Government to secure municipal services: net effect to municipalities to total over EUR 670 by 2011 as a result of the tax decisions
Government reached decision on spending limits for 2010 - 2013
The Government has reached agreement on the Government spending limits for 2010 – 2013. Due to the deep recession in the world economy, Finland’s export-led economy will contract substantially. Overall production will reduce by 5 per cent in 2009; however, the stimulus measures of the 2009 budget proposal and the first supplementary budget will work to compensate for the economic downturn and the rise of unemployment. In 2010, overall production will further shrink by 1.5 per cent. Overall production is estimated to start rising in 2011 with global economic recovery. Decreasing volume of available workforce, due to the ageing of the population, will have a negative effect on economic growth from 2012 onwards.
According to calculations by the EU Commission, stimulus measures undertaken by Finland represent top levels in Europe.
Government to secure municipal services and to strengthen the financial basis in municipalities
Public finances are affected by the rapid decline in tax revenue. Over the period 2009 – 2010, Government tax revenue is estimated to diminish by an average of just under 8 per cent a year, after which it would start growing by just over 7 per cent a year towards the end of the review period. Between 2010 – 2013, annual revenue estimates are set to be on average EUR 7.6 billion lower than projected a year ago.
Decreasing tax revenue will have a significant effect on government finances, but the situation will also present a challenge to local government finances. Before the decisions of spending limit discussions, the increase in the debt burden in local government is estimated at around one billion euros this year and the next. The debt burden of municipalities is estimated to reduce at an annual level by the end of the budget planning period, 2013, to about half a billion euros.
In order to provide help to municipalities, the Government will take on some of the deficit by making adjustments in the tax base. This way, basic public services, municipal daycare, schools and health centres, can be secured during difficult times as well.
The corporate income tax apportionments to local authorities will temporarily be increased by 10 percentage points to strengthen the financial basis in municipalities. The tax apportionment to local authorities will rise from 22.03 per cent to 32.03 per cent for the period 2009 – 2011.
Increasing the corporate income tax apportionments will raise municipalities’ income by approximately EUR 390 million in 2009, EUR 355 million in 2010 and EUR 380 million in 2011.
In addition, corporate income tax apportionment in parishes will be increased by 0.8 percentage points for the period 2009 – 2011, raising parishes’ share of corporate income tax revenue from 1.75% to 2.55%. These arrangements will increase parishes’ income by EUR 30 million in 2009 and 2010, and by EUR 34 million in 2011.
Lifting the social insurance contribution will perk local government finances by EUR 248 million from 2010 onwards. This year already, it will reduce labour costs of municipalities by EUR 78 million. This burden will be transferred for the Government to bear.
Minimum and maximum real estate tax rates will be raised from 2010 onwards
The fluctuation margin of the general real estate tax collected by local authorities will be readjusted from the current 0.5 – 1.0 per cent to 0.6 – 1.35 per cent.
The fluctuation margin of the real estate tax for permanent residential buildings will be readjusted from the current 0.22 - 0.5 per cent to 0.32 – 0.75 per cent.
Raising the lower limits will increase local authorities’ real estate tax revenue by approximately EUR 46 million. Should all local authorities apply the adjusted upper limits, their tax revenue would go up by almost EUR 900 million.
Overall impact on local government finances to total a minimum of EUR 674 EUR in 2011
With the measures proposed, the Government will strengthen local government finances by a total of approximately EUR 468 in 2009, EUR 649 million in 2010, and EUR 674 EUR in 2011.
Influence on local government finances may also be greater, depending on the number of municipalities to utilise the possibility to raise the real estate tax.
Government transfers will be brought together
Government transfers from individual administrative branches will be brought together from the beginning of 2010, as outlined in the Government Programme. This will be implemented in a cost-neutral way among local authorities and between local authorities and the Government. Discretionary government transfers will be incorporated into the composite budgetary item for central government transfers.
Problems caused by extremely low population density and living in the archipelago will be solved through long-term system shifts. This applies to eight archipelago municipalities (Enonkoski, Hailuoto, Kemiönsaari, Kustavi, Länsi-Turunmaa, Maalahti, Puumala and Sulkava) and twenty municipalities with extremely low population density (Savukoski, Enontekiö, Utsjoki, Inari, Pelkosenniemi, Kittilä, Salla, Sodankylä, Muonio, Ranua, Puolanka, Posio, Kolari, Pudasjärvi, Rautavaara, Suomussalmi, Utajärvi, Lestijärvi, Ristijärvi and Taivalkoski). These municipalities will be allocated a total of EUR 30 million from within the system.
Potential further measures to perk local government finances will be implemented only on condition that local authorities adopt a long-term scenario of moderation in general cost developments, and particularly in wage settlements.
Ecological tax reform to continue
The abolishment of the social insurance contribution will promote the Government’s ecological tax reform, which has been ongoing throughout its term of office. The costs of hiring an employee have been directly subject to the social insurance contribution, so this solution will reduce the total tax rate of labour.
In its 2008 budget, the blue-green coalition increased environmental taxes by around EUR 300 million. During the electoral period, taxation of labour has been eased by EUR 870 million. As a result of the abolishment of the social insurance contribution, labour tax rate will go down by a net total of approximately EUR 830 million. With the decisions made now, environmental taxes will be raised by EUR 750 million starting in 2011, after the economy has begun to pick up.
The focus of taxation has been shifted from the taxation of labour to the taxation targeted at the environment and consumption. Employers and consumers can reduce the amount of environmental and consumption taxes to be paid by making environment-friendly decisions.
Increases in environmental taxes and decreases in labour-related taxes have been timely implemented as far as economic developments are concerned. As a result, the structural reform in taxation produces the maximum stimulus impact.
Abolishment of the social security contribution to be compensated for through energy taxation
Tax increases will raise the aggregate energy tax accrual by one forth, i.e. by approximately EUR 750 million. Tax increases are mainly targeted at business (EUR 515 million), but also at households to a certain extend (EUR 235 million). Energy tax refunds to agriculture and professional greenhouse farming will be raised (by app. EUR 35 million) in a way which does not substantially increase energy tax burden on agriculture.
| tax level now | tax level in the future | change in tax accrual, app. | |
| heating gas oil, c/l | 8.7 | 15.7 | EUR 125 million |
| heavy fuel oil, c/kg | 6.7 | 14.85 | EUR 65 million |
| excise duty on electricity I, c/kWh | 0.88 | 1.7 | EUR 310 million |
| excise duty on electricity II, c/kWh | 0.26 | 0.7 | EUR 135 million |
| hard coal, e/t | 50.5 | 110.0 | EUR 50 million |
| natural gas, c/nm3 | 2.1 | 9 | EUR 100 million |
The adjustments will increase consumers’ energy costs in an average block-of-flats apartment by EUR 1.7 a month, and in an electricity or oil-heated one-family house by EUR 16.5 a month.
Additional tax guidelines
The excise duty on alcoholic beverages will be raised by 10 per cent as of 1 October 2009. Calculated in euros, the increase focuses on spirit drinks. The tax increase will increase Government tax revenue by an estimated figure of EUR 70 million.
As agreed earlier, value added-tax on foodstuffs will go down by 5 per cent to 12 per cent as of 1 October 2009.
By continuing moderate income taxation reductions in 2010, the Government may advocate the creation of pay agreements that promote job creation and competitiveness.
Government expenditure guidelines
With regard to the falling tax revenue due to the global recession, the Government will maintain a highly prudent approach when it comes to making any permanent increases in spending. Over the next few years, there will be strong pressure to control expenditure levels.
The expenditure level in public finances will not be cut in connection with the decision on spending limits; however, in order to cover the new expenditure pressures, internal transfers within the spending limit framework might be necessary. In order to ensure adequate working conditions as required by the economic situation and to enable the political shift of focus, the Government will prepare, within the spending limit framework, EUR 200 million redeployments to be included in the 2010 budget proposal.
This resource will be targeted at areas such as reforming adult education, enhancing active labour market measures, catering for the needs of immigration policy and promoting R & D and other investments which support future economic growth potential.
Activity support for the recipients of labour market support and basic unemployment allowance will be introduced as of 2010.
In addition, the Government has reached a decision on the national funding of the so-called EU farming Health Check.
The Government will implement the proposals on pensions policy and unemployment security made by labour market organisations as of 1 October 2010. As these decisions enter into force, income security expenditure is estimated to go up by EUR 89 million and labour market support expenditure by EUR 11 million. At the same time, expenditure related to basic social protection would go down by just under EUR 1 million. Due to these changes, Government expenditure is projected to increase by a total of EUR 12 million in 2010.
Appropriations outside the spending limits, such as those for financial investments, central government debt interest payments, funding of national pension payments, unemployment security and housing allowance will increase due to the weakened economic outlook. In 2010, expenditure outside the spending limits is forecast to exceed the estimate presented in the spring 2008 decision on spending limits by approximately EUR 3.5 billion.
Central government debt to grow
Central government debt is projected to reach a total of approximately EUR 64 billion this year. According to the projection, central government debt will continue to grow throughout the budget planning period, totalling around EUR 103 billion in 2013, or 50 per cent in relation to GDP.
In national accounting terms, it is forecast that central government finances will remain in deficit throughout the budget planning period. By 2011, the deficit is projected to stand at 4.7 per cent in relation to GDP.
The Government Programme includes an objective according to which government finances should display a structural surplus equalling one per cent of GDP by the end of the electoral period. In accordance with the Government mid-term policy review, this objective can be temporarily lifted if this is accompanied by decisions to reinforce general government finances structurally. Structural decisions to extend working lives will be prepared in separate working groups by the end of the year.
Further information: Hannu Mäkinen, Budget Director, Ministry of Finance, tel. +358 9 1603 3036