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Next govt needs €2b in cuts or higher taxes, ministry says

A finance ministry report said Finland's next government will need to scrape together some two billion euros by 2023 to ensure fiscal sustainability.

File photo of person counting stack of euro notes.
File photo of person counting stack of euro notes. Image: All Over Press

Finland’s Finance Ministry has warned that the country’s next government can’t go on a spending spree or slash taxes without jeopardising state finances.

Ahead of elections due in April, the ministry has published a report calling on the incoming government to implement an additional two billion euros of spending cuts or tax rises to keep the state coffers in good shape.

VAT hikes suggested

One of the report's few concrete examples of how the state could rake in more cash would be to raise value added taxes (VAT), which have been pared down in recent years. The report suggested the next government could raise VAT on goods and services like food, medicine, books, newspapers, movie tickets, taxi rides and restaurant visits.

Ministry coordinator Sami Yläoutinen said the report's authors did not take a position on how to raise the needed cash injection, but said there are limits to how much taxes could be raised.

The report warned that significant tax increases would weaken economic growth and hurt employment, saying that Finland needs to create a financial buffer for the next economic recession and to address rising pension and health care costs.

It said that in order for the state to reach a surplus of 0.5 percent it would need to boost public finances by a total of two billion euros by 2023.

"Measures that quickly boost public finances are crucial to building buffers for the next recession. An ageing population will also automatically increase public expenditure every year, resulting in a deterioration of public finances unless rapidly effective measures are taken," a ministry press release about the report states.

Sustainability gap

The report noted that Finland's sustainability gap - a growing ageing population and declining birth rate - means that taxes from the country's workforce won't be able to cover increasing health care and pension expenditures.

Yläoutinen said that if the country does not act quickly, public finances will weaken.

The ministry's report also called on the next government to boost employment, saying that 100,000 new jobs need to be filled by 2025, or raising the employment rate from the current 72 percent to 75 percent.

It said such an improvement in workforce numbers would help to slash an additional two billion euros towards compensating the sustainability gap.

The report noted that the future effects of long-planned, but yet-to-be-implemented, reforms to Finland's social and health care systems (colloquially known as sote) are still unknown.

Social, health care costs

However, it said that regardless of what shape such reforms take in the future, the state will need to curb cost increases in the social and health care sectors by some three billion euros by the end of the 2020s.

The report said Finland's sustainability gap is now less that it was in the spring of 2015, when Prime Minister Juha Sipilä's tripartite government took office, saying that its budget cuts helped to achieve that.

When the Sipilä administration ascended in 2015 the sustainability gap amounted to some 11 billion euros, while at the end of last year that gap shrank to around 9.2 billion euros, according to the report.

At the same time, however, the report said that the continuing declining birth rate in recent years has increased that gap by around 1.4 billion euros.

The ministry's calculations did not include the savings that Sipilä's government has been trying to reach through the sote reforms.

Even if the incoming government follows all of the finance ministry's suggestions the state will still be facing a sustainability gap of between two to three billion euros when the following government takes office.

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