The Ministry of Finance proposes in its draft budget that income tax rates be lowered moderately for low and middle-income earners in 2016.

“We've made value choices in the budget. We have faith in budgetary measures that allow people to make an easier living by working,” Alexander Stubb (NCP), the Minister of Finance, stated in a news conference on Wednesday.

The proposal would bump up the tax credits for earned income by a total of 450 million euros and, due to the euro-denominated nature of the credits, benefit especially low-income earners. The unemployment insurance contributions of wage earners will also be raised by 0.5 percentage points in accordance with the employment and growth pact hammered out earlier this summer.

The income tax burden of high-income earners will as a result grow moderately, summarises Teemu Lehtinen, the chief executive at the Taxpayers' Association of Finland (TAF). “It's a bit of a blemish because the government programme states that the taxation of labour will increase on no level. [The promise] will be broken as early as next year,” he points out.

Calculations made by TAF indicate that the tax burden of individuals earning over 50,000 euros a year will increase. The Ministry of Finance, in contrast, estimates that the proposed tax revisions would only have a negative impact on individuals earning a minimum of 100,000 euros a year.

TAF has also calculated that the income tax rate will decrease by 0.2 percentage points for individuals earning the national average of 3,256 euros a month.

Stubb conceded in the news conference that the draft budget is “unsurprisingly stringent”.

The draft budget does follow closely the austerity decisions taken by the Cabinet of Prime Minister Juha Sipilä (Centre). Some of the cost-saving measures, however, have been moved forward because the proposed cuts affecting unemployment security and job alternation leaves were postponed until 2017 due to the ongoing negotiations over a social contract.

The decision to raise the tax credits for earned income was one of the few unexpected pieces of news on Wednesday. Although an agreement on the raise was reached already in the coalition negotiations, no time-frame for the raise had yet to be provided.

The Ministry of Finance proposed on Wednesday that the credits be raised as early as next year.

The objective of the raise is to offset the negative effects of the proposed spending cuts and Pigouvian and indirect tax hikes on purchasing power. The Government is intent on raising the tobacco, vehicle, waste and heating tax, while cutting back especially on development assistance, education and index-based adjustments for social benefits.

Altogether, the measures are projected to generate savings of 900 million euros in comparison to this year.

The Government must, despite the spending cuts, step up borrowing to patch up the deficit of 5.3 billion euros in the draft budget. The Government is set to borrow 5.2 billion euros this year.

The deficit is a result of sharp growth in statutory costs, such as pension and unemployment security costs. The Government will also raise the subsidies granted to local governments by a total of 400 million euros in order to compensate for the recent increase in municipal responsibilities.

Some investments will also be made, Stubb highlighted. Guarantee pensions are set to increase by some 23 euros a month, while 50 million euros will be invested in both internal security and defence capabilities. Costs arising from the additional leaves of informal caregivers, in turn, will amount to 85 million euros.

The objective set forth in the government programme is to generate savings of a total of four billion euros in public finances during the ongoing electoral term. Public finances include not only to government finances but also to the finances of local governments and social funds.

Roughly 1.4 billion euros of the cost-saving measures are to be implemented next year, according to the draft budget. The measures are therefore front-loaded.

“It's our aim to front-load the cuts, especially the difficult decisions, because their corollary impact on growth and employment will thereby take place sooner,” explained Stubb.

The Government is accordingly set to slash the costs of local governments considerably, particularly in the field of special health care, elderly care and early childhood education, according to the government programme.

EU regulations stipulate that the public deficit shall not exceed three per cent of gross domestic product.

Stubb assured on Wednesday that Finland will be able to reduce its deficit to an acceptable level as early as next year. “We'll soon be back on the right side of the three per cent line, unlike in 2014 or 2015. We're heading in the right direction.”

Yet, he also delivered a bleak assessment of the economic conditions in Finland.

“The economic situation is difficult, the employment situation is weak and our total output has diminished for three consecutive years. Our external balance is again showing a deficit, as is our public economy. I hope from the bottom of my heart that I don't have to repeat these lines here next year.”

Marko Junkkari, Pekka Mykkänen, Jani Timonen – HS
Aleksi Teivainen – HT