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Government decides policy positions for remaining part of its term and for 2022–2025 General Government Fiscal Plan

Government Communications DepartmentMinistry of Finance
29.4.2021 20.51 | Published in English on 29.4.2021 at 23.56
Press release 274/2021
Puoliväliriihi 2021

In its mid-term policy review, the Government outlined extensive measures to strengthen employment and public finances and to promote people’s wellbeing in Finland in the aftermath of the COVID-19 pandemic. The decisions in the mid-term review include policies to strengthen growth, to continue on the path to carbon neutrality and to reduce inequality. The measures have been integrated into the 2022–2025 General Government Fiscal Plan, on which the Government determined its policy positions in connection with the mid-term policy review. In addition, the Government carried out a mid-term review of its climate measures.

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 policy positions approved by the Government at its mid-term policy review and spending limits discussion are set out in detail in Appendix 1. 


1. Sustainable growth and fiscal balance

Government’s employment measures

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. The Government will continue the preparation of employment measures within the Ministerial Working Group on Promoting Employment. Decisions were already made by the Government at an earlier date on measures designed to bring 31,000–33,000 new jobs.

The measures decided in the mid-term policy review are aimed at achieving 40,000–44,500 new jobs. In addition, decisions on employment measures that will strengthen general government finances by EUR 110 million will be made before the end of the government term. The Government’s objective is that by the middle of the decade the employment rate will be 75%.

The Government’s employment measures and their job-creating impacts are presented in more detail in Appendix 1, section 2.

General Government Fiscal Plan sets objectives for public finances

The General Government Fiscal Plan and, within it, Finland’s Stability Programme set out multiannual targets for general government finances concerning the general government budgetary position, public debt and public expenditure, and targets for the budgetary positions of general government subsectors.

Spending limits for central government finances

Not least as a result of the COVID-19 crisis, the overall picture of the Finnish economy and of the country’s financial policy needs diverges significantly from the autumn 2019 situation when the spending limits for the parliamentary term were set. The Government has pursued an exceptionally expansionary fiscal policy that has underpinned growth and employment, prevented a permanent loss of production capacity and temporarily raised spending in areas that fall within the expenditure ceiling.  Regarding the parliamentary term spending limits, the Government is in a situation where the room for manoeuvre within the spending limits does not allow the inclusion of unforeseen changes in expenditure and the implementation of all the reforms considered necessary by the Government.

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.

In connection with raising the spending limits, the Government has decided on a reallocation of expenditure, in which certain expenditure under the spending limits will be permanently reduced by EUR 370 million from 2023 onwards. As the savings are continuous, this will also reduce the expenditure covered by the spending limits from 2024 onwards.

(APPENDIX 1, heading 1.1. economic policy positions)

Tax base protection and investment-friendly environment

The Government’s aim is to strengthen the tax base, promote business investment and enhance competitiveness. The 2021 government budget session will decide on a tax package to strengthen central government finances by EUR 100–150 million and, in addition, on other tax changes to encourage investment and enhance competitiveness.

The Government will, for example, continue the double right of depreciation concerning investments in machinery and equipment for the years 2024–2025, which was decided earlier in 2020–2023. In addition, to broaden the tax liability of foreign investors, the Government will ensure that profits made by foreign funds in real estate investments are taxed as widely as possible in Finland. Taxation decisions will be used to encourage the replacement of heating systems that operate on fossil fuels. To foster switching heating systems and relinquishing the use of oil as a form of heating, the maximum domestic deduction will be raised from EUR 2,250 to EUR 3,500 and the compensation percentage from 40 to 60. The change is temporary and effective from 2022 to 2027. To assess the employment impact of the household expenses tax credit, a two-year trial will be outlined in the 2021 government budget session, whereby the maximum amount of household and nursing and care work that qualifies for the tax credit will be significantly increased.

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 Government’s tax policy positions are given in more detail in Appendix 1, heading 1.2. Tax items.

Central government on-budget revenue, expenditure and balance, EUR billion 

 

2021 incl. 2nd supplementary budget proposal

2022, General Government Fiscal Plan 2023, General Government Fiscal Plan 2024, General Government Fiscal Plan 2025, General Government Fiscal Plan
Revenue, excl. net borrowing 53.9 56.2 68.1 70.2 71.9
Expenditure (current prices) 65.9 63.8 77.0 77.4 78.6
Deficit -12.0 -7.6 -8.9 -7.1 -6.7

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 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 approximately 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 approximately 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.

Sustainable Growth Programme for Finland

On 15 March 2021, Finland submitted its preliminary national Recovery and Resilience Plan (RRP) to the European Commission. The Plan sets out how the Recovery and Resilience Facility (RRF) funding is to be used in Finland. The final version of the Plan will be submitted to the Commission in May 2021. The Commission will assess the Plan, and the Council of the EU will approve it in late summer 2021.

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 package will be broken down into appropriate expenditure items later on in connection with the budget proposal. On-budget revenue also takes into account the provisional assessment of the effects of the Sustainable Growth Programme.

Parliamentary working group to look at RDI financing 

Finland’s objective is to raise RDI expenditure to 4% of GDP by 2030 in accordance with the Government Programme and the RDI Roadmap. In 2019, R&D intensity was 2.8% and the public sector’s share of R&D financing was 30%. Reaching the objective by 2030 would mean additional investments of almost EUR 600 million per year on average. Of this, private financing would amount to around EUR 400 million and public sector financing to around EUR 200 million if the public sector’s share of R&D funding remained the same. 

In order to advance Finland’s RDI objective, the Government has decided to set up a parliamentary working group to explore ways to commit to the growth of public sector R&D financing, which is required to achieve the RDI objective until the end of the decade.

A parliamentary working group to be set up later will look at a permanent R&D incentive as part of an overall solution that would lead to a level of private and public RDI investment and financing equivalent to four per cent of GDP. The Government will outline a possible incentive in the 2021 government budget session.

Implementation of one-off future investments 

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. Some of the effects are already included in the spring 2020 decision on spending limits. Approximately EUR 480 million of the figure is allocated to the Ministry of Economic Affairs and Employment and its branch of government, including payments for business development projects in the form of grants and loans and an estimate of the compensation for losses payable to Finnvera Oyj.

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.

Immediate further work will be launched to prepare a new permanent financing model. The aim is to decide on a model that ensures predictable, stable and adequate funding for beneficiaries that also protects their autonomy. The work will be based on the Liikanen group’s report and further work will be carried out in close cooperation with the beneficiaries. The preparation of the measures will take into account parliamentary involvement, more detailed impact assessments for the various beneficiaries, the proposals of the development and digitalisation project concerning discretionary government grants, and the parameters defined by EU law. Implementation of the reform will start in 2024. The decisions will be made by the end of 2021.

Subsidy for electrification of energy-intensive companies

A new subsidy for electrification will be introduced for energy-intensive companies to create a stronger incentive for carbon-neutral production and for the electrification of energy-intensive companies. This subsidy will also take cost competitiveness into account. It was decided that the aid intensity of the electrification subsidy will be 25% and the ceiling EUR 150 million. Investments will account for 50% of the electrification subsidy.

Support for domestic ownership

The measures in the Government's domestic ownership programme, along with the industrial strategy proposals and the entrepreneurship strategy under preparation, together form a comprehensive set of measures to strengthen business financing, the conditions for entrepreneurship and the investment environment. Due to a faster pace of change in ownership, Finnvera’s credit instruments will be developed and Finnvera's cap of EUR 100,000 for loans to entrepreneurs will be augmented in order to introduce more effective financial resources. The volume of growth loans will be increased to at least double the current magnitude.

To improve the social security of sole entrepreneurs, a further study will be carried out by 2022 for the government discussion on spending limits to reshape entrepreneurial and earned income contributions and the determination of per diem allowances closer towards a combined contribution arrangement. 
 

2. Towards a carbon-neutral society 

Climate and energy policy

The Government’s work on climate change has progressed on schedule and the distance to the carbon neutrality target is now much shorter. The gap with respect to the decisions and measures indicating the volume of climate decisions that are still needed to achieve carbon neutrality has decreased to 11 million tonnes (Mt) of carbon dioxide equivalent. In the 2020 Climate Report this gap was still estimated at 15 Mt.

The gap has been reduced especially by the decisions on the energy tax reform (2 Mt) and the reduction of emissions from the emissions trading sector faster than was estimated. In addition, it is estimated that after 2030 the reduction in emissions from transport will be faster than has been expected, and cleaner heating methods and improved energy efficiency will also reduce emissions from housing faster than foreseen.

The carbon neutrality target to 2035 and its implementation have already taken society towards decarbonisation, promoted work to combat climate change and strengthened Finland’s country brand as a strong player in climate change issues in international contexts.

The Government is committed to making decisions on further measures that are needed to achieve carbon neutrality by 2035. The Government has been drafting an action plan to bridge the gap and will decide on further measures in connection with the adoption of the Climate and Energy Strategy in autumn 2021. 

Fair and controlled transition for energy use of peat

In its mid-term policy review, the Government discussed the proposals of a broad-based working group on peat. The use of peat for energy is decreasing faster than anticipated in the Government Programme. The Government recognises the need to take swift action to support a just transition and business operators and employees in the peat sector. 

A support package will be introduced for peat industry operators who will close down their operations. EUR 60 million in 2021 and EUR 10 million in 2022 will be allocated in funding for this support package. In addition, the Government will use part of the EU’s Just Transition Fund (JTF) to support investments in district heating to replace peat.

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. Tax will be only paid on the amount used in excess of this lower limit. From 2030, the limit will be the same as at present.  In this connection, a decision will be made on the Medium-term Climate Change Policy Plan and the Climate and Energy Strategy, which will set out binding action on emission reductions corresponding to the increase in emissions due to the tax changes.

The Government will submit a proposal to Parliament concerning the price floor mechanism for peat during autumn 2021. The price floor mechanism will enter into force on 1 January 2022. The price floor will be based on the level calculated as the sum of the price of emission allowances and tax on peat (EUR/tCO2) that is estimated to be adequate to reduce the use of peat for energy by at least 50% by 2030. The level will be set in connection with the legislative drafting process on the basis of estimates by experts. 

My Nature Gift to Finland campaign

My Nature Gift to Finland campaign will be started in accordance with the Government Programme. In this campaign, when a private land owner designates a valuable nature area he or she owns for protection, Metsähallitus will protect an area of about the same size from its most valuable nature areas. 

Private donations made from the beginning of June 2019 until now, some 300 hectares in total, will be included in the campaign. The Sanginjoki area of 1,400 hectares donated by Kone Foundation is also included. The campaign will run until the end of 2022, and the maximum total area of state lands to be protected is 5,000 hectares. 
 

3. Social sustainability and fair reconstruction 

Wellbeing of children, young people and families will be supported 

The restrictions placed on education, teaching and recreational activities to slow down the spread of the COVID-19 epidemic will have a negative impact on the learning outcomes, wellbeing and equality of children and young people. 

The Government will implement a comprehensive package of measures to mitigate these impacts. The appropriations for the package will be included in the third supplementary budget proposal for 2021.
 
The package covers the administrative branches of three ministries: the Ministry of Education and Culture, the Ministry of Social Affairs and Health, and the Ministry of Economic Affairs and Employment.
 
Funding will be allocated to the patching of the learning gap created by distance learning, the speeding up of young people’s access to mental health and substance abuse services and the improving of the accessibility and availability of such services, among other measures. In addition, families’ need for support will be taken into account in the package.

The criteria for determining the financial compensation for apprenticeship training will be reformed to support the education, training and employment of young people. The Government is scheduled to decide the details in its 2021 budget session. 

The Government will promote the continued use of multi-location working and studying, which have been widely used during the pandemic. To make use of the new practices which have emerged during the lockdown, the Government will adopt a resolution in early 2022 concerning the regional presence of central government and multi-location working. 

Demographic policy included in Government’s agenda

For both public policy and economic reasons, the Government considers it necessary to promote balanced demographic development and active demographic policies. The Government aims to actively support people’s opportunities to form a family and have the number of children they wish.

The goal is to increase work-based and education-based immigration by at least 10,000 persons per year by 2030.

Internal Security and Strengthening the Rule of Law

By amending the Act on the Adjustment of the Debts of a Private Individual, access to debt adjustment will be facilitated and the possibilities of both entrepreneurs in financial difficulties and other debtors to cope with debt adjustment will be improved. On the basis of a study under the Government's analysis, assessment and research activities, a decision will be made on measures to improve the position of low-income debtors in enforcement, either by raising the protected portion in debt enforcement to at least the level of the guarantee pension or by other measures that are at least as effective.

The retention periods for payment default entries will be shortened. The possibilities to permanently lower the maximum interest rate for consumer credits and restrictions on marketing will be assessed in the context of an overall review of consumer credit regulation. Maximum amounts will be set for the debt collection costs for business debts. A unit will be established to coordinate stakeholder cooperation related to citizens' financial literacy. 

The Government will make preparations to allocate funding for the acquisition of two offshore patrol vessels in the 2021 supplementary budget proposals.
A preliminary study on the overall reform of the Aliens Act will be prepared.

The Government is scheduled to approve the General Government Fiscal Plan at a government plenary session in May, after which it will be published on the Ministry of Finance website. The General Government Fiscal Plan, which includes Finland’s Stability Programme, will also be submitted to the European Commission

Inquiries: Joonas Rahkola, Special Adviser to the Prime Minister in Economic Affairs, tel. +358 295 160 998, Tuomas Vanhanen, Special Adviser to the Minister of Finance in Economic Affairs, tel. +358 295 530 417, Henri Purje, Special Adviser to the Minister of Education, tel. +359 295 330 017, Heikki Sairanen, Special Adviser to the Minister of the Interior, tel. +358 50 456 4662 and Silja Borgarsdóttir Sandelin, Special Adviser to the Minister of Justice, tel. +358 295 150 116