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Government agreed on budget proposal for 2015

Government Communications Department 28.8.2014 17.44
Press release 345/2014

(Translation. Originally published in Finnish on 28 August 2014)

The Government has agreed on the 2015 budget proposal. The proposal is mainly based on decisions made in the General Government Fiscal Plan last spring and in the Government Programme in June. In the budget negotiations, the Government also agreed on a supplementary budget for 2014 and decided on strengthening the implementation of the Structural Policy Programme.

Economic outlook weak for budget decisions

According to a forecast made by the Economics Department of the Ministry of Finance, Finland’s GDP will not grow this year. According to the forecast, a very modest upturn in economic conditions will take place in the middle of the year. Without this, Finland’s economy would contract for the third year in succession.

Exports are significant factor in initiating this year’s growth. This year, private consumption will not increase from last year, because development of real purchasing power is subdued and expectations about future economic development are weak. Private investment will decline and the labour market situation will deteriorate further. Inflation will remain low.

In 2015 growth will again be subdued. Export growth will be slower than growth of world trade, and therefore loss of market shares will continue. Industrial production will pick up slightly, which will also improve prospects for service providers supporting the sector. Labour market compatibility problems will remain significant and structural unemployment will remain high.

General government finances will remain in deficit due to the long-continued poor economic situation, even though adjustment measures have contributed to moderating deficit growth. In 2015 central government finances and local government finances will remain clearly in deficit, even though central government deficit will decline significantly from this year. Due to the poor economic situation, Finland may depart from the medium-term objective set for the structural balance of general government finances.

The public debt-to-GDP ratio will exceed the 60% limit in 2015. Exceeding the debt criterion will not, however, lead to the launch of an excessive deficit process, because it will take place against the backdrop of solidarity operations relating to the support of euro area countries and the impact of unfavourable economic conditions.

Adjustment of central government finances will continue as previously agreed

The appropriations of the 2015 budget proposal total EUR 53.7 billion, which is around EUR 1 billion less than the sum budgeted for 2014, including supplementary budget proposals. 

The lower level of appropriations is explained by expenditure savings decided earlier, whose impact is significantly greater next year than this year. Decisions previously made by the Government to adjust central government finances will lower central government spending in 2015 by around EUR 2 billion on a net basis compared with 2014 savings.

Savings will be implemented in accordance with the spring spending limits decision, for example, in the central government transfer for municipalities’ basic public services, development cooperation expenditure, child allowances, defence forces’ operating expenditure and materiel procurement, expenditure arising from the Sickness Insurance Act, national aid to agriculture and horticulture, public employment and business services, unemployment security expenditure, government operating expenditure and crisis management expenditure.

The net impact of tax changes to be implemented in 2015 is expected to increase central government tax revenue by around EUR 0.3 billion.

Overall, measures reducing central government expenditure and increasing central government revenue that strengthen central government finances by a net 2.5% of GDP at 2015 prices have been decided during this parliamentary term.

Slow economic growth will limit tax revenue growth

2015 on-budget revenue is expected to be around EUR 49.2 billion, of which tax revenue will account for around EUR 40.0 billion. Central government tax revenue is projected to grow by around 2% in 2015. The increase in tax revenue growth will be based on growth of tax bases and new changes to tax criteria. The growth of tax bases will remain modest, because GDP will grow slowly. The 2015 tax revenue estimate has been lowered relative to the spring General Government Fiscal Plan by around EUR 0.9 billion, of which EUR 0.5 billion is due to the weaker economic situation.

The budget proposal’s most significant tax changes relate to excise duties and other indirect taxes.

Changes are proposed to income taxation that will maintain consumers’ purchasing power, particularly at low and medium income levels. Tax bases will be expanded with respect to certain tax categories by cutting or limiting tax subsidies.

Growth rate of central government debt will slow

The second supplementary budget proposal of 2014 will reduce on-budget revenue by EUR 233 million and increase appropriations by EUR 95 million. These changes will increase the central government net borrowing requirement by EUR 327 million to a total of EUR 7.4 billion in 2014.

In the 2015 budget proposal, the deficit is projected to decline by nearly EUR 3 billion to EUR 4.5 billion.

At the end of 2015, central government debt is expected to be around EUR 102 billion, which is around 48.5% of GDP.

 

2014, Actual

Budget

2014,

Budgeted

(incl. SBP2)

2015,

Budget Proposal

Revenue (EUR billion)

46.9

47.2 49.2
Expenditure (EUR billion) 54.1 54.7 53.7
Deficit (EUR billion) -7.1 -7.4 -4.5

Local government finances will remain tight

In 2015 central government transfers and grants to local government will total around EUR 9.9 billion, of which imputed central government transfers to local government will be around EUR 9.0 billion. Central government transfers and grants to local government will be around 5% lower than in 2014.

A central government transfer saving of EUR 188 million will be directed at local government finances. The level of central government transfers to local government will also be reduced by the funding reform of universities of applied sciences, which will, however, be cost neutral between central government and local government.

Local government finances are expected in national accounts terms to remain clearly in deficit in in 2015.

Employment and growth will be supported

Central government assets will be directed to more productive use than at present in accordance with the spring 2014 General Government Fiscal Plan. Central government property holdings will be sold and, among other things, revenue recognition from certain funds to the central government will be increased. These measures will bring additional revenue of around EUR 1.9 billion in 2014–2015. Most of the additional recognition of revenue will be directed to the repayment of central government debt.

As part of the reallocation of central government assets, significant investments in growth will also be made, however, totalling around EUR 460 million in 2014–2015. Of this, EUR 240 million will be allocated to 2015. The main investments will be in know-how and innovation that create new growth as well as in transport and construction projects that create jobs quickly.

The Government will launch a programme of housing and infrastructure construction. The central government and the municipalities of Greater Helsinki have reached an agreement by which the Greater Helsinki municipalities’ planning target will be raised by 25% compared with the current letter of intent on land use, housing and transport. In return, the central government will support the City Rail Loop and the Western Metro extension as far as Kivenlahti. In addition, the central government will contribute to the planning costs of the Tampere light rail project.

The Government will increase measures to employ people with lower employment potential and to improve matching of workers and workplaces.

Purchasing power will be boosted

To support low-income families with children, a child deduction will be introduced. The Government proposes in income taxation a child deduction graduated according to the number of children, which will be reduced when income exceeds EUR 36,000 euros per year. The deduction will be EUR 50 per child and at most EUR 200. The amount of the single parent deduction will be double. The deduction will be valid for a fixed term until the end of 2017, when it will serve as transition period compensation for the cutting of child allowances.

The pension income deduction made from pension income in local government taxation will be increased, which will raise disposable income in the area of influence by an average of EUR 7 per month.

EUR 70 million has been allocated to be used for both the child deduction and pension income deduction.

Changes to education appropriations

The central government will capitalise universities of applied sciences next year with EUR 50 million and undertakes to capitalise the universities later by triple the amount they acquire in the form of private donations. The impact of the halving of the index increase of central government funding for universities and universities of applied sciences that was included as a savings measure in the spring 2014 spending limits decision will be compensated for in 2015 with a one-off appropriation increase for both higher education sectors. The increase for universities is EUR 11.2 million and for universities of applied sciences EUR 5.4 million. {Aalto University’s EUR 70 million supplementary funding will be transferred in equal instalments to the competitive funding of all universities by 2020. The sum to be transferred annually is EUR 11.7 million.

To clear the higher education application backlog, higher education establishments’ intake will be increased by 3,000 student places for a fixed term in sectors essential for future labour needs. The second stage of the reform of universities of applied sciences will be implemented in 2015 and at the same time funding of universities of applied sciences will be transferred fully to the responsibility of the central government.

Implementation of the young people’s education guarantee will be continued by providing for young people an adequate supply of vocational upper secondary education and training throughout the country. In addition, the youth guarantee will be implemented by developing further the student selection process, by introducing a new preparatory education entity for vocational upper secondary education and training, and by developing models for completing a basic qualification in which labour-intensive study methods, workplace studies and different forms of arranging education are utilised.

The extension of compulsory schooling to upper secondary education will not be implemented at this stage. Every young person ending basic education will be obliged as part of the youth guarantee to apply for upper secondary education or other further education. If a young person does not enter into upper secondary education, he or she will have the right if he or she so wishes to  further basic education, preparatory education for vocational education, a place in a workshop or corresponding education. The funds previously earmarked for raising the age of compulsory schooling will be allocated to reducing the number of early school-leavers and to developing basic education.

Social justice will be strengthened

EUR 9.4 million will be granted in the 2015 Budget for the implementation of the new Social Welfare Act, and in addition a EUR 6.6 million appropriation allocated to the development of child welfare will be used for the implementation of the proposal. The total cost of the reform will be EUR 32 million. A proposal will be submitted to Parliament in the autumn.

The new act, which will come into force in 2015, will simplify the housing allowance system. The maximum amount of allowable housing expenses will be influenced in future only by the location of the home and the size of the household. The reform will increase housing allowance expenditure by EUR 41 million.

2014 second supplementary budget will support growth

In the 2014 second supplementary budget, appropriation increases will be directed to boosting growth and employment in line with Prime Minister Stubb’s Government Programme. A supplementary appropriation will be allocated in particular to transport and infrastructure projects.

Just under EUR 50 million will be allocated to transport network investments. This year, among other things, four new transport projects (listed at the end of this release) will be initiated and the authorisation for two projects already under way (Highway 19 Seinäjoki eastern by-pass and Highway 8 Turku–Pori) will be expanded.

Measures are proposed to alleviate the effects of the economic sanctions imposed by Russia. A one-off appropriation of EUR 20 million is proposed for aid targeted to safeguard conditions for the profitability of agriculture. EUR 1.3 million is proposed to implement a food export programme in collaboration with the Finnish Food and Drink Industries’ Federation and Team Finland.

A supplementary appropriation of EUR 8.5 million and a supplementary grant authorisation of EUR 12 million is proposed for sudden structural change support, because the ICT sector has experienced structural change and personnel have been made redundant, particularly in the Oulu region.

The estimate of tax revenue is reduced by a net EUR 360 million. The revenue estimates of a number of several indirect taxes are lowered, because the economic outlook has deteriorated and tax receipts have fallen. The estimate of value-added tax revenue, for example, is reduced by EUR 247 million. The power plant tax (windfall tax), which has not yet been applied, will be cancelled and the estimate of the tax revenue removed and replaced by increasing the electricity and motor vehicle taxes. The estimate of loans paid back to the central government is raised by EUR 127 million due to a loan paid back prematurely by Iceland.

Measures of the 2015 budget proposal

Supporting employment, growth and purchasing power

• EUR 20 million is proposed for venture capital investment in start-ups (Tekes).

• EUR 167 million, representing a EUR 60 million increase compared with the actual 2014 Budget, is proposed for the loan authorisations of the Finnish Funding Agency for Innovation Tekes. The additional investment will be directed mainly to the digital and bio economies and the cleantech sector.

• EUR 80 million is proposed for the capitalisation of Finnish Industry Investment Ltd, of which EUR 30 million is intended for use in the activities of the Fund of Funds Growth II Fund and EUR 50 million particularly for the renewal, diversification and growth of industrial companies as well as for venture capital investments promoting the growth of bioeconomy and health sector companies.

• Finnvera’s opportunities to finance the growth and internationalisation of medium-sized companies will be extended.

• Employment and Economic Development Centres will be allocated funds to safeguard their service capacity.

Infrastructure investments

• In housing construction, a new 20-year interest-subsidy model will be introduced.

• For the Helsinki Metropolitan Area, a maximum of EUR 2 million will be allocated in fixed-term grants for modification of use, aimed at promoting conversion of office and industrial buildings to rental housing.

• A total of EUR 35 million will be allocated from the National Housing Fund in 2015 for renovation grants.

• The fixed-term start-up assistance grant authorisation intended for renovations to housing companies, rental homes and right-of-occupancy homes will be increased by EUR 40 million to EUR 140 million in 2014. The amount of assistance can be at most 10% of the approved renovation costs. In 2015 renovations will be supported by a central government conditional guarantee to be introduced.

• Funding of EUR 40 million will be granted in 2015 for the renovation of the Olympic Stadium in Helsinki.

• A number of new infrastructure investments will be launched. In 2015 a start will be made to the construction of the Riihimäki triangular track, increasing the capacity of the Helsinki—Riihimäki rail section, the Highway 3 Tampere—Vaasa Laihia project, the Oulu Highway 22 refurbishment project, the electrification of the Pännäinen-Pietarsaari-Alholma track and the shifting of the Saimaa deep channel at Savonlinna. In addition, authorisations for the Ostrobothnia track will be increased. New projects decided in 2014 will be continued, namely the deepening of the Rauma fairway, the improvement of Road 148 at Kerava, the Arolammi interchange to be built on Highway 3 and the refurbishment of the Viitasaari–Keitele section of Road 77. 

• The allocation for basic infrastructure maintenance will increase by EUR 30 million compared with the spring spending limits decision.

• EUR 5.5 million will be allocated to the completion of the Broadband for All project, which will improve telecommunications connections in sparsely settled and rural areas.

• Government will support the construction of the new children’s hospital with EUR 15 million next year.

Education

• To achieve the target of extending working careers, the clearing of the application backlog of higher education establishments will be implemented by temporarily increasing the student intake by around 3,000 in 2014–2015 in sectors essential for future labour needs.

• In 2015 the central government has earmarked EUR 50 million for the capitalisation of universities of applied sciences and undertakes later to capitalise the universities by triple the amount they acquire through private donations, up to a maximum, however, of EUR 150 million.

• The impact of the halving of the index increase of central government funding for universities and universities of applied sciences that was included as a savings measure in the 2014 spending limits decision will be compensated for in 2015 with a one-off appropriation increase for both university sectors.

• Aalto University’s EUR 70 million supplementary funding will be transferred in equal instalments to the competitive funding of all universities by 2020. The sum to be transferred annually is EUR 11.7 million.

• The knowledge base of adults will be strengthened by allocating EUR 10 million per year to targeted adult education in 2014–2015.

• To maintain the number of apprenticeship places at the 2014 level, EUR 7.5 million will be allocated for this purpose.

• An increase of EUR 10 million will be allocated to hire teaching assistants in special needs education.

• EUR 7.3 million will be allocated to preventing social exclusion among young people at risk of social exclusion.

• EUR 3 million will be allocated for establishing and expanding language immersion schools.

Taxation

• Increases to the tobacco tax, the excise duty on sweets and energy taxes are expected to increase central government tax revenue by a total of around EUR 370 million.

• Revenue from the motor vehicle tax will be increased by EUR 180 million.

• The basic and earned income deduction will be raised and, in addition, the Government will also propose the introduction of a child deduction. The pension income deduction made from pension income will be increased in local government taxation.

• An adjustment for inflation will also be made to the central government income tax scale for the three lowest marginal tax class income limits in 2015. In addition, the income limit of the temporary highest marginal tax class of the tax scale will be lowered.

• Capital income taxation will be tightened such that an increase is proposed for the higher tax rate and the income limit is lowered for the higher tax rate.

• The tax rates of the inheritance and gift tax scales will be raised by one percentage point.

• The power plant tax, which came into force at the beginning of 2014, will be cancelled.

• The right to deduct the interest expenses on home loans will be restricted further and the co-payment portion of the commuting expenses deduction will be increased.

• The deduction for interest paid on study loans will be abolished.

• The tax base will also be expanded by removing and restricting tax subsidies to companies. The partial right to deduct business entertainment expenses will be restored, however.

Other

• A supplementary appropriation of EUR 6.5 million will be allocated to the operating expenditure of the Police.

• Supplementary appropriations totalling EUR 3 million will be allocated to courts of law, the Finnish Prosecution Service and the Criminal Sanctions Agency.

• EUR 0.6 million will be allocated in 2015 for the planning of the refurbishment of the marine research vessel Aranda and an authorisation of EUR 11 million allocated for its implementation in 2016–2017.

• The funding authorisation for unemployment security will be transferred to municipalities to support the employment of the long-term unemployed. In future, the municipalities will fund 50% of the labour market support of those who have received labour market support for more than 300 days (the current limit is 500 days). The aim of the reform is faster and more effective measures to employ the long-term unemployed. The Government will compensate municipalities for costs arising from the transfer by increasing municipalities’ corporate income tax apportionment by EUR 75 million.

• The funding base safeguarding the activities of the Foreign Service’s embassy network  will be secured.

• The Government is preparing to submit to Parliament in the autumn a proposal for a new Crisis Solution Act. In this context, EUR 100 million of the revenue collected from the bank tax will be transferred to the central government budget.

• A supplementary disbursement of EUR 7 million from the undistributed earnings fund of the Finnish lottery operator Veikkaus will be allocated to art, science, sport and youth work. In this way, investments will be made in youth employment, employment of theatres, museums and orchestras, and construction of local sports facilities.

• Of the saving made in assistance paid to the Finnish Student Health Service and student housing foundations for compensation of rental costs, EUR 2.1 million will be cancelled.

The supplementary budget proposal will be approved in a Government session on 4 September 2014, after which it will be published in full on the Ministry of Finance website. The 2015 budget proposal will be approved by the Government on 15 September 2014, after which it will be published in full on the Ministry of Finance website. The budget proposals are based on a new Ministry of Finance economic forecast, which will be published on 15 September in the Ministry of Finance’s Economic Survey.

Further information: Special Adviser to the Prime Minister Joonas Turunen, tel. +358 40 542 5935, Special Adviser to the Minister of Finance Joonas Rahkola, tel. +358 295 530 518, and from the Ministry of Finance, Director General, Budget Department Hannu Mäkinen, tel. +358 295 530 330 and Director General, Tax Department Lasse Arvela, tel. +358 295 530 110