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Finland's tax revenues fall for first time in over a decade

By the end of August, government tax income was nearly two billion euros less than the same time last year.

Kuvassa on Aleksanterinkatu Helsingissä syyskuussa 2020.
Job losses and uncertainty could also dent consumer confidence and result in less spending and lower VAT receipts. Image: Silja Viitala / Yle

The economic shock caused by the coronavirus pandemic has forced the government to dig deep into its coffers, while banking less income than in normal times.

Although various analysts have proclaimed that the economic impact of the crisis has not been as damaging as originally feared, government tax revenues have taken the worst hit in many years.

The last time that tax revenues declined so steeply was more than 10 years ago, when a global financial meltdown ravaged economies worldwide. Back then, the 2008-2009 crunch caused tax revenues to drop after a one-year lag.

However the impact of the coronavirus epidemic in Finland is already evident this year. By the end of August, government tax income was nearly two billion euros less than the same time last year. The slump hardly counts as a collapse, but it is a significant change given that tax income growth had been expected.

In recent years, successive governments have seen tax revenues increase by at least half a billion euros compared to the preceding year. In 2017, tax revenue growth reached six billion euros. As a result, last year analysts at the Ministry of Finance were expecting taxes collected to rise this year, as they had done in the past.

"When the reality of the situation began to dawn and GDP forecasts were downgraded, first in late winter and then in early spring, we forecasted that tax income would not increase this year," economic unit advisor Veliarvo Tamminen said.

New forecasts hinge on how people, virus behave

The Finance Ministry will release a new economic forecast in about a week and a half. The analysis will attempt to predict how the virus and people might change their behaviour. The changes will then need to be interpreted in financial terms to project how revenues will look like at the end of the year.

"In general we can say that the premise of previous forecasts has been that economic growth will pick up at the end of the year and that the economic disruption in Finland will be short-lived," Tamminen added.

However he pointed out that setbacks are still possible and that people in Finland might change their behaviour even if no new restrictions are introduced.

"If the epidemic worsens consumers may react by reducing consumption in stores and restaurants," he explained.

Additionally rising unemployment reduces withholding taxes deducted from salaries, and it also creates uncertainty, which may in turn also reduce spending and eat into government’s value added tax (VAT) receipts.

Rising costs, falling incomes

Companies have the option of deferring the handover of payroll withholding taxes to the state. This year, the government has expanded that option to help businesses weather the coronavirus storm. By the end of August, corporate taxes paid into state coffers were also the lowest in four years.

Corporate tax income levels tend to vary more than revenues from other taxes, but this year it is expected to fall short of receipts for the same time last year by 800 million euros -- an exceptionally large decline. By the end of August, companies had paid 3.5 billion euros in corporate taxes. At the same time the state had provided roughly two billion euros of funding to businesses because of the corona crisis.

Despite all this, Finance Ministry economists say there has been some positive news. The decrease in corporate tax income has not been as sharp as previously anticipated. In addition, the economic slide in the second quarter of the year was not as acute as the worst forecasts.

As a result the ministry trimmed estimates of the amount of new debt government would have to draw down this year by nearly half a billion euros. However on the flip side of the coin, greater spending and lower incomes will create a gap that will be filled by 17.8 billion euros in debt. Government debt exceeded the 100-billion euro threshold for the first time at the beginning of this year.

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