Finland: Government decides policy positions for remaining part of its term and for 2022–2025 General Government Fiscal Plan

NordenBladet — In its mid-term policy review, the Government outlined extensive measures to strengthen employment and public finances and to promote people’s wellbeing in Finland in the aftermath of the COVID-19 pandemic.

The decisions in the mid-term review include policies to strengthen growth, to continue on the path to carbon neutrality and to reduce inequality. The measures have been integrated into the 2022–2025 General Government Fiscal Plan, on which the Government determined its policy positions in connection with the mid-term policy review. In addition, the Government carried out a mid-term review of its climate measures.

The aim of the Government is to strengthen general government finances by means of growth, employment and moderate adjustment measures. The Government aims at a 75% employment rate and at turning the rising debt ratio onto a declining path by the middle of the decade.The Government’s work on climate change has progressed on schedule and the distance to the carbon neutrality target is now much shorter. The Government is committed to making decisions on further measures that are needed to achieve carbon neutrality by 2035.

In its mid-term policy review, the Government published a sustainability roadmap that describes the current state of social, economic and ecological sustainability in Finland and sets goals for 2030.

The policy positions approved by the Government at its mid-term policy review and spending limits discussion are set out in detail in Appendix 1.

1. Sustainable growth and fiscal balance
Government’s employment measures
The Government is committed to a long-term approach in its work to raise the employment rate through decisions that will bring an estimated 80,000 new jobs. The Government will continue the preparation of employment measures within the Ministerial Working Group on Promoting Employment. Decisions were already made by the Government at an earlier date on measures designed to bring 31,000–33,000 new jobs.

The measures decided in the mid-term policy review are aimed at achieving 40,000–44,500 new jobs. In addition, decisions on employment measures that will strengthen general government finances by EUR 110 million will be made before the end of the government term. The Government’s objective is that by the middle of the decade the employment rate will be 75%.

The Government’s employment measures and their job-creating impacts are presented in more detail in Appendix 1 (section 2).

General Government Fiscal Plan sets objectives for public financesThe General Government Fiscal Plan and, within it, Finland’s Stability Programme set out multiannual targets for general government finances concerning the general government budgetary position, public debt and public expenditure, and targets for the budgetary positions of general government subsectors.

Spending limits for central government finances
Not least as a result of the COVID-19 crisis, the overall picture of the Finnish economy and of the country’s financial policy needs diverges significantly from the autumn 2019 situation when the spending limits for the parliamentary term were set. The Government has pursued an exceptionally expansionary fiscal policy that has underpinned growth and employment, prevented a permanent loss of production capacity and temporarily raised spending in areas that fall within the expenditure ceiling.  Regarding the parliamentary term spending limits, the Government is in a situation where the room for manoeuvre within the spending limits does not allow the inclusion of unforeseen changes in expenditure and the implementation of all the reforms considered necessary by the Government.

Consequently, as part of the solutions determined in the mid-term policy review, the Government has decided that the parliamentary term spending limits will be raised for 2022–2023. The expenditure line will gradually descend towards the end of the parliamentary term and will continue on this path after the parliamentary term is over. The expenditure ceiling will be raised by EUR 900 million for 2022 and by EUR 500 million for 2023. In addition, the exceptional situation mechanism included in the spending limits rule under the Government Programme is available in 2021 and 2022, allowing an annual EUR 500 million for one-off expenditure. Direct COVID-19 related costs, i.e. health security costs, such as expenditure on testing and vaccination, will be covered as expenditure outside the spending limits in each of the years 2021–2023.

In connection with raising the spending limits, the Government has decided on a reallocation of expenditure, in which certain expenditure under the spending limits will be permanently reduced by EUR 370 million from 2023 onwards. As the savings are continuous, this will also reduce the expenditure covered by the spending limits from 2024 onwards.
(APPENDIX 1, heading 1.1. economic policy positions)

Tax base protection and investment-friendly environment
The Government’s aim is to strengthen the tax base, promote business investment and enhance competitiveness. The 2021 government budget session will decide on a tax package to strengthen central government finances by EUR 100–150 million and, in addition, on other tax changes to encourage investment and enhance competitiveness.

The Government will, for example, continue the double right of depreciation concerning investments in machinery and equipment for the years 2024–2025, which was decided earlier in 2020–2023. In addition, to broaden the tax liability of foreign investors, the Government will ensure that profits made by foreign funds in real estate investments are taxed as widely as possible in Finland. Taxation decisions will be used to encourage the replacement of heating systems that operate on fossil fuels. To foster switching heating systems and relinquishing the use of oil as a form of heating, the maximum domestic deduction will be raised from EUR 2,250 to EUR 3,500 and the compensation percentage from 40 to 60. The change is temporary and effective from 2022 to 2027. To assess the employment impact of the household expenses tax credit, a two-year trial will be outlined in the 2021 government budget session, whereby the maximum amount of household and nursing and care work that qualifies for the tax credit will be significantly increased.Implementation of the tax policy principles set out in the Government Programme will continue. Taxation of tobacco will be raised by a total of EUR 100 million in 2022–2023. In line with the decisions of the autumn 2019 government budget session, the tax expenditure on synthetic diesel will be removed in 2021–2023, which is estimated to increase tax revenue by a total of EUR 87 million in 2022–2023. An index adjustment will be made annually to the tax basis for earned income taxation, to ensure there is no rise in taxation as a result of a general rise in earnings. The creation of the wellbeing services counties will mean that a proportion of local government tax revenues will instead go to central government as the municipalities’ cost burden and duties are reduced substantially. In connection with this, taxation of earned income will be reduced to ensure that the reform does not lead to higher taxation for any group of earners. Without the effects of the reform, central government tax revenue in 2021–2025 would increase by an average of 2.8% annually.

The Government’s tax policy positions are given in more detail in Appendix 1, heading 1.2. Tax itemsCentral government on-budget revenue, expenditure and balance, EUR billion


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