2011 Budget Proposal to Parliament - Tax decisions and local government finances
The Government is using income taxation as a means of promoting employment, better household purchasing power and domestic demand. There are plans to ease the tax bases on earned income by altogether EUR 400 million in 2011. The taxation of pension income would be eased by about EUR 30 million to ensure that the tax ratio for pension income stays in the same range as that for earned income. The basic deduction in local government taxation would be increased by around EUR 16 million to secure purchasing power for those in the very lowest income brackets. The changes in the local government tax base brought about by these adjustments in the basis of assessment would be offset through the system of central government transfers to local government.
The government proposes that the maximum earned income deduction be raised from EUR 650 to EUR 740 and that the accrual rate of the deduction is raised from 5.2% to 5.9%. The pension income deduction in central government taxation could be increased by raising the coefficient used in computing the full deduction from 3.78 to 3.80 and by lowering the deduction exit rate from 46% to 44%. The pension income deduction in local government taxation could be increased by lowering the deduction exit rate from 56% to 55%.
It is proposed that the maximum basic deduction in local government taxation should be raised from EUR 2,200 to EUR 2,500. To improve conditions for investment and to encourage private equity investment in companies, the government suggests that the time span for deducting losses from assignment be extended from 3 years to five years.
By ensuring that taxes on earned income do not become tougher on average relative to 2010, it would be possible to ease taxes on labour, taking into account the rise in the earnings level and forthcoming changes to employee contribution rates. It is proposed that the tax scale for 2011 be eased by raising the income thresholds in all brackets by about 3%.
Income tax scale 2011
Taxable earned income, EUR |
Tax at lower limit, EUR |
Rate within brackets, % |
15 600 - 23 200 |
8 |
6.5 |
23 200 - 37 800 |
502 |
17.5 |
37 800 - 68 200 |
3 057 |
21.5 |
68 200 - |
9 593 |
30.0 |
Changes in lottery tax
The lottery tax rate for lotteries other than totalisator betting executed by exclusive right would be raised to 10%.
Changes in value added taxes
The lower thresholds applied in VAT in the taxationof own use of facilities management services and construction services performed by the property owner would be raised from EUR 35,000 to EUR 50,000.
It is suggested that the reduced VAT rate of 9% applied to barber and hairdresser services and to small-scale repair services be kept in force until the end of 2011.
Government to increase transfers for basic public services
An index adjustment of 1.6% will be introduced to the central government transfers for basic public services in local government, which will increase transfers to local government by nearly EUR 120 million in 2011. Owing to changes in population numbers and factors related to the assessment bases, transfers will grow by over EUR 56 million. An increase of EUR 21.25 million will be made to the transfers for basic public services, as outlined in the Government Programme, to improve health care and social welfare services. Altogether, central government transfers to local government will grow by EUR 286 million relative to this year. A sum of EUR 8.039 billion is proposed for central government transfers to local government for financing basic public services.
It is proposed that altogether EUR 114 million be allocated to finance municipal mergers and towards cooperation grants. The appropriation is at the same level as in 2010. There will be six municipal mergers, reducing the total number of municipalities by six.
Planned increases in discretionary government transfers to local government amount to EUR 20 million.
Strict spending discipline warranted for stable local government finances
In the light of the latest basic public services budget, it appears that the economic crisis has caused less damage than feared to local government finances. The estimates are much more positive than last spring. The 2009 financial statements were better than expected, mainly due to the combined affect of several factors, such as the central government's substantial measures to strengthen local government finances, more favourable development of employment than anticipated, a slower increase in cost levels, and municipalities' own savings measures to control expenditure growth. Local government finances will be further boosted in 2010 owing to substantial municipal and real-estate tax percentage increases, a modest labour market settlement and the impact of economic recovery on the development of local government tax revenue both this year and next. Strict spending discipline will still be required to keep the operational finances of municipalities and joint municipal authorities stable.