Gradual shift from stimulus to tighter fiscal policy

Prime Minister Mari Kiviniemi’s Government reached agreement on the budget proposal for 2011. The proposal represents a decisive step towards sound fiscal consolidation of central government finances. There will be a gradual shift from expansionary stimulus measures to more restrictive fiscal policy, with tax policy action calculated to total almost EUR 1 billion. Temporary and one-off stimulatory measures will be gradually phased out and the associated costs thus eventually no longer exist in the Budget.

Restrictive fiscal policy will help slow down the growth in the government debt rate. Next year, the deficit in central government finances is expected to decrease from EUR 13.3 billion to EUR 8.3 billion. Economic and employment trends have recovered slightly but because prospects in the global economy are inconsistent, the outlook in economic growth remains uncertain.

Unemployment is expected to start edging down estimated at 8.2 per cent next year. The rate of employment activation measures is expected to be around 25 per cent.

As a whole, the 2011 budget proposal pursues the line adopted by this Government of ensuring economic stability, employment, sustainable growth and well-being throughout the country.

Green tax reform and a renewable energy package

The Government aims at an environmentally responsible, sustainable economy. To achieve this, the measures adopted include a renewable energy package, emissions-based energy taxation, and shifting the burden in taxation to higher taxes on consumption rather than labour. During this term in government, the overall emphasis in taxation has shifted from that on labour to that on levies on consumption, energy and excise duties that have environmental and functional impact. Their effect amounts to almost EUR 2 billion.

Energy tax on fuels will provide incentives that will help reach environmental policy goals. In future, energy will be taxed according to energy content and carbon dioxide emissions. The level of emissions to the immediate surroundings will also be taken into account in the case of transport fuels, so that taxes on environmentally friendly transport fuels will be lighter. Energy taxes will be increased by around EUR 700 million to compensate for tax revenue losses arising from the abolition of the employers’ national pension contributions. The increase will not affect transport fuels.

The Government will implement the measures previously agreed to increase the use of renewable energy. The Budget allocates EUR 55 million in support for renewable energy production payable for electricity produced by wind power, biogas, wood chips and other wood-based fuels. Subsidies for the use of wood chips as a source of fuel will also be introduced.

A funding authorisation of almost EUR 150 million is proposed for energy support, an increase of almost EUR 85 million over the 2010 budget. The additional funding will be used to finance transport bio-fuel demonstration plants and other projects.

The Government is to encourage the installation of renewable energy heating systems with EUR 30 million set aside for this purpose. This is to promote the installation of effective heat pumps as main heating systems, and to help people switch from electricity and oil heating to pellets.

Steps will be taken to protect the Baltic Sea. Additional funding of EUR 3 million will be allocated to improving the state of the Archipelago Sea by continuing a project in southwest Finland aimed at increasing the effectiveness water protection measures against agricultural run-off.

The tax base will be broadened by taxation on waste in line with environment policy goals. The tax will be increased by EUR 10 per tonne in both 2011 and 2013. This is expected to increase tax revenue by a total of EUR 40 million in 2011.

In 2011 an excise duty on sweets, ice cream and other such products will be introduced and the excise duty on soft drinks increased. This should bring in a total of EUR 100 million in 2011.

Progress in studies to be stepped up

The Government aims to lengthen work careers and raise the employment rate among all the age groups in the work force. The Government has prepared a set of measures for expediting studies and lowering the starting age in higher education, which will lower the age at which graduates enter the labour market.

The admissions to vocational and higher education will be overhauled. An electronic application system will be introduced in higher education in 2013. With a view to favouring first-time applicants, an increased relative weight will be placed on the matriculation examination and a separate quota will be set up for those who have already pursued higher education studies.

A programme will be launched to speed up graduation in vocational education and training. A programme will be undertaken to enlarge the provision of guidance counselling education in order to ensure the availability and competence of guidance counsellors.

The joint application system and admissions criteria at the upper secondary level will be developed to promote the placement in training of school-leavers and untrained young people. The system of competence-based vocational qualifications will be used more extensively in the education and training of adults.

Guidance counselling will be increased at all levels of education and measures will be taken to upgrade the educational counselling given to those doing military and non-military service.

The placement of graduates in the labour market will be made one of the funding criteria. The structure of studies will be developed to enable students to graduate more rapidly.

Student financial aid will be developed to give incentive for full-time studies. The granting of financial aid for higher education will be altered to correspond to the two-cycle degree structure. The time a student has received housing supplement will be counted as time when the student has received aid. The monitoring of study progress will be reformed.

At the beginning of the electoral period, the Government raised the level of study grant by 15 per cent. As a further measure for ensuring adequate study support, the means-testing in student financial aid will be relaxed during traineeship and the meal subsidy appropriation will be raised by EUR 1.8 million. The student loan will be developed and the conditions for school travel subsidy will be improved in order to make education and training more accessible.

Grey economy to be combated

A government programme to decrease grey economy and financial crime will ensure the accrual of taxes and payments, and support fair competition.

As part of the programme implementation, around EUR 6 million will be allocated to the police, prosecutors, courts, the Office of the Bankruptcy Ombudsman and debt recovery authorities to improve the processing of cases of financial crime and recovery of proceeds from crime. Emphasis will be on special debt collection to improve the effectiveness of recovering proceeds from crime. This will secure the claims of creditors and increase the accrual of taxes and payments.

A unit for investigating grey economy will be established within the Tax Administration to promote fight against the grey economy by producing and disseminating information. Tax authorities will be given the right to carry out comparison data audits at credit institutions.

The VAT reverse charge for the construction industry, which was decided earlier, will be introduced on 1 April 2011. It is expected to increase annual tax revenues by EUR 100 million.

Purchasing power for lowest income groups will be ensured

Income tax bases will be adjusted so that a higher earnings level and increases in employee contributions will not lead to tougher taxation of employment income and so that taxes on pension income are not tighter than the equivalent taxes on wage income. In addition, the basic deduction in local government taxation will be raised by EUR 50 to EUR 2,250, which will improve the purchasing power of those in the lowest income groups.

The compensation measures to readdress tougher taxation will reduce central government tax revenue by EUR 400 million on an annual level; the tax cuts in pension income accounting for EUR 30 million and the cut in the basic deduction for EUR 16 million. The local government tax revenue losses of EUR 129 million will be fully offset through the system of central government transfers to local government.

A guarantee pension will be introduced and benefits indexed

The efforts to improve the basic protection benefits will continue. To prevent social exclusion, the society will offer support to those most in need of care.

The financial state of people with very small pensions will be improved considerably by introducing a guarantee pension on 1 March 2011. A full guarantee pension will amount to EUR 685 per month at the index level of 2010. The guarantee pension will especially improve the pension income of low-income women; the increase can be as much as EUR 170 per month for pensioner spouses. The introduction of the guarantee pension will generate additional costs of EUR 94 million for central government in 2011.

The indexation of several family benefits to consumer prices will improve especially the situation of families with children from 1 March 2011. Accordingly, the rate of these benefits will rise in line with consumer price index developments. The minimum rehabilitation allowance as well as sickness, maternity, paternity and parents’ allowance, special care allowance, child benefits, home care allowance and private care allowance for children will be indexed. This will generate extra expenses of roughly EUR 11 million for central government in 2011.

A guarantee system to shorten the time it takes to process social security benefits will be implemented, and the processing of applications at the Social Security Appeal Board will be accelerated. In future, it will be mandatory to assess the level of basic protection once during each government term.

New growth through innovations and promotion of exports

The Government will promote companies’ possibilities for innovative action. Appropriations for innovation policy and promotion of international activities, under the main title of the Ministry of Employment and the Economy, will be increased to EUR 823 million, an increase of more than EUR 33 million over the 2010 budget.

Funding authorisations allocated to the Finnish Funding Agency for Technology and Innovation (Tekes) for supporting the growth of SMEs, in particular, will be increased by over EUR 8 million.

The growth of the companies will also be boosted by allocating EUR 23.6 million to the promotion of exports.

Central government funding of universities will grow by EUR 160 million. A total of EUR 125 million will be allocated to the capitalisation of universities, excluding the Aalto University.

Construction of the Seinäjoki-Oulu rail link to continue

The continuation of the Seinäjoki-Oulu rail track project will be ensured by allocating EUR 40 million to its construction next year. Its funding is arranged by granting additional funding and by re-allocating appropriations saved from other transport projects.

In 2011, seven new transport projects will be launched: a by-pass road for E18 in Hamina, main road 8 Sepänkylä by-pass, main road 19 Seinäjoki eastern by-pass road, the 2nd phase of improving the service level of the Seinäjoki-Oulu rail section, electrification of the Rovaniemi-Kemijärvi rail section, deepening of the Uusikaupunki fairway and, relating to the Pajari-Kolari mining project, reconstruction of the Kemi-Äkäsjärvi rail section and the Muonijoki bridge project.

The central government will participate in the building of the Western Metro with a maximum of a 30 per cent share of the construction costs. The central government contribution will amount to EUR 13 million in 2011.

Around EUR 963 million in appropriations and income financing will be allocated to trunk route maintenance expenditure. A total of around EUR 365 million will be allotted to trunk route development investments, which will be used mainly to continue construction work on 27 transport projects initiated in earlier years.

Selection of different administrative branch appropriations

The Government also takes responsibility for global issues. Finland’s official development assistance (ODA) will rise by EUR 108 million from 2010 Budget. The ODA /GDI ratio will be 0.58 per cent in 2011, which is a determined step closer to the international goal of 0.7 per cent.

Neighbouring area cooperation between Finland and Russia will receive EUR 15.5 million, which is EUR 4 million less than this year. Russia is expected to increase its share of the financing so that, despite the decrease of the Finnish contribution, the volume of the activities may be kept at the same level as in the past few years.

A total of EUR 203 million will be allocated for the expenditure arising from immigration of which EUR 87 million to cover expenses for receiving refugees and asylum seekers and EUR 100 million for costs incurred by municipalities. An additional appropriation of about EUR 21 million will be allocated to municipalities relative to the 2010 ordinary Budget level. In addition, fixed-term public service positions at the Immigration Service will be continued to make the processing times of asylum applications shorter.

Petty assaults in close relationships will be made an offence subject to public prosecution. At present, it is still an offence in which the prosecution rests with the injured part. Consequently, the prosecution service and courts will be allocated additional funding of EUR 1.5 million.

The Border Guard will be authorised to start replacing its twin-engine helicopters. The total cost of the acquisition is EUR 62 million and it will be completed in 2011−2014. The procurement of patrol boats will continue with an appropriation of EUR 4.2 million for 2011. Modernisation of the technical surveillance system of the other Dornier aircraft will receive EUR 3 million. The Security Police will receive EUR 0.85 million for the implementation of the National Counter-Terrorism Strategy adopted by the Government.

A total of EUR 6 million will be allocated for the administrative reorganisation of the Emergency Response Centre Administration and for the acquisition of a new information system.

EUR 20 million, mainly transfers of appropriations, will be reallocated for joint information system projects by the central and local government. The objective is to promote public eServices and the compatibility of all public information systems.

Cultural, sport and youth work will receive an additional grant of around EUR 19 million from the pools and lottery funds. Altogether EUR 12.5 million will be allocated to youth workshops and outreach youth work.

The Sámi language cultural and language nests will receive EUR 350,000 to make the activities and funding permanent.

A one-off additional sum of EUR 1 million will be allocated for balancing the finances of the Agrifood Research Finland MTT. The funds for compensating damages caused by large carnivores will be increased.

The new surface area to be covered by the agri-environmental and natural handicap payments will be decided in the context of the supplementary budget proposal.

A total of EUR 0.7 million will be added to the operating expenses of the Centre for Metrology and Accreditation

Relating to the protection of Saimaa ringed seal, EUR 360,000 is still being reserved for the premiums paid under the agreements to owners of water areas. It is proposed that the game management fee be raised from EUR 28 to EUR 30.

By 2015, a total of EUR 66 million, out of which EUR 9.8 million in 2011, will be reserved for the national broadband project under the administrative branch of the Ministry of Transport and Communications. In addition, around EUR 25 million will be reallocated to the project from the administrative branch of the Ministry of Agriculture and Forestry.

With unemployment decreasing, appropriations reserved for employment, training and special measures will fall by EUR 22 million relative to the 2010 ordinary Budget. The employment activation rate is expected to reach 24.5 per cent in 2011.

An additional sum of EUR 2.3 million is allocated to the home care of front veterans.

The provision of advice on the decree on treating domestic wastewater in sparsely populated areas will be promoted by a EUR 1 million increase.

As a stimulus measure, the level of interest-subsidised housing production was tripled in 2009-2010. The level will be brought down in the 2011 budget proposal, creating room for non-subsidised housing production. This is necessary to balance the demand/supply ratio and reduce the risk of a housing price bubble. EUR 975 million is proposed for interest subsidy loan appropriations for social rented housing and EUR 285 million in guarantee appropriations for the deficiency guarantee for rental housing construction loans. The construction of housing for special groups will be funded by EUR 110 million in investment grants.

A total of EUR 90.5 million in grants for housing is proposed for renovation, energy and improvement measures and to address adverse effects on health by means of measures to improve the energy efficiency of terraced and apartment buildings, to replace oil and electricity heating by renewable energy sources and to encourage the construction of elevators. In 2011, a total of EUR 121 million will be available for the costs brought about by cyclical renovation grants allocated in 2009-2010, EUR 75 million of which will be financed by the Housing Finance and Development Centre of Finland.

The prospects of local government finances on an upturn but decisive action to curb expenses still necessary

Central government support to boost local government finances and the unexpectedly positive developments in employment prospects had a more favourable impact on the 2009 final accounts that had been anticipated. Considerable raises in local and property tax rates introduced in 2010, moderate labour market settlements, an increase in the corporate tax apportionment in local government, and more positive tax revenues have all helped to improve prospects in local government finances.

The financial equilibrium related to local government tasks and obligations is examined in the Basic Public Services Programme and the related annual basic public services budget, which is part of the government spending limits and budgetary procedure. As a whole, the measures included in the Budget are expected to weaken the financial position in local government by a net of EUR 42 million relative to 2010.

Central government transfers to local government will be increased by EUR 21.25 million to upgrade, for example, social welfare and health care services. The funds will be used to implement the new Health Care Act and amendment to the Services and Assistance for the Disabled Act, improve school and student health care, organise care for mothers who use intoxicants, improve in-home services for families with children, and support in-prison family contacts.

In addition, index adjustments will increase central government transfers to local government by EUR 152 million and demographic changes in age structure and population numbers will boost government transfers by EUR 56 million. With the temporary additional central government transfers to local government introduced in 2010 being abolished, transfers to local government will drop by EUR 30 million.

To keep operating finances in local government stable, it is important to exercise restraint in expenditure growth. Local government tax revenues are projected to grow by an average of 3½ per cent in the next few years, which is a much slower rate than the one experienced during the exceptional pre-recession period. Indeed, favourable developments in local government finances will be immediately jeopardised if the growth in operating expenses is not adjusted to revenue estimates. It is essential to restrain payroll expenses and follow through with measures to boost productivity.