Ministry of Finance proposal for 2007 budget: Budget focuses on employment and municipalities

Minister of Finance Eero Heinäluoma describes the budget proposal for 2007 as putting the economy on a sound footing. An employment package of EUR one hundred million has been put together for the proposal. It includes action for helping communities going through structural change and alleviating bottlenecks on the labour market, and tax and social security solutions. Additional revenue for municipalities in the budget will come to close on EUR 500 million.

The final amount of Minister of Finance Heinäluoma’s budget will stand at EUR 40.1 billion. EUR 37.9 billion is proposed as the administrative branches’ expenditure, EUR 30.1 billion of which is included in the spending limits. The budget proposal keeps strictly within the overall spending limits approved earlier by the Government and Parliament. EUR 159 million will remain as an undistributed reserve.

The Ministry of Finance has created its own employment package for the proposal. The bottleneck problem on the labour market will be tackled in many ways. There will be an appropriation increase of EUR 15 million for improvements to the functioning of the employment services. A new discretionary relocation grant that would become part of the redundancy protection is also proposed. The maximum amount of the tax deduction for commuting expenses will be raised to EUR 7,000 from the present EUR 4,700. In addition, by Government decision appropriations will be directed towards assisting communities suffering from the acute structural change. A total of EUR 30 million will be reserved for this purpose.

In order to support employment and regional vitality, employers’ social security contributions in the sub-regions of Pielisen Karjala, Ilomantsi and Rautavaara will be reduced for 2007-2009. A similar reduction will continue in municipalities in Lapland and the archipelago region.

In order to improve employment, value added tax on hairdressing services and certain small repair services will be reduced from 22 per cent to 8 per cent. This is part of an experiment taking place in the European Community.

The biggest main title for expenditure in the budget proposal is that of the Ministry of Social Affairs and Health at EUR 11.7 billion. The appropriations will increase by about 3 per cent over 2006.

The family leave reform will come into force at the beginning of 2007. The parental daily allowance will be increased, the annual leave compensation paid to the employer will be increased, and the use of the ‘father’s month’ will be made more flexible. In addition, the parental allowance period for parents who adopt will be extended, and support for family carers and interpreter services for those with hearing and speech impediments will be improved. The pension security of agricultural entrepreneurs, entrepreneurs and grant recipients will be reformed.

EUR 1.7 billion is proposed for the Ministry of Transport and Communications in order to secure basic road and track maintenance and start up ten new traffic route projects totalling EUR 800 million. They are: the first stage of basic improvements to the Seinäjoki-Oulu track, basic improvements to the Lahti-Luumäki track, rail yard work at central Pasila and basic improvements to the Lappeenranta-Imatra road, Ring Road I in the Helsinki area between Turunväylä and Vallikallio, the Lusi-Vaajakoski road, the Kirkkonummi-Kivenlahti road, the road in the centre of Savonlinna and the Kemi road and bridges, and improvements to the Hamina sea route. These investments are also expected to have a considerable employment impact. The financing of public transport will be increased by EUR 8 million to EUR 82.6 million compared with the decision on spending limits in March.

EUR 119 million is proposed for crisis management expenditure granted by Finland, civil crisis management accounting for more than EUR 14 million. About 0.43 per cent of GNI is proposed as the amount for appropriations for international development cooperation, an increase of EUR 75 million compared with the current year.

The Minister of Finance proposes an increase of EUR 3.5 million in appropriations allocated to the prison service.

Local government reform to start
Local government reform will start in next year’s budget. Municipalities’ tax revenue will be increased next year by almost EUR 200 million. Correspondingly, it will be possible to forego a similar sum in compensation for municipalities’ costs that was planned for 2008.

Central government measures included in the budget proposal are expected, considering the overall effect of the municipalities’ expenditure, revenue and changes in the tax bases, to improve the financial position of the municipalities by a net amount of EUR 345 million compared with 2006 or by EUR 471 million including index increases. About EUR 55 million will be allocated to municipalities’ merger grants, i.e. EUR 30 million more than this year.

An increase of EUR 75 million will be allocated to implementing a national healthcare project and a development project in the social sector, EUR 2 million of which will be for increasing interpreter services and EUR 1 million for improving the availability of family carers.

EUR 8 million is proposed for developing school wellbeing. A total of EUR 86 million will be paid for a revision of the expenditure distribution between central and local government, the municipalities share being EUR 81 million. Furthermore, the payment of the final instalment of the expenditure distribution to the municipalities will be brought forward by reducing the earned income allowance in municipal income tax.

Increase in tax revenue
Central government revenue next year will be EUR 40.5 billion, with tax revenue accounting for EUR 34.8 billion. Revenue will rise by just under one per cent from the budgeted figure for the current year. The growth in tax revenue will be in excess of 3 per cent. The biggest increase will come in value added tax and corporation tax; on the other hand, the revenue from excise duty and other taxes is not expected to rise.

Taxation on earned income will be reduced in accordance with the Government’s position on the result of the negotiation outcome concerning the incomes policy agreement in 2004. Payment of the final instalment for the revision of the expenditure distribution between central and local government for 2005-2008 will be brought forward to next year. This will be implemented by reducing the earned income allowance in municipal income tax and correspondingly altering the earned income allowance in state tax and the state income tax scale. The net effect on the taxpayer will be negligible.

The above-mentioned changes in the tax bases and the increase in the maximum amount of the deduction for commuting expenses will reduce the proceeds from state income tax at the annual level by a total of some EUR 790 million. In addition, a two-per cent inflation revision will be made to the income tax scale. The tax rate of the middle-income wage-earners will fall by just under one percentage point in 2007.

Finland is participating in an experiment taking place in the European Community, the purpose being to find out what impact a targeted reduction in value added tax has on employment and the grey economy. The value added tax rate on hairdressing services and certain small repair services will be reduced from 22 per cent to 8 per cent for 2007-2010. The lowering of the value added tax rate is expected to reduce tax revenue by some EUR 43 million per year.

The electricity tax on industry and greenhouse cultivation will be lowered next year. The halving of the electricity tax and the abolition of certain subsidies for electricity production will reduce tax revenue by a net amount of some EUR 70 million.

It is intended to accumulate more funds for the State Pension Fund than before because the revenue side of central government finances is developing well, and withdrawals from the Pension Fund to on-budget activities will be reduced by EUR 500 million.

On-budget entities in balance
Revenue from on-budget activities is expected to be EUR 40.5 billion. The budget will be in balance, with a slight surplus (about EUR 240 million) and it is proposed that the surplus be used for reducing central government debt.

The target of the Government Programme concerning the balance of central government finances at the end of the present Parliament will be met.

Central government debt is expected to be EUR 60 billion at the end of 2007, which is about 34 per cent of the GDP. Interest on central government debt is put at EUR 2.3 billion.

Economy developing well
The economic policy has created the basis for stable economic growth and demand for labour. The growth in total output was quick in the first months of the year, with GDP growing 5 per cent over last year in the first quarter of the year. The growth continued to be strong in the second quarter as well. Domestic demand is showing a strong increase. The prospects for the international economy are also generally good. The growth in total output may slow down in the final few months of the year; the growth in the gross domestic product overall will probably reach about 4 per cent this year and be around 3 per cent next year.

The availability of labour will start to restrict production growth opportunities to an increasing extent. An improvement in the functioning of the labour market is a basic requirement if balanced economic growth is to continue.

The good economic development has been supported by the implementation of tax cuts. A rise in employment and the rapid growth in private consumption have increased tax revenue. The rapid increase in household indebtedness and the booming housing market, however, are cause for concern. The rise in consumer prices has remained moderate for the moment – partly thanks to imported goods becoming cheaper – but the rise in energy prices has increased inflationary pressures. The increase in consumer prices, however, will remain at just below 1.5 per cent.

The growth in employment has been strong in the past couple of years, but the increase in jobs slowed down in the first half of the year, partly perhaps because of the increase in labour market bottlenecks.

Productivity
According to the decision on spending limits for central government finances for 2007-2011, the central government productivity programme will be transferred in its entirety to the implementation stage, in which the ministries will put into effect the productivity projects that were the basis for the preparation of the decision on spending limits in their administrative branches and will take their effects into account in the budget. Furthermore, a number of general administrative and support-service reforms covering the whole of central government will be implemented under the guidance of the Ministry of Finance.

 

Employment and responding to labour market bottleneck problems