Budget for stability, employment and fairness

The Government’s budget proposal has been prepared in a challenging economic situation. The global economy and the economic outlook are characterised by exceptional uncertainty. Market uncertainty is further compounded by the euro area debt crisis.

From a Finnish point of view, the priorities now are to strengthen the economy’s competitiveness and to maintain confidence in the ability of general government to meet its obligations in all situations. One concrete objective is to ensure that Finland’s credit rating remains at the highest level possible.

To ensure the sustainability of public finances, the Government’s aim is to significantly reduce the central government debt-to-GDP ratio by the end of the electoral term. With this objective in mind, the Government will aim to achieve balance in central government finances and to bolster economic growth.

The 2012 budget proposal amounts to EUR 52.3 billion. Revenue is expected to total EUR 45.3 billion, leaving a deficit of EUR 7.1 billion. The actual on-budget deficit will shrink by EUR 1.2 billion from 2011.

Compared to the previous Government’s spending limits decision in March, the 2012 budget proposal includes expenditure cuts of EUR 1.1 billion and tax increases worth EUR 1.1 billion. The new Government proposes increases in expenditure worth over EUR 400 million and measures that will reduce central government tax revenue by EUR 0.9 billion with a specific view to stimulating economic growth and employment and preventing social exclusion and inequality.

Taxation geared to strengthen the financial base of welfare society and bolster growth

The Government’s taxation policy aims to strengthen the financial base of the welfare society and improve the long-term sustainability of public finances. The central government’s tax base will be made broader and several specific tax bases will be revised. Apart from strengthening central government finances, the aim is to promote economic growth and employment and to enhance social justice. Environmentally more sustainable production and consumption will be encouraged by shifting the focus of taxation from growth-hampering taxation of labour and entrepreneurship towards environmentally and health motivated taxation.

In 2012 the income tax rate will be adjusted by 3.3% to prevent the tax burden on labour from increasing as a result of higher earnings and inflation. Taxes on low income earners and people on basic social benefits will be eased by increasing the basic deduction in municipal taxation as well as the earned income deduction. These measures will reduce general government revenue by some EUR 800 million. To harmonise the tax treatment of rented and owner-occupied housing, the right to deduct interest paid on housing loans will be moderately and progressively limited. Originally increased as a stimulus incentive, the domestic help credit will now be lowered.

In coming years, taxation will increasingly be based on the principle of the ability to pay. The tax rate for capital income will be raised to 30% and progression will be introduced so that the tax rate for capital income exceeding EUR 50,000 is set at 32%. A new rate will be added at the high end of the inheritance and gift tax scale: inheritances and gifts valued at over EUR 200,000 will now be taxed at 16% instead of the former 13%. Tax withheld at source from interest will be raised by two percentage points. The tax exempt limit for dividends paid by unlisted companies will be lowered to EUR 60,000. A new 28% tax rate will be introduced for jointly-owned forests so as to maintain the tax incentive for establishing such forests at two percentage points compared to the tax rate for capital income.

The VAT tax bases will be expanded to newspaper and magazine subscriptions. Excise duties on products with adverse environmental and health effects will be increased. Taxes on alcohol and tobacco will be raised in order to limit their adverse health effects. Likewise, excise duties on sweets, ice cream and soft drinks will be raised. Steps will be taken to explore the possibilities of introducing a sugar tax.

Taxes on transport fuels will be increased in two phases. The first increase will be put in place in 2012. In addition, the tax hike on diesel fuel decided by the previous Government will take effect from the beginning of 2012, and in this connection the vehicle motive force tax levied on cars and trucks will be lowered. To strengthen environmental regulation, the Government will increase the annual vehicle tax will and adjust the car tax scale so as to reduce taxes on cars with the lowest emissions.

Measures to promote employment and growth

To improve businesses’ employment, growth and investment opportunities, the Government will lower the corporate tax rate by one percentage point to 25%.

The fight against the shadow economy is intended to protect honest workers and entrepreneurs. The Government will continue to implement the fifth national programme for economic crime prevention and start preparations for the launch of a sixth action plan. Combating the shadow economy requires broad-based cooperation. An additional annual allocation of EUR 20 million will be made available for combating the shadow economy in the executive agencies under the Ministry of Justice, the Ministry of the Interior, the Ministry of Finance, the Ministry of Employment and the Economy and the Ministry of Social Affairs and Health. The need to amend the Act on the Contractor’s Obligations and Liability will be reviewed. Through its measures aimed at combating the shadow economy, the Government expects to generate additional tax revenue of at least EUR 300 million by the end of the electoral term.

In a bid to improve the competitiveness of energy-intensive industries, the Government will begin preparations during 2012 for the launch in 2013 of an improved energy tax refund mechanism. Following the same schedule, a search will be started for the best way to implement a windfall tax, and the pros and cons of a uranium tax will be explored. The energy tax reform will be prepared in close consultation with business and industry.

In transport infrastructure management, priority will be given to rail transport, which in 2012 will receive additional funding of EUR 20 million. The risk-taking capacities of Finnvera, the state-owned business financing company, will be significantly increased. The Government will also support growth, competencies and new innovations by allocating an additional EUR 8.5 million to strengthening the science and research infrastructure and the green economy at the very start of the electoral term.

Social guarantee for young people and major improvements to basic social security

Rollout of the social guarantee for young people will begin in 2012, and the scheme will be fully operational by 2013. The scheme will ensure that all young people aged under 25 and all recent graduates under 30 are offered a job or training, study placement, workshop or rehabilitation placement within three months of registration as unemployed. In apprenticeship training special attention will be given to providing opportunities for young people with no qualifications. An annual allocation of EUR 60 million is earmarked for the social guarantee scheme, of which EUR 5 million will go to workshop activities for young people and to outreach youth work.

A total of EUR 480 million is allocated to employment, training and special measures. Compared to the 2011 ordinary budget, however, these appropriations are down by around EUR 50 million because of falling unemployment.

In a bid to tackle the problem of long-term unemployment, a trial will be launched for the duration of the electoral term whereby local authorities will take over responsibility for the management of employment no later than 12 months after a person has become jobless. The employment potential of each unemployed person will be charted and their progress actively monitored. The trial will be allocated EUR 5 million in 2012 and EUR 20 million annually over the following years. Furthermore, an additional appropriation of EUR 20 million is set aside to support the participation of the long-term unemployed in wage-subsidised work, training and other services.

Despite the severity of the economic situation, the Government is committed to implement an internationally exceptional social security improvement programme. To improve the position of people dependent on basic social security, the basic daily allowance and labour market support for the unemployed and the income threshold for housing allowance will be raised by EUR 100 per month as of 1 January 2012. This includes an index-linked increase. The basic amount of social assistance will be increased by 6% and social assistance for single parents by a further 10%. In 2012 central government will face additional costs of EUR 250 million from these improvements to basic social security.

Strong local government to guarantee efficient service delivery

Before the end of 2011, the Government will launch a nationwide programme to restructure local government in Finland. The aim is to establish a viable local government structure that is based on natural employment areas. The priority target in local government policy is to secure the delivery of high-quality welfare services throughout the country. At the same time the restructuring programme will help to improve conditions for democracy and municipal self-government, reduce the sustainability gap in public finances and prepare for the surge in service demand resulting from population ageing. The system of central government transfers to local government will also be streamlined and simplified as part of the restructuring programme.

In 2010 local government finances developed more favourably than expected, mainly because of faster-than-expected tax revenue growth. The forecast for local government tax revenue growth in 2011 is 4½%. Central government transfers to local government will increase by over 3% as a result of indexation and measures taken to offset the tax cuts. The temporary 10% increase in the apportionment of corporate taxes to local government will be replaced by a 5% increase in 2012 and 2013. The same temporary increases are applicable to parishes.

In 2012 state subsidies to local government will amount to EUR 10.5 billion, with imputed central government transfers accounting for EUR 9.5 billion. State subsidies will rise by around EUR 370 million from 2011, an increase of 4½%. Subsidies will be lowered by the EUR 631 million reduction in central government transfers for the delivery of basic public services as well as by savings in allocations for vocational training and the establishment of educational institutions, for example. On the other hand, transfers will be increased by the revised distribution of costs between central and local government (EUR 412 million), the compensation of tax revenue losses (EUR 262 million) and increased allocations for employment subsidies, immigrant compensation, and for raising the quality of education. Furthermore, indexation will increase central government transfers to municipalities and joint municipal authorities by EUR 341 million and the changing age structure and population numbers by EUR 68 million. Losses suffered by local governments from tax base changes introduced by central government will be offset in full.

Appropriations to administrative branches: some extracts

Appropriations for development cooperation will increase by around EUR 40 million in 2012, despite the challenging economic situation. It is expected that development cooperation funds will reach 0.56% of GDP in 2012. In fact, midway through the Government’s term, revenue from the auctioning of emissions rights will be allocated to climate change and development cooperation spending. The aim is to see a steady increase in spending on development cooperation as a proportion of GDP during the Government’s term in office.

The Ministry of Justice will set up a programme to systematically monitor the development of democracy and civil society. Based on a plan jointly prepared by the Ministry of Justice and the Ministry of the Interior in early 2011, measures will be introduced to reduce the duration of criminal trials. Special focus will be given to tackling financial crime: prosecutors, courts of law and enforcement authorities will be allocated an extra EUR 4.6 million. Sentencing authorities will pursue the policy of shifting the emphasis away from institutional sentences towards sentences served in the community and from closed prisons to open prisons.

The reform of the police administrative structure will be taken forward to completion in order to improve productivity. This will involve a continued shift in personnel focus away from administration and management positions in the National Police Board and in police departments towards operational fieldwork. A major priority for the police is to combat the shadow economy. The Government is spending EUR 5 million to support the employment of young, newly graduated police officers out of work.

Steps will be taken to improve the division of labour between the Police, Customs and the Border Guard in cross¬-border crime prevention. The main focus in the prevention of violent crime is on interpersonal violence in intimate relationships. The police will actively intervene in crime of a racist nature as well as in human trafficking. Furthermore, the police will continue its efforts for the development of licence administration. The share of both online and by-appointment services will be significantly increased.

Emergency response centres and their information systems will be reformed by 2015 with a view to improved networking in situations of volume overload or other disturbances.

Plans for an operational and structural reform of the Defence Forces will be outlined during 2012. Key underlying principles are to ensure that the Defence Forces continue to perform their current tasks, that the conscription system functions properly and that the defence principle is further developed. The reform will help create a balanced system that is aligned with the needs and requirements of the 2020s under conditions of both war and peace.

As part of the efforts to combat the shadow economy, the tax authorities will launch a tax debt publication project, including an online questionnaire system. Moreover, an ID tax code scheme and access pass will be introduced in the construction industry together with procedures for contract reporting: this will make it possible to check that ID card holders are registered with the tax authorities, for instance. An additional appropriation of EUR 6.2 million will be allocated to the Tax Administration in 2012.

An additional appropriation of EUR 10 million is proposed for preschool and comprehensive education, for upper secondary schools, morning and afternoon activities and for basic art education.

The Government will start work to prepare a long-term language strategy under the lead of the Prime Minister.

The Government is committed to maintain the profitability and competitiveness of agriculture and to ensure that the food chain has access to high-quality, locally produced raw materials throughout Finland. Steps will be taken to reduce the nutrient load and greenhouse gas emissions from agriculture.

Appropriations to the administrative branch under the Ministry of Transport and Communications total EUR 2,375 million, which is EUR 315 million more than in the 2011 ordinary budget. This is primarily due to increased allocations for the development of transport networks, since there are several ongoing major transport investments on which decisions were made earlier.

Transport network development projects are aimed at improving conditions for transport. Total investment in these projects amounts to EUR 596 million. New start-up projects include the upgrade of the Tampere coastal bypass, the improvement of the road link to Turku harbour and the construction of the E18 motorway from Koskenkylä to Kotka. In addition, the Government will contribute to the construction costs for the metro line to the west of Helsinki.

VTT Technical Research Centre of Finland will receive appropriations of EUR 89 million, some EUR 2 million more than allocated in the previous Budget. As part of the cuts in business subsidies outlined in the Government Programme, the authority to grant aid by the Finnish Funding Agency for Technology and Innovation (Tekes) will be reduced by EUR 50.4 million from the 2011 ordinary budget.

The Government’s business and innovation policy is designed to increase the number of innovative, fast growth businesses with a strong international presence. Key policy measures include the allocation of increased innovation funding to support the growth of start-up companies as well as increased risk-taking in public funding for growth.

Energy policy appropriations come to EUR 235 million, up EUR 98 million from the 2011 ordinary budget. It is suggested that authority to grant energy aid be capped at EUR 80 million. EUR 50 million of this is earmarked for supporting transport biofuel demonstration plants. The proposed appropriation for renewable energy production subsidies is EUR 98 million.

Cuts being made in the job alternation scheme as proposed in the Government Programme will bring savings of EUR 7.5 million. The level of compensation will be higher for individual beneficiaries, offsetting part of the cuts. A higher compensation level means central government transfers will increase by EUR 6.2 million.

The Act on Services for Older People will enter into force in 2013.

The Ministry of the Environment will continue to implement the Forest Biodiversity Programme for Southern Finland (METSO 2008–2016) as well as the Natura 2000 network and earlier nature conservation programmes. Allocations for the acquisition of nature conservation areas will be increased by EUR 15 million.

The Government will step up efforts for the protection of the Baltic Sea both nationally and in concert with other Baltic Sea states. It is proposed that the national funding base for Baltic Sea protection be strengthened by allocating an additional appropriation of EUR 1 million for 2012 and a further several million over the whole planning period.

It is proposed that resources made available for area management and recreation purposes under Metsähallitus Natural Heritage Services be increased by EUR 1 million. Proposed funding for the public administration functions conducted by Metsähallitus under the auspices of the Ministry of the Environment totals EUR 26.9 million.

A housing policy action plan detailing key measures for the years ahead will be drafted by the end of 2011 for the Government’s term in office. The Government will significantly increase the authority to grant interest-subsidised loans (by EUR 1.024 billion). This will ensure adequate lending facilities for the construction of new rental housing for low and middle income earners.

Government to monitor achievement of its strategic priorities

The Government also discussed the Government Programme’s strategic implementation plan. The Government Programme’s main areas of priority are the prevention of poverty, inequality and social exclusion, the consolidation of public finances, and the strengthening of sustainable economic growth, employment and competitiveness. The spearhead projects of these respective areas have been identified and incorporated in the implementation plan, and the responsibilities of the executive agencies involved in implementation have been established. The policy measures included in the implementation plan will receive special investment and monitoring from the Government, and progress and needs for revision will be assessed in annual strategy sessions early in the year. The first strategy session will be held in early 2012.

Cumulative surplus in supplementary budget reduces borrowing in 2011

The Government also approved the third supplementary budget for 2011. The supplementary budget will bring additional revenue of over EUR 1.8 billion due to the use of the 2010 cumulative surplus. Revised expenditure estimates mean that certain appropriations are increased and others reduced. Net expenditure increases come to EUR 52 million. The third supplementary budget thus reduces net borrowing needs in 2011 by some EUR 1.8 billion to EUR 6.5 billion.

To expedite construction of the second rail track between Kokkola and Ylivieska, an appropriation of EUR 5 million is allocated for the acquisition of preliminary construction plans on a direct award basis. The authority granted for improvements on the section of main road 2 from Karkkila to Humppila is increased from EUR 3 million to EUR 10 million.

An appropriation of EUR 16 million is allocated in support of innovation in shipbuilding with a view to promoting orders for vessels that can generate appreciable employment effects and have significant implications for industry policy.

An additional appropriation of EUR 0.34 million is proposed to cover the Radiation and Nuclear Safety Authority’s unexpected operating expenses and acquisitions arising from the preparedness actions in the wake of the Fukushima nuclear accident.

EUR 0.2 million is allocated to research exploring the link between narcolepsy and the H1N1 vaccine and associated activities.

Spending limits on downward curve to ensure sustainable public finances

The Government has set itself the goal of achieving a substantial reduction in the central government debt-to-GDP ratio by the end of the parliamentary term. Furthermore, the Government has pledged to decide on measures that are needed to fully close the sustainability gap in public finances.

The Government’s spending limits decision details the measures it intends to take that by 2015 will strengthen the central government budgetary position by around EUR 2.3 billion. In addition, spending is re-allocated to improving basic social security and to promoting employment and growth. Compared to the previous Government’s spending limits decision in March 2011, the expenditure cuts listed in Annex 2 to the Government Programme imply a net reduction in spending of EUR 1,215.5 million at 2015 prices. The Government will set aside EUR 200 million annually for supplementary budget needs.

Items excluded from the spending limits are mostly expenditure that fluctuates with economic cycles as well as automatic fiscal stabilisers. Also excluded from the spending limits are interest payments on central government debt, VAT expenditure and financial investment expenditure.

The Government adopted the following spending limits for the administrative branches: EUR 42,284 million for 2012; EUR 42,205 million for 2013; EUR 42,037 million for 2014; and EUR 42,132 million for 2015.

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The Government approved the third supplementary budget for 2011 on 22 September 2011, when it was also published on the Government’s website (in Finnish and Swedish). The 2012 budget proposal and spending limits decision will be adopted on 5 October 2011, when they will be published in full (in Finnish and Swedish) on the Government’s website.