Govt decides fiscal plan for 2022–2025

The government on Thursday in its mid-term policy review, outlined extensive measures to strengthen employment and public finances in the aftermath of the COVID-19 pandemic.

The decisions in the mid-term review included policies to strengthen growth, to continue on the path to carbon neutrality and to reduce inequality, said an official press release.

The measures have been integrated into the 2022–2025 general government Fiscal Plan.

On-budget expenditure in 2022 is estimated at EUR 63.8 billion, which is about EUR 2.1 billion less than has been budgeted for 2021 (including the year’s second supplementary budget).

This lower level of expenditure compared with 2021 is attributable particularly to the reduction in spending as a consequence of the pandemic.

The aim of the Government is to strengthen general government finances by means of growth, employment and moderate adjustment measures. The Government aims at a 75% employment rate and at turning the rising debt ratio onto a declining path by the middle of the decade.

The Government’s work on climate change has progressed on schedule and the distance to the carbon neutrality target is now much shorter. The Government is committed to making decisions on further measures that are needed to achieve carbon neutrality by 2035.

In its mid-term policy review, the Government published a sustainability roadmap that describes the current state of social, economic and ecological sustainability in Finland and sets goals for 2030.

The Government is committed to a long-term approach in its work to raise the employment rate through decisions that will bring an estimated 80,000 new jobs.

Consequently, as part of the solutions determined in the mid-term policy review, the Government has decided that the parliamentary term spending limits will be raised for 2022–2023.

The expenditure line will gradually descend towards the end of the parliamentary term and will continue on this path after the parliamentary term is over. The expenditure ceiling will be raised by EUR 900 million for 2022 and by EUR 500 million for 2023.

In addition, the exceptional situation mechanism included in the spending limits rule under the Government Programme is available in 2021 and 2022, allowing an annual EUR 500 million for one-off expenditure. Direct COVID-19 related costs, i.e. health security costs, such as expenditure on testing and vaccination, will be covered as expenditure outside the spending limits in each of the years 2021–2023.

Implementation of the tax policy principles set out in the Government Programme will continue. Taxation of tobacco will be raised by a total of EUR 100 million in 2022–2023. In line with the decisions of the autumn 2019 government budget session, the tax expenditure on synthetic diesel will be removed in 2021–2023, which is estimated to increase tax revenue by a total of EUR 87 million in 2022–2023.

An index adjustment will be made annually to the tax basis for earned income taxation, to ensure there is no rise in taxation as a result of a general rise in earnings.

The creation of the wellbeing services counties will mean that a proportion of local government tax revenues will instead go to central government as the municipalities’ cost burden and duties are reduced substantially. In connection with this, taxation of earned income will be reduced to ensure that the reform does not lead to higher taxation for any group of earners. Without the effects of the reform, central government tax revenue in 2021–2025 would increase by an average of 2.8% annually.

The health and social services reform will change the structure of public expenditure, reducing local government spending and raising central government on-budget expenditure considerably from 2023 onwards. The financing of wellbeing services counties is made up of transfers from the central government financing and tax revenues of the municipalities. Due to the delay concerning the rendering of accounts on tax revenues, the impact of the change in the tax bases will not be fully evident in 2023, when the reform enters into force, which will temporarily increase the on-budget deficit in 2023.

Central government debt is expected to climb to about EUR 145 billion in 2022. The ratio of total central government debt to gross domestic product (GDP) will rise throughout the budget planning period. Central government debt in 2025 is estimated to be about EUR 167 billion, or about 59% of GDP.

Finland’s GDP is expected to increase by 2.5% in 2021. A distinct post-pandemic recovery in the economy will not be seen until the latter part of 2021, as the pandemic recedes. Demand will start returning to normal once the improving virus situation allows the restrictions to be eased and lifted. Economic growth will be boosted significantly this year and in 2022 as the global recovery gathers pace.

Based on current projections, Finland’s maximum allocation is estimated to be EUR 2.085 billion. This will not be confirmed until the summer of 2022, however. The Sustainable Growth Programme for Finland will be implemented within the framework of Finland’s maximum allocation. Implementation of the Sustainable Growth Programme is also conditional on the Council’s approval of the RRP. In addition, the decision regarding own funds must be ratified by all EU Member States before the EU’s recovery instrument can be applied.

In the General Government Fiscal Plan for 2022–2025, the financing allocations for the Sustainable Growth Programme have mainly been treated as a separate package of expenditure due to the uncertainties still related to the matter.

The Government is allocating EUR 300 million for one-off future-oriented investments in 2022 as part of the funding for the second and final stages of the future-oriented investments, as decided in October 2020. Following this, future-oriented investments will have been allocated a total of EUR 2 billion in the period 2020–2022. In addition, investments totalling more than EUR 200 million will be allocated from the Housing Fund of Finland in 2020–2022. As set out in the Government Programme, the future-oriented investments will be funded for the most part through property income so that they will not lead to an increase in the debt burden in 2023.

Due to the pandemic, the 2020 supplementary budgets included decisions on substantial measures, including measures designed to support the economic recovery. The measures also have spillover effects for the years of the budget planning period.

The impacts on the budget planning period are altogether about EUR 610 million, weighted especially towards 2022 and 2023.

The Government has also decided on various new fixed-term increases. EUR 50 million is reserved for the purchase of COVID-19 vaccines for 2022 and EUR 35 million for 2023. A total of EUR 29.2 million is allocated in 2022–2024 for the implementation of a positive credit register as outlined in the Government Programme.

For 2022 and 2023, beneficiaries will be compensated for the decrease in revenue from the proceeds of gambling services. The compensation will amount to EUR 330 million in 2022 and EUR 305 million in 2023.

In the taxation of peat, the lower limit for tax-exempt small-scale use of peat will be raised from 5,000 MWh to 10,000 MWH in 2022–2026 and to 8,000 MWh in 2027–2029.

The Government is scheduled to approve the General Government Fiscal Plan at a government plenary session in May.