Minister of Finance Riikka Purra (PS) and Prime Minister Petteri Orpo (NCP) prepared with their aides to commence the framework session in the banquet hall Smolna in Helsinki on Monday, 15 April 2024. Helsingin Sanomat reported at the closing of day one of the two-day session that the government has reached an agreement to raise the general value-added tax rate from 24.0 to 25.5 per cent. (Heikki Saukkomaa – Lehtikuva)

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THE GENERAL value-added tax rate could rise from 24.0 to 25.5 per cent as soon as this year, reports Helsingin Sanomat.

The daily newspaper reported yesterday evening, citing unnamed sources, that the government reached an agreement to raise the general tax rate by one-and-a-half percentage points on the first day of its framework session.

Also Iltalehti and Ilta-Sanomat reported about the raise, citing their own sources, on Monday.

No changes will be made to the lower value-added tax rates, though, which apply to products and services such as books and food.

As the value-added tax is levied on virtually all products and services, raising the general rate from 24.0 to 25.5 per cent would increase tax revenue by around one billion euros a year, according to calculations by the Ministry of Finance. The raise will be the single largest measure the government takes in pursuit of three billion euros worth of spending cuts and tax increases at the framework session, according to Helsingin Sanomat.

Prime Minister Petteri Orpo (NCP) stated before the start of the session yesterday morning that he expects the negotiations to be challenging but emphasised that the government has to take action to reverse the national debt trajectory or risk an economic nosedive.

The framework session will conclude today.

Helsingin Sanomat wrote that even though it remains unknown whether an agreement was reached also on the timing of the raise, the expectation is that it will come into effect no later than at the turn of the year.

Minister of Finance Riikka Purra (PS) has demanded that the raise be implemented well before year-end in order to boost tax revenue and ensure the government does not trigger the excessive deficit procedure of the EU.

The procedure can be launched if a member state has breached or is at risk of breaching the deficit threshold of three per cent of gross domestic product, or if a member state has or is at risk of having a debt level in excess of 60 per cent of gross domestic product, without an action plan to diminish the ratio at a satisfactory pace.

In Finland, a value-added tax of 14 per cent is presently levied on food, animal feed, and meal and restaurant services. The lowest rate of 10 per cent, meanwhile, is levied on products such as medications; books, magazines and newspapers; exercise services; accommodation and passenger transport services; and culture and entertainment events.

From the latter group, all but magazines and newspapers will likely be taxed at the 14-per-cent rate starting in 2025, as per an agreement struck during the coalition formation negotiations.

The general value-added tax rate stands at 25 per cent in Denmark and Sweden. In 2022, Hungary was the only EU member state with a tougher value-added tax regime, with its general rate of 27 per cent.

Experts told Helsingin Sanomat last weekend that raising the value-added tax rate is an effective means to boost tax revenue.

“Increasing the value-added tax rate is a relatively safe way to boost tax revenue because it applies to a broad base. It’s largely targeted at work, which will be reflected in a decline in the purchasing power of wages. On the other hand, it’s also targeted at wealth when it’s converted to consumption,” analysed Niku Määttänen, a professor of economics at the University of Helsinki.

Tuomas Kosonen, a research professor at VATT Institute for Economic Research, said to the newspaper that even though value-added tax hikes tend to target low-income households, they generate substantial tax revenue with only a minor effect on economic activity.

“It creates a lot of new tax revenue, and its effects on activity are fairly limited because total consumption doesn’t decrease,” he commented.

Aleksi Teivainen – HT

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