Minister of Finance Riikka Purra (PS) and Prime Minister Petteri Orpo (NCP) addressed the media before the ruling coalition began its framework session at the government’s banquet hall in Helsinki on Monday, 15 April 2024. The government wrapped up the session on Tuesday, revealing it has come to terms on spending cuts worth 1.63 billion euros and tax increases worth 1.45 billion euros. (Heikki Saukkomaa – Lehtikuva)

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THE GOVERNMENT of Prime Minister Petteri Orpo (NCP) on Tuesday announced it has agreed on 1.6 billion euros worth of spending cuts and 1.4 billion euros worth of tax increases as part of its effort to avoid triggering the excessive deficit procedure of the EU.

The measures were agreed on in the two-day framework session that concluded on Tuesday, 16 April.

Orpo described the decisions at a news conference as heavy and painful but “necessary,” estimating that they will suffice to rein in the growth of the debt ratio by the end of the electoral term.

“I understand, we understand people’s concerns and misery during these cuts and in this time. But I believe firmly that by doing these things now, in the long run things will be better than they’re today for Finland and Finns. We’ll turn this around,” he asserted.

The ruling parties headed into the framework session with the objective of agreeing on spending cuts worth roughly two billion euros and tax increases worth roughly one billion euros. Orpo on Tuesday justified the shift in the balance between the two approaches by saying the government had reached the “bottom of the granary”.

“If we pressed on with spending cuts, we’d dig even deeper into the welfare society,” he said.

The government confirmed yesterday it decided to raise the general value-added tax rate by 1.5 percentage points to 25.5 per cent, a move that could raise the prices of products and services such as clothes, petrol and hair salon services. The decision is estimated to add around one billion euros annually to state coffers.

Minister of Finance Riikka Purra (PS) stated that, if necessary, the general rate can be raised as soon as this year.

The value-added tax on food will remain at 14 per cent, but sweets and chocolate will be moved from the lowered tax category to the general category. The government indicated in a press release that the decision was made based on calls for health-based taxation from the Finnish Institute for Health and Welfare (THL).

“The value-added tax rate for sweets and chocolate will be raised from the current, lowered rate of 14 per cent to align with the new general value-added tax rate of 25.5 per cent,” it said.

Rationale questioned

The increase came as a surprise to Fazer, one of the best-known sweets and chocolate makers in Finland.

“We are very surprised by this government proposal. The volatility, unpredictability and unequal regulation in the Finnish political operating environment is very alarming,” a spokesperson at Fazer stated to Helsingin Sanomat.

The food producer voiced its bafflement at the decision to focus on “a single category of indulgence” while entirely ignoring products with a high fat and salt content, which are increasingly popular.

With Fazer deriving roughly half of its revenue last year from sweets, the company retorted that the tax increase will “naturally” have an impact on its business operations and capacity and willingness to make investments.

“We can’t at this stage comment on how the plan presented by the government will affect us in a broader sense, but we’ll have to seriously weigh up our options,” the spokesperson said.

Sanna Kurronen, a senior economist at the Bank of Finland, pointed out that the government lowered the excise tax on transport fuels last year, estimating at the time that the decision would reduce the pump price of petrol by about 4.4 cents per litre and that of diesel by 4.9 cents per litre.

“It doesn’t strike me as particularly useful that the government first lowers fuel taxes, and now it’s raising them,” she commented on X.

High-income earners and pensioners to pay more taxes

The ruling parties also agreed to increase the taxation of pensioners and high-income earners to generate some 200 million euros in additional tax revenue.

The tax burden on pensioners will increase as a consequence of a modest cut implemented in the pension income deduction for pensioners making more than 1,900 euros a month or 23,000 a year. In Finland, roughly half of pensioners make less than 23,000 euros a year.

The Taxpayers’ Association of Finland calculated that the tax burden of pensioners making 2,000 euros a month will creep up by 18 euros a year. The cut will have an impact particularly on high-income pensioners, with the tax burden of those making 4,000 a month jumping by 510 euros a year.

The tax burden will also increase for people making over 8,000 euros a year, be it in earned or pension income, due to a decision not to adjust the two highest tax brackets in line with the general income development. The Taxpayers’ Association calculated that people making over 14,000 euros a month will have to cough up at most an additional 330 euros a year in taxes, assuming that incomes in general rose by 3.3 per cent.

Helsingin Sanomat on Tuesday also reported that the government will increase taxes on electric vehicles and plug-in hybrid vehicles, by 60 euros and 90 euros a year, respectively.

Spending cuts hit social and health care, students

The spending cuts, in turn, are targeted in domains such as education and social and health care services.

The care guarantee – the maximum allowed waiting time – will be extended from two weeks to three months in basic health care and to six months in basic dental care. Customer fees will be raised by a total of 100 million euros, with an emphasis on special health care, while the service offering of social and special health care will be streamlined, with services such as sterilisations left completely to the private sector.

The staffing requirement in around-the-clock elderly care will be lowered from 13 to 12 nurses per 20 clients.

Although emergency care units in basic health care and special hospital care will be reduced and centralised, each well-being services county will continue to have its own central hospital capable of performing challenging surgeries.

The government decided to cut funding for vocational education by 100 million euros, with a view to targeting the cut specifically at students who have already completed a post-primary degree. The housing supplement of student financial aid will be reinstated and replace the general housing allowance for students.

Students will also lose their right to free textbooks the year they turn 18.

Some of the other decisions made by the government include cutting an additional 50 million euros from development co-operation and implementing the previously agreed cuts in the field earlier than planned. The state administration, in turn, is faced with additional cuts worth 150 million euros.

Business Finland’s grant authorisations will be reduced by 20 million euros.

Aleksi Teivainen – HT

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