)

434.1

391.3

42.8

(1) The cut-off date for data on disbursements under the RRF is 31 May 2025.

(2) Cohesion policy 2014-2020 allocations include REACT-EU appropriations committed in 2021-2022.

(3) These amounts relate only to disbursements made from 2021 onwards and do not include payments made to the Member

State before 2021. Hence the figures do not comprise the totality of payments corresponding to the 2014-2020 allocation. The

cut-off date for data on disbursements under EMFAF and EMFF is 29 April 2025. The cut-off date for data on disbursements

under cohesion policy funds, AMIF, BMVI and ISF is 5 May 2025.

(4) AMIF - Asylum, Migration and Integration Fund; BMVI- Border Management and Visa Instrument; ISF - Internal Security Fund.

(5) Expenditure outside the CAP strategic plan is not included.

(6) The cut-off date for data on EARDF disbursements is 5 May 2025. The information on EAGF disbursements is based on the

Member State declarations until March 2025. Disbursements for the Direct Payments (EAGF) started in 2024.

Source:

European Commission

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Table A16.2:

Estonia

2019 CSR 1

Ensure that the nominal growth rate of net primary government expenditure does

not exceed 4.1% in 2020, corresponding to an annual structural adjustment of

0.6% of GDP.

Ensure effective supervision and the enforcement of the anti-money laundering

framework.

2019 CSR 2

Address skills shortages and foster innovation by improving the capacity and

labour market relevance of the education and training system.

Improve the adequacy of the social safety net and access to affordable and

integrated social services.

Take measures to reduce the gender pay gap, including by improving wage

transparency.

2019 CSR 3

Focus investment-related economic policy on sustainable transport and energy

infrastructure, including interconnections, on fostering research and innovation,

and on resource and energy efficiency, taking into account regional disparities.

2020 CSR 1

In line with the general escape clause, take all necessary measures to effectively

address the pandemic, sustain the economy and support the ensuing recovery.

When economic conditions allow, pursue fiscal policies aimed at achieving prudent

medium-term fiscal positions and ensuring debt sustainability, while enhancing

investment.

Improve the accessibility and resilience of the health system, including by

addressing the shortages of health workers, strengthening primary care and

ensuring the supply of critical medical products.

2020 CSR2

Strengthen the adequacy of the social safety net, including by broadening the

coverage of unemployment benefits.

2020 CSR 3

Front-load mature public investment projects

and promote private investment to foster the economic recovery.

Focus investment on the green and digital transition, in particular on digitalisation

of companies,

research and innovation,

clean and efficient production and use of energy,

resource efficiency, and

sustainable transport, contributing to a progressive decarbonisation of the

economy.

Support the innovation capacity of small and medium-sized enterprises,

and ensure sufficient access to finance.

2020 CSR 4

Step up the efforts to ensure effective supervision and enforcement of the anti-

money laundering framework.

Assessment in May 2025

Substantial progress

Not relevant anymore

SDG 8, 16

Relevant SDGs

Substantial progress

Some progress

SDG 8, 16

SDG 4

SDG 1, 2, 10

SDG 8, 10

Some progress

SDG 7, 9, 10, 11, 13

Some progress

Not relevant anymore

SDG 8, 16

Some progress

SDG 3

Some progress

Substantial progress

Some progress

Limited progress

Substantial progress

Some progress

Substantial progress

SDG 8, 16

SDG 8, 9

SDG 9

SDG 7, 9, 13

SDG 6, 7, 12, 15

SDG 11

SDG 8, 9

SDG 1, 2, 10

(Continued on the next page)

kom (2025) 0206 - Ingen titel

Table (continued)

2021 CSR 1

In 2022, maintain a supportive fiscal stance, including the impulse provided by the

Recovery and Resilience Facility, and preserve nationally financed investment.

When economic conditions allow, pursue a fiscal policy aimed at achieving prudent

medium-term fiscal positions and ensuring fiscal sustainability in the medium term.

At the same time, enhance investment to boost growth potential.

Pay particular attention to the composition of public finances, on both the revenue

and expenditure sides of the budget, and to the quality of budgetary measures in

order to ensure a sustainable and inclusive recovery. Prioritise sustainable and

growth-enhancing investment, in particular investment supporting the green and

digital transition.

Give priority to fiscal structural reforms that will help provide financing for public

policy priorities and contribute to the long-term sustainability of public finances,

including, where relevant, by strengthening the coverage, adequacy and

sustainability of health and social protection systems for all.

2022 CSR 1

In 2023, ensure that the growth of nationally financed primary current expenditure

is in line with an overall neutral policy stance, taking into account continued

temporary and targeted support to households and firms most vulnerable to

energy price hikes and to people fleeing Ukraine. Stand ready to adjust current

spending to the evolving situation.

Expand public investment for the green and digital transitions, and for energy

security taking into account the REPowerEU initiative, including by making use of

the Recovery and Resilience Facility and other Union funds.

For the period beyond 2023, pursue a fiscal policy aimed at achieving prudent

medium-term fiscal positions.

2022 CSR 2

Proceed with the implementation of its recovery and resilience plan, in line with the

RRP implementation is monitored by assessing RRP payment requests

milestones and targets included in the Council Implementing Decision of 29

and analysing reports published twice a year on the achievement of the

milestones and targets. These are to be reflected in the country reports.

October 2021.

Submit the 2021-2027 cohesion policy programming documents with a view to

finalising their negotiations with the Commission and subsequently starting their

implementation.

2022 CSR 3

Strengthen social protection, including by extending the coverage of

unemployment benefits, in particular to those with short work spells and in non-

standard forms of work.

Improve the affordability and quality of long-term care, in particular by ensuring its

sustainable funding and integrating health and social services.

2022 CSR 4

Reduce overall reliance on fossil fuels and diversify imports of fossil fuels

by accelerating the deployment of renewables, including through further

streamlining of permitting procedures

ensuring sufficient capacity of interconnection

and strengthening the domestic electricity grid.

Increase energy efficiency, including of buildings, to reduce energy consumption.

Intensify efforts to improve the sustainability of the transport system, including

through electrification of the rail network and by increasing incentives to

encourage sustainable and less polluting transport, including the renewal of the

road vehicle stock.

Progress on the cohesion policy programming documents is monitored

under the EU cohesion policy.

Some progress

SDG 1, 2, 10

Not relevant anymore

SDG 8, 16

Not relevant anymore

SDG 8, 16

Not relevant anymore

SDG 8, 16

Not relevant anymore

SDG 8, 16

Not relevant anymore

SDG 8, 16

Not relevant anymore

SDG 8, 16

Not relevant anymore

SDG 8, 16

Some progress

Substantial progress

Some progress

SDG 3

SDG 7, 9, 13

SDG 7, 8, 9, 13

SDG 7, 9, 13

SDG 7

Some progress

SDG 11

(Continued on the next page)

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Table (continued)

2023 CSR 1

Wind down the emergency energy support measures in force, using the related

savings to reduce the government deficit, as soon as possible in 2023 and 2024.

Should renewed energy price increases necessitate new or continued support

measures, ensure that such support measures are targeted at protecting

vulnerable households and firms, are fiscally affordable and preserve incentives

for energy savings.

Ensure prudent fiscal policy, in particular by limiting the nominal increase in

nationally financed net primary expenditure in 2024 to not more than 4,9%.

Preserve nationally financed public investment and ensure the effective absorption

of grants under the Facility and of other Union funds, in particular to foster the

green and digital transitions.

For the period beyond 2024, continue to pursue a medium-term fiscal strategy of

gradual and sustainable consolidation, combined with investments and reforms

conducive to higher sustainable growth, in order to achieve a prudent medium-

term fiscal position.

2023 CSR 2

Proceed with the steady implementation of its recovery and resilience plan

including its REPowerEU chapter. Proceed with the swift implementation of

cohesion policy programmes, in close complementarity and synergy with the

recovery and resilience plan.

2023 CSR 3

Strengthen social protection, including to address old-age poverty, and by

extending the coverage of unemployment benefits, in particular for those with short

work spells and in non-standard forms of work.

Improve access to and the affordability of healthcare and

long-term care, in particular by ensuring their sustainable funding.

2023 CSR 4

Reduce overall reliance on fossil fuels,

accelerate the deployment of renewable energy

strengthening the domestic electricity grid capacity.

sources,

including

RRP implementation is monitored through the assessment of RRP

payment requests and analysis of the bi-annual reporting on the

achievement of the milestones and targets, to be reflected in the country

reports. Progress with the cohesion policy is monitored in the context of

the Cohesion Policy of the European Union.

Some progress

Limited progress

Some progress

SDG 7,9,13

SDG 1,2,10

SDG 3

Substantial progress

Full implementation

SDG 8,16

Full implementation

SDG 8,16

Substantial progress

SDG 8,16

Full implementation

SDG 8,16

Ensure sufficient capacity of electricity interconnections to increase the security of

supply and continue the synchronisation with the Union electricity grid.

Strengthen energy efficiency through new financing and support measures to meet

the targets of the long-term renovation strategy.

Continue efforts to increase the share of sustainable transport by electrifying the

rail network and through taxation that incentivises the gradual renewal of the

vehicle stock towards zero or low-emission vehicles.

Step up policy efforts aimed at the provision and acquisition of skills and

competences needed for the green transition.

2024 CSR 1

Submit the medium-term fiscal-structural plan in a timely manner.

In line with the requirements of the reformed Stability and Growth Pact, limit the

growth in net expenditure in 2025 to a rate consistent with, inter alia, reducing the

general government deficit below the 3% of GDP Treaty reference value and

keeping the general government debt at a prudent level over the medium term.

Broaden the tax base and

improve access to and financing of healthcare and

long-term care.

Substantial progress

SDG 7,9,13

Some progress

SDG 7

Some progress

SDG 8, 10, 11, 12

Some progress

Full implementation

SDG 4

SDG 8, 16

Full implementation

SDG 8, 16

Some progress

Limited progress

Some progress

SDG 8, 10, 12

SDG 3

(Continued on the next page)

kom (2025) 0206 - Ingen titel

Table (continued)

2024 CSR 2

Continue with the swift and effective implementation of the recovery and resilience

plan, including the REPowerEU chapter, ensuring completion of reforms and

investments by August 2026. Accelerate the implementation of the cohesion policy

programme. In the context of the mid-term review, continue focusing on the

agreed priorities, taking action to better address the needs in the long-term care

sector, while considering the opportunities provided by the Strategic Technologies

for Europe Platform initiative to improve competitiveness.

2024 CSR 3

Strengthen social protection, inter alia to address old-age poverty and by

extending the coverage of unemployment benefits, in particular to those with short

work spells and in non-standard forms of work.

2024 CSR 4

Reduce the share of oil shale in the energy mix and raise resource productivity

through bio-based innovation.

Improve labour productivity and skills supply through reskilling and upskilling, and

by better attracting and retaining talent.

RRP implementation is monitored through the assessment of RRP

payment requests and analysis of the bi-annual reporting on the

achievement of the milestones and targets. Progress with the cohesion

policy is monitored in the context of the Cohesion Policy of the

European Union.

Some progress

SDG 1, 2, 10

SDG 6, 12, 15

SDG 4

Source:

European Commission

100

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ANNEX 17: COMPETITIVE REGIONS

While Estonia scores well on quality of

government and ease of doing business, it

remains important for the country to boost

productivity and entrepreneurship outside

the main economic centres to address

disparities in regional development.

Estonia’s regional outlook continues to be

characterised by significant disparities

between its capital region

–

Põhja-Eesti

–

and the rest of the country.

In 2023, GDP per

head (purchasing power standard (PPS) in Põhja-

Eesti stood at 105% of the EU average. In the

remaining four NUTS 3 regions, GDP per head

ranged from 51% in Kesk-Eesti to 63% in Lõuna-

Eesti (Map A17.1).

Map A17.1:

GDP per head (in purchasing power

standard PPS), NUTS 3, 2023

100).

A deeper analysis of the index’s

components

reveals that Estonia outperformed the EU average

in the

basic

pillar, which includes factors such as

transport infrastructure and population health, and

in the advanced pillar, related to innovation

outputs and inputs. However, Estonia lagged

behind the EU average in the efficiency pillar,

which evaluates factors linked to labour market

efficiency and human capital.

Entrepreneurial activity and innovation are

highly concentrated in two counties, although

other regions also have competitive

advantages.

71% of companies are registered in

Harju (Põhja-Eesti) and Tartu (in Lõuna-Eesti)

counties and they produce 68% of Estonian goods

and 84% of services exports. While the relative

ease of doing business in Estonia provides

favourable conditions, particularly for starting a

business (

224

), and there are cases of businesses

successfully scaling up, larger tech-based

companies are generally concentrated in Tallinn

and the second biggest city of Tartu in the south

of the country. Innovation activity is also

concentrated in these two cities, clustering around

major universities. These cities host various

innovation ecosystems and clusters in areas such

as health and medicine, defence (dual-use

technologies), ICT, logistics and aviation. These

cities hold the biggest potential for creating and

scaling up tech-based companies. The county of

Ida-Viru (Kirde-Eesti) is transitioning out of an

economy relying largely on oil shale mining and

energy production. The existing industrial base

provides opportunities for developing new

industries. However, this transition also presents

economic and labour market challenges (see

Annex 11). The existence of a university branch in

the city of Kohtla-Järve that is already geared

towards a just transition both in terms of

education and applied research can help ensure

that skills development matches future needs. The

higher GDP and gross value added in Põhja-Eesti is

largely based on service-sector exports. The

economies of Lääne-Eesti, Kesk-Eesti and Lõuna-

Eesti (except Tartu County) are largely based on

forestry, agriculture, wood and food processing,

which have less added value

Source:

Eurostat

Competitiveness

In 2022, Estonia’s score in the EU Regional

Competitiveness Index exceeded the EU

average with a score of 106.5 (EU average =

(

224

) World Bank ease of doing business ranking.

101

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Table A17.1:

Selection of indicators at regional (NUTS 3)

level in Estonia

GDP per

head (PPS)

Real GDP

per head

growth

Productivity

Real

Productivity

Real

- GDP per productivity - GDP per productivity

person

growth

hour

growth (per

employed (per person worked

hour

(PPS)

employed)

(PPS)

worked)

Index

EU-27 = 100

2023

European Union

(27 MS)

Estonia

Põhja-Eesti

Lääne-Eesti

Kesk-Eesti

Kirde-Eesti

Lõuna-Eesti

100

105

Average

Index

annual

EU-27 = 100

% change

2014-2023

1.6

1.8

0.8

1.9

2.8

2.4

3.4

2023

100

2014-2023

0.6

0.8

0.1

1.4

2.1

1.8

2022

100

2013-2022

0.9

1.8

0.9

1.8

3.7

4.9

2.7

European Quality of Government Index (

226

)

exceeds the EU average but trust in regional and

local authorities has decreased, which could be

due to regional disparities and underfunding (see

Annex 6). Even though the administrative reform

of 2017 reduced the number of municipalities

from 213 to 79, many of them remain relatively

small. Local planning processes can act as barriers

to investments, where they are lengthy. Estonia

has launched changes to planning legislation to

speed up and streamline planning processes. Quick

adoption of relevant legislation could boost

economic development and attract new

investment, especially at local level.

In some areas such as water management,

fragmented public service provision raises

issues of financial sustainability.

The

fragmentation of the water management sector

(

227

) and the limited size of the many service

providers hinder the industry’s financial capacity to

operate, maintain and renew existing assets.

Estonia currently lacks a sustainable funding

strategy for the long-term operation and

maintenance of infrastructure that provides

drinking water and wastewater treatment services

but work on this has started (

228

). The road map for

water sector services reform is expected to be

completed by June 2025.

Significant socio-economic disparities persist

between urban and rural areas.

The weaker

performance of rural areas is further exacerbated

by low levels or lack of human capital and access

to services. The share of the working-age

population with a tertiary education is at its lowest

in rural regions, underperforming urban areas by

approximately 15 percentage points. In addition, in

comparison to rural areas, as well as towns and

suburbs, urban areas have lower rates of young

people not in employment, education, or training,

as well as those who have prematurely left

education or training (Table A17.2) (see also Annex

10).

(

226

)

European Quality of Government Index 2024 | University of

Gothenburg

(

227

) 135 water companies were operating in Estonia at the start of

2024, of which 90 were water companies designated by

municipalities and approx. 45 were various non-profit

organizations that meet the characteristics of a water company.

Source: Inception report on the implementation of the action

plan towards sustainable water services, 2023.

(

228

) OECD Study

‘Towards Sustainable Water Services in Estonia’, 2022.

Source:

Eurostat and JRC

The significant disparities in GDP per capita

across Estonia’s NUTS 3 regions are linked to

substantial gaps in labour productivity.

2022, productivity measured as GDP per hour

worked in purchasing power standard was below

the EU average (100) in all Estonian regions. It

ranged from 52% of the EU average in Lääne-

Eesti to 71% in Kirde-Eesti and 80% in the capital

region, Põhja-Eesti. Labour productivity in every

Estonian region was also below the average for

the EU’s transition regions, which stood at 93% of

the EU average. Increasing productivity across the

board, especially outside the better-performing

capital area, remains one of Estonia's key

challenges for the coming years.

Additional bottlenecks that hinder Estonia’s

competitiveness

are

low

resource

productivity, knowledge gaps in technology-

intensive business and low clarity in

government priorities and policies

(

225

Strengthening long-term strategic planning by

adapting to changing economic reality, with fully

integrating the green and digital transition,

increasing resource efficiency, and with stronger

focus on strategic new sectors like defence, could

help bring the economy back to growth.

While Estonia ranks well as regards the

quality of government, the capacity of

municipalities can vary, and local planning

processes can take time.

The quality of

government in Estonia, as measured by the

(

225

)

Eesti majanduse olukord ja väljavaated: konkurentsivõime

eksperdikogu raport Riigikogule, June 2024

102

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Table A17.2:

Socio-demographic indicators by degree of

urbanisation, 2024

Cities

Population with high educational attainment

(% of population aged 25-64)

Early leavers from education and training

(% of population aged 18-24)

NEET: Neither in employment nor in education

or training (% of population 15-34)

At-risk-of-poverty or social exclusion

(% of total population)

Housing cost overburden

(% of total population)

Towns and

Rural areas

suburbs

36.9

11.8

24.7

10.1

10.3

34.4

14.2

22.6

12.5

7.9

49.3

9.7

20.9

9.3

8.4

due to influx of refugees from Ukraine, there are

significant regional disparities. The population in

the capital region grew substantially by 12%,

whereas Kirde-Eesti experienced a sharp decline of

12%. In contrast, population declines in the

remaining NUTS 3 regions were relatively modest,

at less than 2% (

229

Housing cost overburden used to be highest

in urbanised areas of the country (

230

However, due to increases in 2023 and 2024,

approximately 10% of the population in towns and

suburbs and around 8% in cities and rural areas

live in households burdened by housing costs.

The relatively low population density in rural

areas translates into more challenges in

physical access to basic services, which may

be exacerbated by the trend of depopulation.

Access to healthcare infrastructure in Estonia is at

its lowest in rural areas, where only 13% of the

population lives within a 10-minute drive of a

hospital (

231

). This is well below the average for

rural areas in transition regions in the EU (34.6%)

and below the average for rural areas in the EU's

less developed regions (15.8%). While travel time

is not is not the main reason for the relatively high

unmet needs for healthcare in Estonia (see also

Annex 14), it is a more significant factor than in

most other Member States. Similarly, access to

primary school facilities is significantly lower in

rural areas, with only 21% of rural residents

having access to a primary school within a 15-

minute walk compared to an average of 63% in

urbanised areas (

232

). More remote municipalities

have started to close and downsize smaller

schools, partly as depopulation reduces demand

and therefore the viability of schools.

Source:

Eurostat

Graph A17.1:

GDP per capita in 2010-2022 in capital

region (Harjumaa) and counties at EUs external border

(% of Estonian average)

160

120

Harju

maakond

Ida-Viru

maakond

2010

Põlva

maakond

2015

2018

Tartu

maakond

2022

Võru

maakond

Source:

Statistics Estonia

The change in the GDP per capita in 2010-

2022 in counties on the EUs external border

shows convergence towards the national

average.

However, close monitoring of

developments on the impact of the Russian war of

aggression in Ukraine on border regions is still

warranted. In some border counties such as Põlva

and Võru, GDP per capita remains well below the

national average and the convergence has been

relatively slow (Graph A17.1).

(

229

) Average annual change per 1 000 residents.

(

230

) The housing cost overburden rate is the percentage of the

population living in households where the total housing costs (‘net’

of housing allowances) represent more than 40% of disposable

income (‘net’ of housing allowances).

(

231

) This figure is not based on the official definition of degree of

urbanisation.

(

232

) This figure is not based on the official definition of degree of

urbanisation.

Social fairness

Like its Baltic neighbours, Estonia is

experiencing depopulation in non-capital

regions.

While the country’s overall population

grew by 4.3% between 2014 and 2023, mainly

103

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Sustainability

The county of Ida-Viru faces the additional

challenges of phasing out production of

energy from oil shale and dealing with the

consequences of the transition as well as the

Russian war of aggression in Ukraine.

Nevertheless, the use of oil shale in energy

production is decreasing again after the world

energy crises. In 2023, Estonia’s average

greenhouse gas (GHG) emissions per capita of

10.5 tonnes of CO

equivalent were well above the

EU average of 7.1 tonnes and 7.7 tonnes in

transition regions. The energy production using oil

shale, which contributed substantially to the

country's GHG emissions (

233

), is fully concentrated

in the county of Ida-Viru on the eastern border.

The Just Transition Fund investments are starting

to mitigate the impact of the energy transition and

will create up to 1 000 jobs. They are also helping

reduce CO

emissions.

Untapped potential in solar and wind power

in the Estonia's NUTS 3 regions is relatively

high.

In 2023, the share of renewable energy in

the country's gross final energy consumption was

38.5%, and there is potential for a more extensive

uptake of renewable energy sources. In addition to

coastal areas, which already exploit wind energy to

an extent, there is untapped potential in inland

NUTS 3 regions (

234

). Exploiting the potential and

increasing the supply of renewable energy could

benefit not only Estonia, but economic cohesion in

the EU.

Access to alternative fuel infrastructure (

235

)

is relatively limited in Estonia.

In 2022, the

average number of electric vehicle charging points

within a 10

km drive from people’s homes was 30,

which is below the average for EU transition

regions (89) and far from the EU average (287). In

addition, infrastructure for charging electric

vehicles is concentrated in the capital region of

Põhja-Eesti where the number of charging points

(

233

) JRC regional emissions data (EDGAR database)

(

234

)

JRC data: 9th Report on economic, social and territorial cohesion,

Map 4.5.

(

235

) Indicators of access to alternative fuel infrastructure are based on

calculations by DG REGIO and the JRC, using data from the

European Alternative Fuels Observatory (EAFO), Eurostat, TomTom

and Eco-Movement.

within 10 km is 58. In all remaining NUTS 3

regions this number is below 10.

104