Budget proposal geared for stimulus
The Government is set to borrow EUR 13 billion in 2010. Total expenditures under Minister of Finance Jyrki Katainen's budget proposal come to EUR 49.9 billion, with the budget deficit standing at EUR 12.9 billion.
Central government finances, which in 2008 still showed a surplus-to-GDP ratio of one per cent, will weaken considerably both this year and next. The National Accounts deficit ratio will rise from just over 4% this year to 6% in 2010. The deficit will be covered by increased borrowing: in 2010 the government debt to GDP ratio will edge up to around 44%.
General government finances are also set to deteriorate in the wake of rising unemployment and declining tax bases. The general government deficit to GDP ratio is projected to stand at 4½% in 2010, with the public debt ratio coming in at over 48%.
Increases in appropriations
The recommendations of a working group set up to prepare plans to bring forward investments and other measures are not yet included in the Ministry of Finance budget proposal. Ministries have been requested to draft budget proposals according to the recommendations for their respective administrative branches. Decisions on the inclusion of these proposals in the 2010 budget proposal will be made in the Government budget sessionat the end of August. The recommendations and proposed measures set out in the working group report would increase on-budget expenditure by EUR 330 million, EUR 80 million of which would be realized in 2010.
It is estimated that the unemployment rate will rise to 10½% next year, and therefore appropriations allocated for employment policy purposes will be increased by EUR 40 million. In addition, around EUR 80 million of ESF-earmarked funding will be spent on employment policy measures. The main focus will be on finding jobs for young people and recent graduates and on preventing long-term unemployment and marginalization.
Changes will be made to unemployment security and training benefits for the unemployed from the beginning of 2010. This will increase central government expenditure by EUR 25 million in 2010. The job alternation scheme will be established on a permanent basis.
The existing upper age limit for compulsory activation plans and obligatory participation in rehabilitative work programmes will be removed from the beginning of 2010. This will have the effect of increasing government expenditure by EUR 2.1 million.
The growing number of asylum seekers has driven up the costs of reception and increased compensations payable to local authorities for the reception of refugees and asylum seekers. It is proposed that expenditures under this item be increased by EUR 70.3 million.
The national pension and benefits indexed to the national pension, such as the basic unemployment allowance, labour market support and maintenance allowance, shall not be reduced in the event of falling consumer prices in 2010. This will increase government expenditure by EUR 24.1 million.
The employer's national pension contribution will be abolished as of 1 January 2010. Prior to this the contribution rate was cut by 0.801 percentage points on 1 April 2009. The removal of the employer's national pension contribution will increase government spending on national pension contributions by around EUR 1.1 billion. The annual neteffect is estimated at around EUR 0.8 billion. It is proposed that steps to remove the distinction between outpatient and inpatient care be continued by making pensioners in institutional care eligible for pensioners' care allowance as of 1 January 2010.
In keeping with the Government Programme, paternity leave will be extended by two weeks as of 1 January 2010, increasing central government expenditure by EUR 1 million. Partial care allowance will be increased by 20 euros, and eligibility for the allowance will be extended to the self-employed. This is estimated to increase expenditure by EUR 3.1 million, with the share of central government coming to EUR 1.55 million.
Farmers' annual leave will be extended by one day, which will increase government expenditure by EUR 4 million. A holiday replacement scheme will be started up for fur farmers in 2010, allowing them an annual leave of 14 days plus additional days against payment. EUR 2.6 million is set aside for this purpose.
In response to the slowdown in the construction sector, budget authority earmarked for state-subsidised housing production has been increased in 2009 to EUR 1,170 million, or more than twice the figure recorded last year. The employment effects of new housing construction started under this budget authority will mainly be felt in 2010. State-subsidised housing production will be maintained at its elevated level for stimulus reasons into 2010, with the proposed authority to grant interest subsidy loans remaining at EUR 1,190 million. Grants will continue to be made available for rented housing construction starts.
The 2010 budget proposal takes account of the new status of universities as independent institutions or foundations under public law whose funding from central government is determined by the extent, quality and impact of their operation and by national education and science policy objectives. It is proposed that a total of EUR 150 million be allocated to the capitalization ofthe Aalto University and the Tampere University of Technology foundations.
Steps will be taken to develop the system of central government transfers to local government. Transfers currently paid from different administrative branches will be combined into a single subsidy for the provision of basic public services. At the same time transfers for pre-school and basic education will no longer be based on pupil numbers but on the population number in each age band, and the transfer percentage rate will be harmonized.
Changes to taxation
It is proposed that taxes on the lowest income groups be reduced by increasing the basic deduction in municipal taxation. In addition, tax rates should be revised to reflect rising income levels. These revisions are also aimed at preventing an increase in taxes on labour in 2010, given the expected rises in wage earner contributions. The taxation of pensions will be eased in keeping with the Government Programme so that tax rates for pension income will be no higher than the corresponding tax rate for earned income. All told, these changes are expected to lower tax revenue by some EUR 800 million. The local government share of EUR 225 million will be offset by increasing central government transfers.
To help companies facing financial difficulties, it is proposed that the penalty interest rate on delinquent taxes be lowered to 7% next year. This will allow companies experiencing temporary cash flow problems to make the necessary arrangements so that they can pay off their taxes at a reasonable interest rate. The current penalty interest rate on unpaid taxes is 11.5%, and without the proposed change it is expected to drop to 8%.
Taxes on cigarettes and other tobacco products will be raised by around 5% as from the beginning of 2010. The tax on loose tobacco, however, will be raised by 15%.
Economic recovery expected to start in 2010
Triggered by falling exports last autumn, the vicious cycle of economic recession continued to deepen in Finland during the winter. Economic activity has slowed even further over the summer, although the fall in GDP is no longer accelerating. The pace of decline in the global economy has also slowed, and the uncertainties in the financial market have continued to ease. Already there are some signs of recovery: new orders are up in German manufacturing, short-term market interest rates have come down and the business loans market has revived.
By and large the economic forecast published by the Ministry of Finance in June is still valid. However the unemployment situation looks set to deteriorate more rapidly than predicted in June, with the unemployment rate projected to climb to an average of 10½% in 2010.
The indications are that economic recovery will start later in Finland than in the other euro countries. However by the beginning of 2010 the economy should be back on a cautious growth track. Even so, average output will hardly exceed the level recorded this year. The depth of the recession will leave the economy scarred for many years to come, and the labour market situation will remain difficult.
The rise in consumer prices has decelerated sharply during 2009, but the sharp decline in export and import prices has come to a halt during the summer. However in the domestic market there are continued pressures to cut prices, and it is expected that consumer prices in the second half of the year will be lower than last year. Next year prices will rise only slowly.
Household income differentiation will increase significantly both this year and next depending on households' labour market position. However, the combined disposable income of all households will continue slightly to rise both this year and next.
Inquiries: Mr Lasse Arvela, Director General of the Tax Department, tel. 358 9 160 33150, Mr Hannu Mäkinen, Director General of the Budget Department, tel. 358 9 160 33036, Mr Jukka Pekkarinen, Director General of the Economics Department, tel. 358 9 160 33191 and Mr Markus Sovala, Deputy Director General of the Budget Department, tel. 358 9 160 33105