Sunday 10/25/20

Finland shoots herself in the foot

Finland has come out quite well in this Covid-19 crisis, in health terms. Compared to the rest of Europe, the small Nordic state has been little hit by the virus and the number of infections and deaths is very small.

However, the country will not escape the effects of the other more serious consequence of the pandemic: the economic collapse that already affects the entire continent. 

According to the figures released today by the EU, the GDP of the eurozone sank 12.1% in the second quarter of the year.

Finland has not yet published its specific data for the second quarter, but in view of what happened until March, the European Commission predicted a month ago that the country will suffer a contraction of more than 6% and - most worryingly - it will be the slowest country of the bloc to recover. The reason is simple, Finland depends on exports to the large European countries, and if they do not consume, the business sinks.

Fuel tax increase

In this context of global recession and uncertainty, the Finnish government will apply from 1 August a sharp rise - actually the largest since the turn of the century - of excise taxes on fuels. 

The measure, agreed in autumn 2019 for its entry into force in August 2020, has been widely criticized within the country. And not just for being a tax increase, but for the moment: activity, consumption and investment are contracting and any tax hike can have very harmful effects.

The government should have been flexible enough to delay tax increases until the dangers that threaten us have been overcome

The government said last autumn that the goal is to raise an additional 250 million euros to deepen the green economy. But in between there has been a global pandemic that has sunk companies' production and business. It has also raised layoffs and unemployment, and it has sunk public and private consumption.

This fuel tax raise will increase, as has been said many times, by 100 euros the annual bill of most people who use the car daily to go to work. But nobody should be fooled: its impact will be much stronger on the entire distribution chains and will lead to a general rise in prices of products and services.

And when everything is more expensive but people are not richer, sales fall. And if less is sold, unemployment rises.

A race to take over the remains

The coronavirus is not yet gone and we don't know how long the recession will last. So I think that at this uncertain time, instead of raising taxes and costs on those who keep the country standing, it would be smarter to protect the employment and operation of the few businesses that still contribute to the system.

Personally, I think the government should have been flexible enough to delay tax increases until the dangers that threaten us have been overcome.

As soon as the virus is gone, all countries will start a crazy race to take over what little is left. And Finland, which so far has suffered less in economic and health terms, was until now very well placed on the starting line for this competition.

With this tax increase, Finland shot herself in the foot. I hope that this desire to raise 250 million does not end up generating a greater fall in consumption and activity, with the consequent increase in unemployment, system costs, debt and, ultimately, impoverishment.