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Ministry of Finance draft budget will boost employment

Ministry of Finance
11.8.2016 16.00
Press release

The budget proposal of Minister of Finance Petteri Orpo for 2017 will bolster Finland’s economic growth and employment. The draft budget will be published in full on the Ministry’s website on Friday 12 August.

The Ministry of Finance’s budget proposal is based on the decisions made in the general government fiscal plan of April 2016. The proposal also takes account of the effects of the Competitiveness Pact and the Government’s position on the pact.

The Minister of Finance will hold bilateral discussions on the draft budget with the ministries on 17–18 August.

The Government will discuss the budget proposal at its budget session on 31 August – 1 September. The government proposal will be published on Monday 19 September after it has been considered by the Government. At the same time the Ministry of Finance will publish its full economic forecast.

According to estimates by the Ministry’s Economics Department there has been no significant improvement in the economic situation. Economic growth is expected to remain slow in the next few years.

There has been a favourable trend in employment over the past twelve months, with the total employment figure growing by 33,000 from the previous year. However, current estimates suggest that employment will not improve at the rate targeted in the Government Programme of Prime Minister Juha Sipilä without taking additional measures. The weak employment rate will deepen the general government deficit and add to the debt burden in public finances.

The Government has begun preparations for new measures to boost employment. It will make the first decisions on these measures in connection with the government budget session. The next set of measures will be prepared for the Government’s mid-term policy review session in spring 2017.

Budget total EUR 55.2 billion

The Ministry of Finance proposes that EUR 55.2 billion be allocated for its draft budget, which is EUR 0.8 billion more than in the 2016 budget. The reasons for the increase in the budget total include the general rise in costs, the investment in key projects, the effects of the Competitiveness Pact, the compensation for municipalities as a result of the tax concessions, and the growth in the State’s pension expenditure.

The appropriations for the different branches of government take account of the savings measures set out in the Government Programme, which were revised in spring 2016 in the general government fiscal plan for 2017–2020. The Ministry of Finance’s budget proposal does not incorporate any new savings measures beyond those determined earlier by the Government.

The estimate of expenditure arising from immigration will be reviewed by the time of the government budget session.  The spending level is expected to remain more or less unchanged from the current year.

Changes in appropriations for 2017

Unemployment security is being reformed to activate more effectively and support growth in employment. In line with the decision made in the government discussion on spending limits, the intended purpose of unemployment benefits will be broadened to cover funding of mobility allowances, start-up grants and wage subsidies. The scope for using start-up grants will be widened. The number of people obtaining wage subsidy is growing significantly. The reforms also include removal of the expense allowance for those studying independently on unemployment benefit, which will save about EUR 29 million in government expenditure. Payment of expense allowances during work try-outs for young people without vocational education or training will increase government spending by EUR 7 million.

To support preparations for the reform of health and social services and regional government, EUR 41 million will be allocated for temporary administrative costs, establishment of the counties, establishment of the counties’ joint service centres and support for ICT changes.

To dismantle the incentive traps, young people’s rehabilitation allowance and the rehabilitation allowance for vocational rehabilitation payable to young people will be increased to the level of guarantee pensions, and the upper age limit for rehabilitation allowances will be raised. The proposal will increase government expenditure by EUR 17.4 million.

Five new transport projects will be launched in 2017 (Luumäki-Imatra, Vt4 Oulu-Kemi, Vt5 Mikkeli-Juva, Vt12 Lahti southern bypass and Helsinki-Turku further planning of high speed rail link). EUR 37 million is proposed for these projects in 2017. The extra funding for basic infrastructure management will be increased by EUR 100 million to reduce the maintenance backlog. In addition, EUR 104 million of the funding reserved for new projects will be transferred to these purposes.

To improve the competitiveness of Finnish industry a system will be introduced in 2017 to compensate for the indirect costs of emissions trading. The compensation will amount to 50 per cent of the maximum level of support under EU state aid rules. EUR 43 million is allotted for this in 2017–2019 and EUR 46 million in 2020.

Extra funding of approximately EUR 40 million will be allocated to enhance digital learning environments in tertiary education, to improve opportunities for year-round learning, and to promote scientific work by young researchers.

Extra funding of EUR 40.7 million will be allocated to the municipalities for the development of informal and family care in accordance with legislation that entered into force in 2016. Relief arrangements and services for informal and family caregivers will be developed and family care compensation will be raised. An extra EUR 4.8 million in central government transfers to municipalities will be allocated for expanding the provision of home-delivered services for older people.

To ease the income and profitability situation in agriculture, EUR 6.7 million will be allocated to national aid for agriculture and horticulture in 2017, and EUR 20.3 million to payments to areas facing natural or other specific constraints.

An allocation of EUR 500,000 will be made for a vessel acquisition for the Keep the Archipelago Tidy Association.

To strengthen the scientific basis for the bioeconomy and international climate policy, the basic funding for the European Forest Institute will be boosted by EUR 1 million.

The level of lending compensation payable for the lending from public libraries will be raised to EUR 15.6 million in 2017 (including value-added tax). This will mean that the lending compensation payable to creators of copyright works will be increased to the level of other Nordic countries in the manner required by Parliament.

A supplementary appropriation of EUR 4.2 million will be allocated for vaccine procurement in order to include a chickenpox vaccine in the national vaccination programme. This would virtually eliminate chickenpox in Finland and save a total of about 80,000 working days and EUR 13.6 million in costs associated with parental absence from work.

To implement the National Genome Strategy EUR 5.8 million will be allocated in 2017 to the establishment of the Genome Centre and National Cancer Centre, among other things.

Additional funding totalling EUR 3.7 million in 2017 will be allocated to safeguard the operational capacity of the Criminal Sanctions Agency and for maintenance of the prison network.

A supplementary appropriation of EUR 1 million will be allocated for the funding of replacement investments in the weather radar network of the Finnish Meteorological Institute.

The budget proposal includes the savings measures decided earlier by the Government, the most significant of which are given below. Savings of approximately EUR 195 million agreed in the general government fiscal plan in the spring will be applied in index-linked expenditure.  Savings of EUR 69 million are to be made in earnings-related unemployment security. Structural reform in student financial aid will take effect in August 2017, producing an expenditure saving of EUR 47 million.

The special central government transfer for teaching and research activities at the University of Helsinki and the University of Eastern Finland will be discontinued. A saving of EUR 25 million will be made in the staffing levels of services for older people. In addition, a saving of EUR 190 million will be made in vocational upper secondary education and training in 2017, which is connected with the broad reform of vocational education and training. The overall saving will be directed to the benefit of the municipalities.

The earlier savings measures taken, affecting job alternation leave, refund of medicine expenses, specialised health care, Tekes grants and loans, and central government operating expenses, among other things, will have a growing impact.

Changes in taxation for 2017

The draft budget of the Ministry of Finance includes a significant tax package to boost growth and employment.

Labour taxation concessions of EUR 415 million will be made as a result of the Competitiveness Pact and the tax concessions decided by the Government. A concession of about EUR 130 million will be correspondingly applied to address the contribution burden of the lowest income earners and the taxation of pension recipients. In addition, an index adjustment will be made to the tax basis of earned income taxation to correspond to the rise in costs, which will reduce tax revenues by about EUR 190 million.

Incentives to engage in business activities will be enhanced through a new tax deduction for entrepreneurs. In future, five per cent will be deducted from profits in taxation in the case of business operations, agriculture and reindeer husbandry when profits are taken into account in the taxation of a natural person or death estate. A similar deduction would be taken into account in forestry taxation.

Conditions for engaging in business activities will be improved by reducing gift and inheritance tax in order to facilitate generational change in businesses. Generational change in forest holdings will be made easier by the introduction of a forest gift deduction granted on the basis of gift tax.

The liquidity of small firms will be strengthened through the introduction of cash-basis VAT accounting.

To increase the consumption of household services, the domestic help credit will be increased. This will create new jobs in the small business sector that produces these services and will also reduce the extent of the shadow economy.

The tax on confectionery and ice cream will be discontinued from the start of next year. The yearly reductions in car tax will continue with an emphasis on low-emission cars.

In line with decisions taken earlier by the Government, there will be an increase in excise duty on tobacco products, energy taxes and vehicle tax, and a decrease in the tax-deductibility of housing loan interest.

The tax revenue effect of the Government’s tax basis changes on the municipalities will be compensated in accordance with the Government Programme.

Competitiveness Pact

The Competitiveness Pact to boost Finland’s growth and employment was signed in June. The negotiations on collective agreements related to the  Competitiveness Pact have mostly been completed, but negotiations in certain sectors are still in progress. The current estimate is that the Pact’s coverage will reach about 87 per cent. The Government has announced that if the Pact’s coverage exceeds 85 per cent, then it will introduce tax concessions of EUR 415 million. A concession of about EUR 130 million will be applied to address the contribution burden of the lowest income earners and the taxation of pension recipients. The Ministry of Finance estimates that the combined effect of the Competitiveness Pact and the tax solutions associated with it will be a reduction of about 0.5 percentage points in the taxation of income earners.

During the government budget session, the Government will assess whether or not the Competitiveness Pact covers 90 per cent of income earners. If the Pact’s coverage rises to 90 per cent, the tax concessions will be EUR 515 million, as announced earlier by the Government.

The reduction in employer contributions, the decrease in holiday bonus days and the extension in working hours will all reduce central and local government expenditure. The effect of this is taken into account by reducing government operating expenses and central government transfers to local government. By contrast, the government transfers to the Social Insurance Institution Kela will increase as a consequence of the lower social security contributions in the private sector. Overall, the Competitiveness Pact will weaken the balance in public finances next year by roughly half a billion euros.

EUR 5.9 billion deficit

The Ministry of Finance’s budget proposal presents a deficit of approximately EUR 5.9 billion. In the spring’s general government fiscal plan the 2017 deficit was estimated at EUR 5.8 billion. Following the spring’s supplementary budget, a budget deficit of EUR 5.6 billion was estimated for 2016, and so the deficit will be slightly higher than this in 2017. Central government debt will rise in 2017 to an estimated EUR 111 billion.

Central government revenue is estimated to be EUR 49.2 billion, of which EUR 41.6 billion is tax revenue. Tax revenue is expected to grow by around 1.5 per cent in comparison with the budgeted figure for 2016. In accordance with the spring’s general government fiscal plan the deficit is expected to fall in the latter part of the budget planning period.

Further information:

Laura Åvall, Special Adviser, tel. +358 50 361 7511
Mikko Kortelainen, Special Adviser, tel. +358 50 301 8334

[email protected]

Economic Policy Petteri Orpo Taxation