Government agrees on spending limits during its term of office

Due consideration for business cycles in spending increases and decisions on taxes

To alleviate the pressures on public finances caused by an ageing population, the Government will take measures that will reinforce the economy and also adopt a responsible tax and spending policy. With carefully targeted increases in appropriations, tax cuts and structural reforms, the Government will promote the supply of labour, improve the operation of the labour market and reduce structural unemployment.

Additionally, the spending increases and tax breaks will be timed so as to ensure that the currently stable business cycle is not upset and the Government’s budget surplus target is reached. At the same time, growth in public spending will be curbed by improving productivity, the main tools used to accomplish this being the project to restructure local government and services and the state productivity programme.

The Ministry of Finance predicts that short-term economic growth will be robust in Finland, reaching approximately three per cent, and continue through 2007 and 2008. The situation in the labour market will intensify with the falling supply of labour and the jobless rate approaching the presumed level of structural unemployment.

Pressures to increase wages have been building up after an exceptionally long and relatively moderate collective bargaining agreement. The housing loan stock continues to grow at a brisk pace, even though the fiscal and monetary policy in Europe has been frequently tightened. In real terms, the prices of dwellings have already reached the earlier all-time high of the late 1980s and even exceeded this level by a considerable margin in the Helsinki Area. Consumer demand is increasingly based on record borrowing levels. A high degree of restraint is required in fiscal policy and on the part of the labour market partners in order to prevent the economy from overheating.

Economic growth during the electoral period will, in particular, be affected by the falling supply of labour due to the ageing population, highlighting the importance of a structural policy to promote growth.

The spending limits now agreed for the electoral period include increases of EUR 1.55 billion outlined in the government programme. Wherever possible, the increases in appropriation have been scheduled towards the end of the period in order to secure balanced economic development. Of all the increases in spending limits decided by the Government, EUR 250 million will be financed by re-allocating resources. Consequently, the net increase in spending will be EUR 1.3 billion in 2011.

Central governments transfers to finance basic services will increased by EUR 822 million during the electoral period, said amount including the increase in spending limits approved in March. The burden of cost divided between the central and local government will be adjusted in full to reflect actual changes. A total of EUR 290 will be allocated to the promotion of education and competence. Additionally, the amount allocated for student loans will be increased by EUR 79 million.

For a supplementary budget, the Government will make a provision of EUR 300 million. Of the EUR 200 million set aside for future expenditure, EUR 101 million will be unallocated at the 2011 level.

Child allowance for single parents, student loans and national pensions to increase

In order to improve the position of low-income recipients, the Government will effect the current transfers agreed in the government programme at the beginning of the electoral period. The supplementary child allowance paid to single parents will be increased as of 1 January 2008 by EUR 10 per month. A general increase of EUR 10 per month in child allowances for the third child or more will be implemented as of 1 January 2009.

The minimum maternity, paternity and parental grants will be increased to the level of the means-tested unemployment benefit as of 1 January 2009. The paternity leave will be extended by two weeks in 2010.

The student loan will be increased by 15 percent for all educational levels at the beginning of the autumn term 2008 while the earnings limits affecting the amount of student loans will be raised by 30 per cent on 1 January 2008.

National pensions will be increased across the board by EUR 20 from the beginning of 2008. As the cost-of-living classification of municipalities will be abandoned at the same time, the increase in national pensions, for the majority of beneficiaries, will be EUR 40 per month.

Focus on competence – Innovation University to be launched in 2009

The Helsinki University of Technology, Helsinki School of Economics, and the University of Art and Design Helsinki will be merged to establish a new Innovation University. At the same time, steps will be taken to allocate the administrative and financial resources necessary to ensure that the university can offer a framework conducive to high-standard research and education. The Innovation University is due to start in 2009.

As outlined in the government programme, basic funding for universities will be increased by EUR 20 million per year in addition to adjustments for changes in the general price levels. Services related to financial and human resources administration will be concentrated in specific service centres. Central government transfers to local governments to finance education and cultural activities will be increased by EUR 205 million.

The theoretical savings of approx. EUR 80 million, due to the reduced number of students in each age group, will be reallocated in full to improve the standard of education by reducing class sizes, reinforcing supportive and special education, etc.

Basic vocational education will be expanded and further training provided under apprenticeship contracts will be increased. National funding for youth workshops will be increased as part of the programme for life-long learning.

Funding for the technology and innovation policy will be increased by a total of EUR 35 million. At the same time, funding for the Technical Research Centre of Finland (VTT) will be boosted by EUR 2 million. Total funding for research and development activities will grow by EUR 90 million during the full electoral period, as the authorization to grant applications for funding and the appropriations of the Academy of Finland will be increased by EUR 35 million and EUR 20 million will be ear-marked for the establishment of the Innovation University.

Employment policy and it impact enhanced

Employment appropriations will be re-targeted to facilitate the employment of the jobless in the private sector and to achieve a greater compatibility between job-seekers and vacancies. In real terms, this means increasing the domestic help credit, extending the low-pay support experiment to young and disabled persons, and expanding apprenticeship training and workshop activities that target young people.

Appropriations for adult education will be re-targeted to schemes that promote employment more efficiently than today, such as vocational training for the unemployed organised in collaboration with employers and subsidized employment in the private sector. Conversely, initial training and subsidized employment by the central and local government will be reduced. A total EUR 6 million will be reserved for the additional benefit paid on top of the labour market support, as of 2010, in order to encourage the jobless to seek employment more actively.

Services for the elderly and families with children to be developed

Central government transfers to local government in the field of social services and health care will be increased by a total of EUR 608 million over the budget planning period. In this way, the Government will reinforce basic health care, increase the number of personnel who provide home and institutional care for the elderly, and expand the coverage and support for informal care.

The system of personal assistants for the disabled will be developed. Family care and domestic services for families with children will be improved. In 2009, the child home care allowance will be increased by EUR 20 and the private care allowance by EUR 23. Additionally, the partial child-care allowance will be increased by EUR 20 in 2010.
A child’s right to day care will be rationalized by introducing a minimum charge for full-day care. However, the right to free full-day care will be preserved on child welfare grounds, etc.
Compensation for dental surgeon’s fees will be increased to 40 per cent of the base rate.
If a patient refuses to accept an optional lower-priced medicine, the patient deductible will be increased, which will save EUR 7.4 million in government expenditure.

Traffic and transport projects to be decided upon on completion of related report

The Government will decide on investments in transport facilities following completion of the report on transport policy that will include the transport infrastructure investment programme for 2007–2011. Work to design the ring railway in the Helsinki Area will be continued but construction will be postponed until 2009 because of the current business cycle. For the same reason, the construction of the Lusi-Mikkeli motorway will be postponed for one year.

Supply of timber secured

A one-off appropriation of EUR 20 million for basic road maintenance will be provided to improve the condition of the road network in order to secure timber procurement for industry. Aid for private roads will be increased for the same reason.

KEMERA funding under the Act on the Financing of Sustainable Forestry will be increased by EUR 20 million during the electoral period.

Resources allocated to climate and energy policy

The Government will promote the use of renewable energy in order to reduce greenhouse gas emissions. Investment aid for renewable energy sources will be increased by a total of EUR 15 million, efficiency in the procurement of energy wood will be improved by increasing sustainable forestry funding, and the subsidies for the conversion of the heating systems used in residential housing will be increased by EUR10 million.

Other decisions made during the government discussion on spending limits

During the electoral period, the development cooperation expenditure will be increased by almost EUR 370 million. In 2011, the total aid will amount to EUR 1.1 billion, which is assumed to represent 0.55 per cent of the GDP. This is in keeping with the position recorded in the government programme stating that by the end of the budget planning period, the development cooperation expenditure should be EUR 25 million more than foreseen in the decision on spending limits made in March.

The network of district courts will be pruned to 25–30 courts. The juror system will be phased out except in serious criminal cases. Adequate resources will be secured for prison services.
The number of police precincts will be reduced and administrative structures overhauled. The changes will be coordinated to coincide with the reforms to be made to the district court system. The management systems in the emergency response services will be developed and adequate resources allocated to increase the number of personnel.

Defence appropriations will be increased in order to ensure the operational capabilities of the Defence Forces and the procurement of spares parts and to improve the financial position of the conscripts.

Around EUR 320 million will be ear-marked for aid to promote municipal amalgamations and inter-municipal cooperation during the entire electoral period.

Proceeds from Veikkaus, the Finnish gaming operator, will be used for the purposes set forth in the Lotteries Act and in compliance with the act on the criteria for the distribution of proceeds from betting in Finland. For some cultural expenditure, funding will, in the future, come from Veikkaus’ proceeds instead of the government budget. At the same time, the estimated revenues to be included in the government budget will be increased.

Access to Swedish TV in Finland and Finnish TV in Sweden will be secured.

A total of EUR 60 million will be allocated to reinforce the operative conditions for agriculture by 2011. The capabilities of the Development Fund of Agriculture and Forestry will be improved by an annual budget transfer of approx. EUR 30 million. The duration of the annual leave of agricultural entrepreneurs will be increased by one day as of the beginning of 2008 and another additional day from 2010. The other proposals made by the working party on the farm relief system will be implemented step by step.

The authorization to grant funding for corporate development and investment projects will be increased as a result of the extension of the support system for sole entrepreneurs. Additionally, the authorization to provide aid for international expansion will be increased.

A provision is made for using the SF funds within the restrictions imposed by EU legislation when deemed to be necessary to respond to the special needs occurring in areas affected by abrupt structural changes. As a result of the measures to be taken to improve efficiency and centralise operations, the administration of the structural funds will be streamlined.

Provincial development funding for the Kainuu region will be increased for 2010 and 2011 by a total of EUR 8.7 million to finance the construction of the transport infrastructure required for the Talvivaara Mine.

Efforts to improve productivity

The Government will go ahead with the implementation of the productivity programme for government administration and will make a further decision on new measures in the spring of 2008. Decisions already made will not only modernise the services and administration and improve efficiency but also lead to a reduction in personnel in government employ by approximately 9,600 man-years during the period from 2005 to 2011. The new measures will help improve productivity by cutting down on the number of central government personnel by another 4,800 man-years. At the same time, steps will be taken to secure an adequate standard of service and the further development of activities.

When the spending limits were determined, due consideration was given to the funding required to finance information technology and other such projects geared to the enhancement of productivity. All productivity programmes must be prepared and implemented in a spirit of positive collaboration with the personnel and their representatives at all levels of the organisation.

Tax cuts towards the end of the electoral period

The objective of the Government’s tax policy is to promote employment, entrepreneurship and competence and to increase equality in taxation. Changes to tax rates will be timed with due regard to the current business cycle in an attempt to ensure steady growth. Additionally, collective labour agreements will be taken into account when determining the level of tax cuts.

While the exact size of the changes to the tax criteria and related timing will be determined in more detail at a later date, the most significant changes will not be made until towards the end of the electoral period in order not to upset the economy. A technical assumption has been made in the theoretical calculations related to the timing of tax adjustments.

The tax cuts foreseen in the government programme will reduce tax revenues by a total of EUR 2.2 billion in 2011. Taxes on labour will be reduced by a total of EUR 1.6 billion. Additionally, annual adjustments for inflation will be made to income tax rates. Taxes on pensions will be reduced.

Inheritance and gift taxes will be reduced by a total of EUR 165 million. Of this, EUR 150 million will be used for raising the lower limit for taxable income and to alleviate the position of the widows/widowers and the children. In order to promote employment and entrepreneurship, the inheritance tax on corporate, agricultural and forest farm succession will be abolished.
The value added tax on food will be lowered by 5 percentage points, which will reduce tax revenues by EUR 500 million.

The increase in the taxes on alcoholic beverages, tobacco, energy and emissions will increase tax revenues by € 330 million.

Debt and balance

As in the past few years, the ratio of national debt to the GDP is assumed to continue to decline throughout the electoral period as a result of the increasing GDP. At the end of the term, the national debt is assumed to be approx. € 58 billion, equivalent to less than 30 per cent of the GDP.

In terms of national accounts, government finances are predicted to show a surplus during the first few years to be followed by a deficit in 2010. However, the Government’s goal is that, as a result of the structural reforms designed to promote employment, a structural surplus equivalent to one per cent of the GDP will accrue by the end of the electoral period. If the employment rate can be increased by 80,000–100,000 jobs, as envisaged in the government programme, and if the economy grows at an annual average rate of one percentage point higher than assumed in the calculations, the Government’s objective of a one percent structural surplus by the end of the period is attainable.

In order to ensure the sustainability of public finances, the Government makes a full commitment to the policy outlined in Finland’s stability programme.

Basic services programme

The prospects for local government finances have improved. It is estimated that the annual surplus of municipalities and municipal alliances will clearly exceed depreciation. Revenues are expected to cover net investments, meaning that total indebtedness will no longer grow. Operational expenses are assumed to increase at an average rate of 4.6 per cent per year. The number of employees is expected to increase by about 4,000 people per year, or 16,000 over the entire electoral period. This will be mainly due to the growing need for social and health care services. Tax revenues and central government transfers are expected to increase at an average annual rate of 4 per cent.

Determined efforts will be made to implement the project to restructure services and local government in accordance with the Framework Act and the adopted criteria and timeline. The progress made in the project will be evaluated on an on-going basis and a report will be submitted to Parliament in 2009.