Sunday. 17.11.2019
El tiempo

Finland draft budget 2020: tax increases and focus on foreign talent

The draft budget for 2020 includes strong tax increases on fuels (250 million euros), tobacco (50 million) and soft drinks (25 million), combined with a 200 million reduction of taxation on earned income for employees, pensioners and benefit recipients. There will be also a reduction of tax deductibility of interest payments on home loans. On the spending side, the Government allocates more money for universities and employment services, for families and to attract talent from abroad.


Finland draft budget 2020: tax increases and focus on foreign talent

The Finnish Ministry of Finance has published the basic lines of its budget project for 2020. This draft of the public accounts emphasizes the need to strengthen job creation -to achieve the Government's goal of 75% occupancy in 2023-, increase investments and compete globally to attract foreign talent. The big question, also formulated in the Government's proposal, is how to achieve these goals within a context of economic uncertainty and slowdown in growth and job creation.

The Government admits there are clouds on the economic horizon, both in Finland and in the euro zone. This is why Minister of Finance Mika Lintila's draft budget for next year aims to "strengthen the confidence felt in the future by individuals and businesses at a time when uncertainty about the global economy is growing" "Growth in the global economy is slackening" and "employment is also rising more slowly than before", the Government's proposal says.

"In this situation it is vital that we keep the Finnish economy in good shape and take steps to increase employment and investment", says Minister Lintilä.

The proposals in the draft budget for 2020 total 57.0 billion euros, approximately 1.5 billion euros more than the current's year budget, and are based on the Government Programme.

The measures included in the Programme will increase net Government expenditure by approximately 1 billion euros in 2020. However, decisions will be made separately on what the Ministry of Finance calls "the future-oriented investments" referred to in the Government Programme.

Boost education and employment

To enhance skills, it is proposed that core funding for universities will be increased by 10 million euros and for universities of applied sciences by 5 million euros in 2020.

To attain the employment goal, a supplementary appropriation of around 15 million euros is proposed for TE services. This will ensure the resources are in place for enabling job seekers to attend periodic interviews and will help implement the youth guarantee. In addition, work permit processes will be streamlined and international recruitment facilitated. "These measures aim to respond to labour shortages", explained the Government.

To increase the use of the pay subsidies in companies, an increase of 10 million euros is proposed for public employment services. An additional 33 million euros in Business Finland grant authorisations is proposed as support for the creation of new billion-euro ecosystems and innovations in Finland.

Attracting foreign talent

The entry to Finland of foreign talent sought by companies will be facilitated by making the so-called key personnel act permanent. At the same time, a moderate lowering of the 35% withholding tax for key personnel is proposed within the cost frame of the Government Programme.

As uncertainty is growing about the outlook for the global economy, Government considers "essential" to promote measures in Finland that encourage companies to invest. This is also needed in order to attain the Government's employment goal. After the 2008 financial crisis, the low level of investment has been a key bottleneck for Finland's productivity growth.

Minister Lintilä appointed Permanent Secretary Martti Hetemäki to review and report on measures that could speed up investment and could be included in the Government's budget proposal for 2020.

Increased funding for climate and nature measures

The budget draft proposes the amount of funding for nature conservation be increased by a total of 25 million euros in 2020. The funding will be divided between the Ministry of Agriculture and Forestry and the Ministry of the Environment.

This additional funding would be allocated to the voluntary METSO programme, in particular, that aims to safeguard forest biodiversity. The funds would also be used by the Natural Heritage Services of the state-owned forest enterprise Metsähallitus to improve recreational opportunities and strengthen the conditions for nature tourism.

Progress will be made towards the climate targets by investing in renewable energy sources, promoting resource efficiency and increasing the share of renewable energy relative to all energy use. An increase of 30 euros million in the approval authority for energy subsidies is proposed to support investments in energy technologies to replace coal.

An additional 300 million euros is proposed for the management of basic transport infrastructure, including roads, railways and waterways. It is also proposed that subsidies for private roads be kept at the current level during the government term. In addition, the level of funding for public passenger transport would be increased by 20 million euros, and this is intended for climate-related measures.

A supplementary appropriation of just under 72 million euros is proposed for the exclusive ODA budget item (official development assistance).

Families and students

It is proposed that the position of families be improved in a variety of ways. An appropriation is proposed for municipalities to reduce the group sizes in early childhood education and care and extend the right to early childhood education and care.

An increase of 25 euros per month is proposed for the family provider increment to the study grant.

The single-parent increment for child benefits will rise by 10 euros per month and the income of multi-child families will be improved by raising the child benefits paid for the fourth child and each additional child.

Students’ income will be secured by index-linking the study grant starting from 1 August 2020. It is proposed that basic security be raised by 20 euros per month, and the lowest pensions will be increased.

The draft budget also includes measures to increase people’s everyday security. Measures would begin for increasing the human resources of the police to 7,500 person-years by 2022. Other 2 million euros is proposed as an additional appropriation to increase the number of shelters and to develop this service.

Tax increases

Government stressed that, as agreed in the Government Programme, taxation of earned income will be reduced by 200 million euros. The reduction concerns employees, pensioners and benefit recipients in the low and middle-income bands. The solidarity tax will continue until the end of the Government’s term of office. An index adjustment will be made to the taxation of earned income in line with the rise in earnings.

However, there are other fiscal measures aimed at increasing tax collection, either through increases on consumption or via reduction of deductions.

For example, tobacco tax increases will continue in stages during the Government’s term of office. The increase for next year will be 50 million euros.

The tax on soft drinks will be also raised by 25 million euros in 2020, with the focus on sugar-rich drinks.

Taxation on transport fuels will also  be raised by 250 million euros. This increase would come into force in August 2020.

Aware of the blow that the above described tax increases will mean for many families, the Government said that benefit increases in basic social security and reductions in the taxation of earned income will compensate for the rise in fuel taxation for low-income earners.

Besides that, the tax deductibility of interest payments on home loans will continue to be reduced in stages during the Government’s term of office. Next year, 15% of the interest payments on home loans will be tax deductible.

There will be also a moderate reduction in the maximum amount of domestic help credit, from 2,400 euros down to 2,250 euros. The domestic help credit will be reduced from 50% to 40% of the payment for labour or service, and from 20% to 15% of the payment for wages.

1 billion more in tax revenue

The draft budget proposed by the Minister of Finance shows a deficit of 2.3 billion euros. The allocations for future-oriented investments will be agreed later in connection with the budget preparations. For this reason, their impact on appropriations and the budget balance has not yet been taken into account.

The budget deficit estimated for 2020 is about 0.5 billion euros higher than the deficit of about 1.7 billion euros for 2019 which was estimated in the summer’s supplementary budget. Central government debt will rise in 2020 to an estimated 109 billion euros.

Central government revenue is estimated to be 54.8 billion euros, of which 47.1 billion euros is tax revenue. Central government tax revenue in 2020 is expected to be around 2.4%, or about 1 billion euros, higher than the budgeted figure for 2019.

Municipalities’ new duties and responsibilities

Central government transfers to local government in 2020 will be approximately 7.3 billion euros, which is 1.2 billion euros less than the figure in the budget for the current year.

The reduced figure is due to the transfer of compensation payments (2.3 billion euros) for tax revenue losses to a budget item of their own. Compensation payments for tax revenue losses were previously made to municipalities as part of the central government transfers to local government. Central government transfers to local government for basic public services will therefore rise by about 1.1 billion euros.

General Government Fiscal Plan 2020–2023

The General Government Fiscal Plan for the full government term is being prepared at the same time as the work on the Government’s 2020 budget proposal.

The General Government Fiscal Plan also serves as Finland’s Stability Programme and it sets a medium-term budgetary objective (MTO) for general government finances in accordance with domestic and EU legislation. It also sets national budgetary objectives for central government finances, local government finances, employment pension funds and other social security funds for 2023, and presents the measures to achieve them.

The goal is that, given normal global economic circumstances, Finland’s general government finances will be in balance in 2023

In its draft budget proposals, the Ministry of Finance has incorporated the permanent expenditure increases and reductions set out in the Government Programme. The effect of these measures is that government expenditure will increase in net terms by approximately 1.3 billion euros at the 2023 level. This does not include a reduction of 100 million euros in business subsidies, on which a working group is to present its proposals before the government budget session in the autumn.

Neither does the General Government Fiscal Plan yet include measures to improve productivity in public services, as these are still to be separately negotiated with the regions in autumn 2019.

Discussions on the 2020 budget proposal

The Government will discuss the budget during the government budget session on 17–18 September. At the same time it will also discuss the General Government Fiscal Plan for 2020–2023.

The Ministry of Finance will publish its proposal for the 2020 budget on 16 August at Negotiations between the ministries and the Ministry of Finance will take place on 28–29 August. The Government will debate the budget proposal and the General Government Fiscal Plan on 7 October.