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Drop in revenue pressures municipalities to raise tax rates

Finland's local governments say they are short on funds after the government's competitiveness pact cut income tax revenue, among other things.

Vaakunakäytävä kuntatalossa.
Image: Jarno Kuusinen / AOP

Municipalities in Finland will meet to assess their tax percentages for the coming year soon, and many cities and regions are mulling increases.

"Decisions on next year's municipal taxes are going to be made in the next few weeks, and the message we are hearing from many municipalities is that they will have to raise their tax rates," says Minna Punakallio, chief economist of Kuntaliitto, Finland's association of local and regional governments.

Even though Finland is currently enjoying an economic upswing and improved employment figures, the country's over 300 municipalities have not seen the increase in income tax-related revenue that they expected.

Figures from the state-owned number cruncher Statistics Finland show that municipalities took in 22.8 billion euros in tax revenue in 2018, 3.8 percent higher than the year before. At the same time, however, revenue from compulsory social security contributions decreased by 2.1 percent, and the operating expenses of municipalities in mainland Finland grew. According to Statistics Finland, municipal operating expenses grew by 2.2 percent in the first six months of 2018, for example.

Kuntaliitto's chief economist believes that the government's competitiveness pact, with its wage freezes and holiday bonus reductions, is behind the trends.

"The contributions increase caused by the competitive pact's transfer of employer [earnings-related pension and unemployment insurance] contributions to the employees has now eaten into the tax revenue of the municipalities and the state more than we had been expected," Punakallio says.

More austerity in store

The loss of revenue will also require many locations in Finland to cut costs again next year.

"Local governments have launched a financial adjustment programme, meaning they have once again taken out their calculators to see how much they can tighten their belts," says Punakallio.

According to Statistics Finland, social and health care activities accounted for 58.4 percent of total net costs in municipal operational economies in 2017, with 6.7 billion euros directed to specialised health care alone. The second largest share of municipal net costs was directed at education and cultural activities, for 34.8 percent of the total. Primary education received the most funding in this second category, followed by early childhood education.

Annual municipal operating costs decreased by 2 percent on the previous year in 2017.

Example municipal tax rates from last year cite the metropolitan city of Kauniainen at 17 percent and the south-western Finland municipality of Jämijärvi at 22.5 percent.

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