Expenditure, revenue structure adjustments needed to improve govt finances

General government finances must be improved significantly over the next two parliamentary terms, according to the expenditure and structural survey and the tax survey published by the Ministry of Finance on Monday.

The weak outlook for general government finances coupled with limited opportunities to remedy the problem through economic growth are confronting Finnish decision-makers with difficult choices.

The Ministry of Finance’s strategy is to ensure that Finland remains a stable and sustainable society for future generations.

The expenditure and structural survey and the tax survey provide a variety of concrete alternatives for measures to improve general government finances.

The structures of Finland’s general government finances were created in a time of more favourable demographic and economic development, and the public sector’s financing base can no longer support all of the public sector’s tasks.

The outlook review by officials at the Ministry of Finance published in December 2022 proposed that a number of measures are needed to improve general government finances by at least nine billion euros over the next two parliamentary terms.

In concrete terms, this means that the scale of the necessary measures to reduce expenditure and increase revenue is permanently over EUR 1,600 per Finn per year.

The fundamental nature of the problem is simple: general government expenditure has remained higher than revenue, and economic growth, even if faster than anticipated, will not close this gap.

Instead, the expenditure and revenue structure requires significant adjustment to stabilise general government finances.

“It is important to keep in mind that adding new sources annual expenditure or reducing revenues will increase the scale of the necessary adjustment,” said Mika Niemelä, Director-General of the Budget Department.

The expenditure and structural survey helps identify the purposes for which public funds are currently being used. It also offers measures that could improve general government finances.

These measures could improve general government finances, for example, by reducing expenditure, increasing income from charges, increasing income from property and improving incentives to work, which will result in employment growth.

The expenditure and structural survey examines the public sector as a whole, meaning central government, wellbeing services counties, local government and social security funds. When examining adjustment measures, no part of the public sector should be ruled out, as this will increase the burden on other parts.

The expenditure and structural survey presents a wide selection of different, partially overlapping or alternative measures to improve general government finances.

The presented measures are not intended to all be implemented as such, but to support public debate and political decision-making.

Because some of the measures are alternatives to one another and may have interlinking effects, it does not make sense to add up their total scale. The report provides a preliminary outline of possible measures and their scale. The measures and the estimates of their effects will be specified during further preparations.

It is possible to use the presented measures to build an overall package that would spread its effects widely and would not unreasonably impact individual citizens or communities. When examining possible measures, efforts have been made to minimise any adverse effects on the growth of productivity, incentives to work and employment.

Though the measures focus on securing financial sustainability, they also seek to take into account social and ecological sustainability. However, the survey does present some measures that, if examined in isolation, are in conflict with the objectives of ecological and social sustainability. The overall package of measures (including tax measures) will determine what the effects of the adjustments will be from different sustainability perspectives.

Tax revenue should be increased in an effective manner that safeguards the sustainability of general government finances

Effective ways of increasing tax revenue that would also improve the tax system include raising reduced VAT rates, reforming dividend taxation and raising real estate taxation on land. The decline in revenue from excise duties and transport taxes can be slowed by indexation of taxes.

In the short term, tax revenue can also be increased using measures that simultaneously support environmental and health objectives. Reforms to energy taxation that improve the effectiveness of emissions guidance and increases to tobacco tax that support the reduction of smoking would increase tax revenue in the short and medium term.

It is important that any reforms to taxation are prepared carefully and that their effects are examined comprehensively.

“If the tax effects of a measure cannot be reliably estimated, it should not be used to stabilise general government finances,” said Terhi Järvikare, Director General of the Tax Department.