The Finnish government has presented its draft budged for 2021. The proposal has been prepared amid exceptionally extensive uncertainty due to the global Covid-19 pandemic, which led to a 6.4% contraction of Finland's GDP in the second quarter of 2020.
Although the shrinkage was less severe than in most European economies, the latest EU Commission's forecast says Finland will be the slowest country to recover after the crisis.
In this scenario, the government has approved its budget proposal for 2021, which forecast an increase in the public deficit and debt, despite including tax increases. Its objectives are to create 31,000-36,000 new jobs, preserve the health of the population, and create the conditions for "an ecologically sustainable recovery," the Ministry of Finance said in a statement.
The government does not hide that the horizon is full of dark clouds. In that sense, it admits that public finances "will deteriorate substantially this year," above all as a consequence of the Covid-19 pandemic and the resulting "severe economic downturn."
The budget proposal for 2021 totals 64.2 billion euros. This is 6.5 billion more than the approved budget for 2020, but it is 2.9 billion euros less than the 2020 budgeted total after inclusion of the supplementary budgets to finance the fight against Covid-19 and its consequences.
Central government revenue in 2021 is estimated to be 53.4 billion, of which tax revenue will account for 45.2 billion. Tax revenue is expected to be around 3.2 billion euros (or 8%) higher in 2020, partly due to the tax hikes applied.
The budget proposal for 2021 is 10.8 billion euros in deficit. The 2020 deficit, including the supplementary budgets, amounts to 17.6 billion euros.
Central government debt will rise to an estimated 135 billion euros in 2021.
Taxes
The energy taxation reform will start to be implemented in 2021. The electricity tax paid by industry (tax category II) will be lowered to the EU minimum level to improve the operating conditions for industry.
In return, for citizens taxes on heating fuels and fuels used in non-road mobile machinery will be increased.
Taxation on heating fuels, such as coal, natural gas and fuel oil, will be increased by 105 million euros net from the beginning of 2021. This will include an increase in peat taxation of 2.7 euros per megawatt hour. A price floor mechanism will be introduced in peat taxation in 2022 which, together with the emission allowance pricing, will ensure that the energy use of peat will be cut by at least half by 2030.
Taxes on alcohol and tobacco products will be raised "to promote public health," the government says.
The taxable value of fully electric vehicles used as company cars will be lowered and the charging benefits of electric vehicles at workplaces and in public recharging points will be made a tax-free benefit in 2021–2025.
The taxation of employer-subsidised commuter tickets will be simplified and company bicycles will be made a tax-free benefit up to 1,200 euros.
In 2021, public finances also continue to benefit from the sharp increase in fuel taxes applied since 1 August 2020.
Employment
The government will take several employment measures aiming to have an employment-generating impact amounting to 80,000 new jobs during its full term (4 years).
The measures decided in the budget session, combined with the government’s earlier employment measures, are expected to generate 31,000–36,000 jobs. The next set of employment measures will be decided in the Government’s mid-term policy review session.
The government is also committed to promoting pay transparency by legislative means. To guarantee a well-functioning labour market, the government will implement measures proposed by the working group for preventing the exploitation of foreign labour.
The government also will request the social partners to prepare a balanced proposal for measures to promote the employment rate of people aged over 55 and to improve their labour market position and wellbeing at work. The proposal is expected by the end of November 2020.
Education
Compulsory education will be raised to the age of 18 and free-of-charge upper secondary education will be implemented at the same time. These changes will be adopted gradually from autumn 2021 onwards, one age group at a time.
Local authorities and other education providers will receive full reimbursement as a central government transfer for these expenses. 22 million euros have been reserved for extending compulsory education, and the level will rise to 129 million euros by 2024. This appropriation will cover items such as learning materials and tools, which will become free of charge for families, and the expansion of the subsidies for school journeys.
A model of three-tier support will be developed for early childhood education and care. 15 million euros are reserved for developing and implementing the model. This is a new structural measure with which the government aims to "strengthen quality and equality" in early childhood education and care.
Fees for early childhood education and care will be reduced by a net of 70 million euros at the annual level. This will be compensated to local authorities by increasing their share of corporation tax.
The increase in the maximum price for student meals introduced on 1 August 2020 will be compensated by an increased appropriation of 4.2 million euros, which will raise the meal allowance by 0.36 euros. The level of the meal allowance will be 2.30 euros per meal as of 1 January 2021.
The government also decided that the resources for vocational education and training will be boosted by allocating 150 million euros for recruiting teachers and instructors by 2022. The additional resources will help increase the amount of contact teaching to ensure learning is of high quality. A programme for quality will be launched to improve the quality of general upper secondary education. 15 million euros are allocated for this purpose. 40 million euros will be allocated for promoting continuous learning. The funding will be used in particular to develop the skills of people of working age, to improve the skills of those who have poor basic skills and to facilitate the employment of older people.
Covid-19 costs
The budget proposal for 2021 reserves 1.4 billion euros for testing required by the hybrid strategy; 355 million euros will be reserved for this in the autumn 2020 supplementary budget proposal. Appropriations will be reviewed as necessary when more detailed cost estimates for 2021 become available.
The budget proposal reserves 30 million euros for supporting investment connected with testing technology.
Another 30 million is allocated to additional costs related to the strengthening of health security at border crossing points, excluding costs related to testing. In addition, 200 million is allocated for hospital districts and municipalities to cover direct costs arising from Covid-19 other than those resulting from testing.
The Government is committed to the central government spending limits system described in the Government Programme. However, due to the continuation of Covid-19, a temporary entry for 2021 will be consciously made in the spending limits rule for the parliamentary term: all direct costs arising from the epidemic, such as expenditure related to testing and the expansion of testing capacity, tracing of transmission chains, quarantines, treatment of patients, health security of those travelling and a vaccine against the virus, will be covered from outside the central government spending limits framework in the 2021 budget and, if necessary, in supplementary budgets.
In addition, due to the significant uncertainty associated with Covid-19, an additional 500 million euros will be reserved for 2021 to be used for one-off expenditure needs arising from Covid-19 which are mandatory in terms of fiscal policy. If there is less expenditure than was reserved within the spending limits, the difference will not be used to increase other expenditure.
Local government - basic public services
The coronavirus epidemic has significantly impacted local government finances owing to reduced tax revenue, among other effects. This, in combination with the pre-existing financial difficulties of many local authorities, has created major challenges for a number of local authorities.
The government proposes to further support local government finances in 2021 through an extensive package.
A one-off increase of 300 million will be introduced to central government transfers to local government for basic public services. 20 million euros of this increase will be allocated towards a discretionary increase in central government transfers.
In addition, a fixed-term increase of 10 percentage points will be made to the local authorities’ share of corporation tax in 2021 (overall annual impact 550 million euros). Costs directly linked to the COVID-19 epidemic, such as testing costs, will be fully reimbursed by the central government to local authorities and hospital districts.
In addition, the Government plans to allocate a total of 600 million euros to local authorities and hospital districts in the autumn supplementary budget proposal for 2020. Central government transfers for basic public services would receive a one-off increase of 400 million euros for 2020 and hospital districts EUR 200 million for 2020.
The Government will begin preparations for a multiannual reform package to improve the availability of health and social services and address the backlog in treatment and services. The Government undertakes to address disruptions in treatment and services by introducing a financing package of 450 million euros between 2021 and 2023.
Discretionary government grants allocated to local authorities will total 12.5 billion euros in 2021, representing an increase of approximately 0.9 billion euros on the 2020 ordinary budget. A total of 8.7 billion euros will be proposed for imputed central government transfers, representing an increase of approximately 0.6 billion euros on the approved 2020 budget.
The budget proposal for 2021 will involve significant changes to local government finances through the extension of compulsory education and the binding minimum staffing level for care personnel in services for older people, among other reforms. The impact of these reforms on local government finances will increase gradually in many duties. Local authorities will receive full central government financing for their extended duties. The impact of the binding minimum staffing level, for example, will be 53 million in 2021, reaching 266 million by 2024.
These discretionary measures of a permanent nature that reinforce care and education services and reduce families’ expenses will be compensated 100% to local authorities to the extent that they increase local government expenditure. This increase is estimated to total 370 million euros in 2021, rising to approximately 790 million euros by 2024.
Agriculture
The government decided to allocate 7,788 million euros in national funding for agriculture and rural development in 2021–2027. The purpose of the national funding is to complement the EU funding that was agreed on in July 2020. The EU funding solution agreed on in July has not yet been taken into account in the appropriations for the items allocated for support. The share of EU funding in the budget will be further specified in connection with the supplementary budget as the EU clarifies its country-specific proposals.
The funding package will be complemented by recovery funding for the European Agricultural Fund for Rural Development.
The EU's Common Agricultural Policy is implemented as a multi-annual package, as is the case with the other policy sectors and funds included in the EU’s multiannual financial framework. The upcoming funding period covers the years 2021–2027. During the transitional period, the measures of the current programming period will continue but with funds from the new funding period. Preparations for the aid scheme to be implemented in 2023–2027 will continue.
An increase of 2.5 million euros is proposed for the compensation given for damage to reindeer caused large carnivores.
Excerpts from the budget proposal
The budget proposal includes a provision of 1.5 billion euros for the procurement of fighter aircraft, but the need for funding will be clarified as the procurement process progresses. The budget proposal will include proposed budget authority for up to 10 billion in funding. According to current information, the payments will take place between 2021 and 2031.
The Government proposes raising the refugee quota by 200 people to 1,050. With this in mind, an increase of 2.1 million euros is proposed in the budget proposal for 2021.
Approximately 848 million euros in net appropriations is proposed for the police. An increase of 10 million euros was already proposed earlier for the 2021 budget proposal to safeguard the operational capacity of the police, along with 465,000 euros to strengthen capacity to investigate the shadow economy and financial crime and to cover the increase in premises costs. In addition, the government proposes an additional 4.1 million euros allocation to strengthen crime prevention, with a particular focus on additional resources for the first phase of crime prevention related to trafficking in human beings, the fight against economic crime, IT crime investigation and surveillance and alert functions, especially as concerns security services in sparsely populated areas. The aim is to increase presence and visibility of the police.
A total of 277 million in net appropriations is proposed for the Border Guard. In addition to the decisions made earlier, an appropriation of 10 million euros will be added for 2021 in order to ensure operational performance, along with 2.5 million euros to improve the security of premises. In its supplementary budget proposal, the Government is prepared to include a procurement authorization for the Border Guard for two offshore patrol vessels.
A total of 10.55 million in additional funding is proposed for courts and the National Prosecution Authority to streamline court proceedings and for courtroom video systems.
In order to strengthen the economic situation in the construction sector, the government proposes increasing the level of interest subsidy authorizations for state-subsidized housing production to 1.8 billion euros, which is 50 million euros more than in the budget for 2020 (including supplementary budgets). Employment in the construction sector will also be supported by increasing the investment mandate of the Senate Group enterprises to 480 million euros.
The production incentive for the audiovisual sector will be continued in 2021, and a total of approximately 9 million euros is reserved for this.
In 2021, the funding level for nature conservation will be 100 million euros higher than at the start of the government term. The funding will be used to implement programmes such as the Helmi habitats programme and the Forest Biodiversity Programme for Southern Finland (METSO).
The amounts and estimates provided in this article are still preliminary. The government will debate this budget proposal on 5 October.
