Government agrees on economic policy for the coming years

English translation of the press release published on 11 September 2015

The Government has agreed on the 2016 budget proposal. In the budget session, the General Government Fiscal Plan for 2016−2019 and a supplementary budget proposal for 2015 aimed at boosting employment were also agreed.

The appropriations of the 2016 budget proposal total EUR 54.1 billion. The budget proposal includes the consolidation measures agreed in the Government Programme that next year will reduce central government expenditure and increase fee revenue in total by around EUR 0.8 billion.

Revenue and expenditure of the 2016 budget proposal

2016 on-budget revenue is expected to be around EUR 49.1 billion, of which tax revenue will account for EUR 40.8 billion. Central government tax revenue is projected to grow by around 2% in 2016 compared with the previous year’s budget. Growth of tax bases will remain modest, due to slow GDP growth. In accordance with the Government Programme, taxation on labour will be eased. The tax increases in 2016 will be directed mainly at indirect taxation.

Although consolidation measures will reduce central government expenditure, the level of appropriations in 2016 will be only slightly lower than was budgeted for the current year. Expenditure will be increased by key Government projects as well as by an adjustment of the division of costs between central and local government, an easing of cuts directed at the housing allowance of pension recipients, asylum seekers and changes in the timing of defence materiel purchases.

The Annex to the press release contains selections from the budget’s taxation and appropriation changes.

Growth of central government debt will continue at an annual rate of EUR 5 billion

In the 2016 budget proposal, the deficit is expected to be EUR 5 billion. The level of central government debt at the end of 2016 would rise to around EUR 106 billion, which is around 50% of GDP. In 2019 central government debt is expected to grow to around EUR 120 billion.

General Government Fiscal Plan also serves as Finland’s Stability Programme

In its budget session, the Government also decided on its first General Government Fiscal Plan, which contains, in addition to the central government spending limits decision, budgetary objectives and a maximum limit for local government expenditure. The central government spending limits decision creates a binding four-year spending framework. In the General Government Fiscal Plan, the Government has set for the parliamentary term the following budgetary objectives:

• central government deficit at most ½% of GDP
• local government deficit at most ½% of GDP
• surplus of earnings-related pension funds approximately 1% of GDP
• balanced budget for other social security funds.

The General Government Fiscal Plan is also Finland’s Stability Programme, to be delivered to the EU Commission. It meets the EU’s requirement for a medium-term budget plan.

General government finances to be consolidated

Expenditure-reducing or fee revenue-raising measures aimed at strengthening general government finances by a net EUR 4 billion at the 2019 level were agreed in the Government Programme. The effects of tax measures are not included in this package. The consolidation measures agreed in the Government Programme have, as a rule, been included in the 2016 budget proposal and in the General Government Fiscal Plan for 2016–2019 (excluding a few items whose preparation is still at too early a stage to assess their impact). In addition, the effects of certain measures have become more accurate during preparation. For example, the estimate of the saving to be achieved by freezing index increases has been lowered from the impact estimates at the time of the Government Programme due to lower inflation forecasts.

The net impact on general government finances of the decided expenditure measures and fee revenue increases is estimated to be around EUR 3.5 billion at the 2019 level. To achieve the consolidation objectives according to the Government Programme, the Government has made certain additional savings decisions, the largest of which is the freezing of index increases to benefits linked to the National Pensions Index and the Cost-of-Living Index.

In future, upper limit set for expenditure arising to municipalities from central government measures

Local government finances will be stringent in the next few years. The aggregate budgetary position of municipalities and joint municipal authorities is expected to be slightly in deficit, and the deficit will deepen towards the end of the outlook period.

The budgetary balance objective (deficit at most ½% of GDP) for local government finances set in the General Government Fiscal Plan means a consolidation requirement of just over EUR 1 billion by the end of the parliamentary term.

The central government bears main responsibility for the consolidation of local government finances, but the municipalities also have significant responsibility for balancing local government finances. To support the achievement of the budgetary balance objective, the Government has set a maximum limit on local government expenditure, aimed at limiting the pressure arising to local government operating expenditure from central government measures.

Central government transfers and grants to municipalities will be around EUR 11 billion in 2016 and around EUR 10.5 billion per year in 2017–2019. The Government Programme includes a number of measures aimed at curbing growth of local government expenditure and thereby strengthening local government finances.

Government decisions based on gloomy economic outlook

The Finnish economy has contracted for three consecutive years. The unemployment rate will rise to nearly 10% this year and is projected to remain at a high level. In 2016 employment will increase slightly due to a modest improvement in economic conditions.

Due to favourable development of investments, growth in 2016 is projected to be over 1%. Consumer prices are expected to fall slightly this year. Next year, inflation will pick up, but remain moderate.

Finland’s general government finances have moved more permanently into deficit due to prolonged weak economic conditions and longer-term structural problems. General government finances will also be in deficit next year, even though consolidation measures will reduce the deficit. Expenditure growth due to ageing will present a permanent additional challenge to balancing general government finances.

In 2014 Finland’s general government deficit exceeded the 3% reference value specified in the EU Treaty. This limit also is likely to be exceeded in the current year. According to the European Commission’s June assessment, the consolidation measures for 2016 decided by the Government will be sufficient to reduce the general government deficit to below 3% next year, which means the fulfilment of the deficit criterion.

Although debt-to-GDP will exceed the 60% limit this year and the debt criterion will also be broken from 2016 onwards, this will still not result in the launch of an excessive deficit procedure. The Commission’s assessment in June was that the launch of an excessive deficit procedure is not justified. Finland is, therefore, still in the preventive arm of the Stability and Growth Pact and subject to its relevant requirements.

Third supplementary budget includes EUR 25 million to boost employment

The employment trend has been weak since the early part of the year. In the ICT sector, in particular, extensive redundancies have been announced during the summer.

An additional EUR 21.6 million is proposed for public employment and business services as a result of growth in unemployment and the redundancies announced by Microsoft. In addition, a supplementary appropriation is proposed for the operating expenditure of the (ELY) Centres for Economic Development, Transport and the Environment as well as the Employment and Economic Development (TE) Centres to facilitate handling of redundancy situations.

An addition of EUR 1.35 million is proposed for the training of highly educated unemployed people and EUR 1 million for vocational further education and training. The additional funding will enable training to be provided for around 750 people. In addition, an increase of EUR 5 million is proposed for the development of vocational education.

In addition, the third supplementary budget proposal allocates an increase totalling EUR 3 million for the operating expenditure of the Police and the Finnish Immigration Service to ensure efficient decision-making in asylum cases. An increase of EUR 5 million is proposed for the vehicle scrapping premium trial to ensure that the trial can continue to the end of the year.

An investment of EUR 20 million is proposed to safeguard the profitability of agriculture and the liquidity of farms.

In the supplementary budget, revenue estimates are increased by a net EUR 6 million. The change is based on tax revenue data for the early part of the year.

The supplementary budget proposal will be approved in a Government session on 17 September, after which it will be published in full on the Ministry of Finance website.

Funding for key Government projects secured

The Government has decided on EUR 1.6 billion of one-off investments in key projects and to reduce the repair debt in 2016–2018. Around EUR 220 million of the key project funding will be used in 2016. In addition, EUR 100 million is proposed to reduce the repair debt.

The key projects will be financed mainly with dividend income and sales of government shareholdings. Of the funding, EUR 330 million will be covered by the cancellation of funding for the City Rail Loop, which was in the spending limits.

The 2016 budget proposal will be approved by the Government on 28 September, after which it will be published in full on the Ministry of Finance website. On the same day, the Government will decide on the General Government Fiscal Plan. The budget proposals are based on a new Ministry of Finance economic forecast, which will be published on 28 September in the Ministry of Finance’s Economic Survey.

Inquiries: Riina Nevamäki, Special Adviser to the Prime Minister (Political Affairs), tel. +358 40 705 2593, Markus Lahtinen, Special Adviser to the Prime Minister (Economic Policy), tel. +358 295 160 404, and Suvi Aherto, Special Adviser to the Minister of Finance, tel. +358 50 349 6121