Main / Press releases and speeches / Press releases / Revised spending limits for the entire electoral period
On 21 May 2003, the Government agreed on spending limits for the 2004-2007 electoral period and on the submission of a report to Parliament concerning the spending limits.
Although the international economy faces serious uncertainty, Finland’s domestic economy is on a strong footing. Employment has remained at a reasonable level, although economic growth has been slow for a couple of years. GDP is expected to grow next year at a rate of nearly 3 per cent, with average annual growth during the electoral period at around 2.5 per cent.
The fiscal policy frame of the Government Programme is the point of departure of the spending limits for the current electoral period. The spending limits are being overhauled in the manner agreed on in the Government Programme. Most appropriations are included under these limits, which are binding for the entire period. Excluded from the spending limits are the expenditures mentioned in the Government Programme, which dimension it is appropriate to let fluctuate in line with the economic cycle, expenditure which has a revenue source of equivalent size corresponding to it, and expenditure that for other reasons there is no justification in constraining during the electoral period.
The spending rule for the electoral period in the Government Programme sets the maximum amount of expenditure for 2007. The spending limits will total EUR 28.0 billion in 2004, EUR 28.3 billion in 2005, EUR 28.5 billion in 2006 and EUR 28.6 billion in 2007.The spending limits for the electoral period are expressed in the price and cost level of 2004, and contain both the budget and the supplementary budget proposals.
Revenue estimates and balancing of on-budget entities
The expenditure frame and the extent of the tax cuts stated in the Government Programme are the point of departure for estimates of central government revenue and budget balance.
The Government will make further cuts in taxes on earned income in the 2004 budget. A sliding lower limit for VAT will be adopted at the beginning of 2004. Preparation for easing the tax treatment of changes in generation, as provided for in the Government Programme, will proceed and take effect during 2004.
Regarding on-budget entities, it is estimated that total revenues and tax revenues will grow by an average of 2 per cent annually during the period in which the current spending limits are in effect. The pressure on tax revenues caused by elimination of restrictions on imports of alcohol and tobacco by travellers and the effects of changes in motor vehicle taxation will retard growth in tax revenues. Also, corporate tax revenues are expected to come under pressure from tax competition amounting to nearly 0.5 per cent of GDP. It is estimated that in 2004 revenues will grow only slightly on the 2003 level of a good EUR 35 billion. After this, growth in revenues should accelerate, totalling some EUR 38 billion in 2007.
It would seem that central government finances, estimated in terms of national accounting, will show a deficit for the entire electoral period. The basic scenario calculations concerning medium-term economic growth and central government finances indicate that the measures itemized in the Government Programme will not be adequate to ensure realization of the Government’s targets for employment and central government budget balance. The Government seeks to raise the employment rate and enhance the efficiency of general government to ensure that the goal of budget balance is achieved. If the employment goal of jobs for 100,000 persons during the electoral period is achieved, keeping within the spending limits frame would also ensure budget balance. Moreover, achievement of the employment goal would strengthen the financial foundation of the welfare society and prepare for the coming pressure to increase expenditure caused by aging.
The Government’s point of departure is that, even sluggish economic growth, the deficit in central government finances may not exceed 2.75 per cent of GDP in terms of national accounting. If forecasts suggest that the deficit will exceed this figure, the Government will propose the necessary measures to reduce spending and other steps to prevent thedeficit to exceed 2.75 per cent of GDP.
In accordance with established practice, proceedss of EUR 420 million annually from the sale of shares owned by the State are entered in the revenue estimates. If annual income from the sale of shares exceeds EUR 500 million, the Government has agreed, as a supplement to its Programme, to allow a maximum of 10 per cent of the excess to be used at its discretion for nonrecurring additional expenditures, mainly investment in infrastructure and the promotion of research and development.
Allocation of appropriations and other positions on operating policy
One billion euros of the expenditure increase of EUR 1.12 billion agreed in the Government Programme has been designated in the decision on spending limits during this electoral period for purposes specified in advance. The remaining EUR 120 million euros has been reserved for needs emerging in conjunction with subsequent budget proposals and decisions on spending limits.
An increase gradually rising to EUR 63 million has been designated for the annual level of development cooperation expenditure.
Active labour policy measures will be increased strongly during the initial years of the budget planning period. A cross-administrative programme of employment will be initiated. Means test for labour market subsidies will be eased at the end of the period. Annual appropriations for labour policy measures will rise by EUR 190 million in 2004. This higher level will decline gradually, so that an increase of EUR 150 million will be reserved for labour policy measures in 2007.
Appropriations for increased child allowances have been designated as of 2004. The cost effect of the increase in 2007 will be EUR 74 million. Minimum daily sickness insurance allowances will be increased as of 2005 and the level of old-age pensions in 2006. The cost effect of these measures will total EUR 76 million in 2007. In addition, an increase of EUR 10 million has been allocated to increased small children’s home care allowances in the system of central government transfers to local government. An increase of some EUR 160 million will be allocated for increases in income transfers within spending limits at the 2007 level.
A spending limit increase of some EUR 250 million has been designated for the administrative sector of the Ministry of Education.
A gradually rising addition to the spending limit on basic funding for universities and on funding the Academy of Finland has also been designated; the increase will amount to about EUR 105 million at the 2007 level. Spending limits for the needs of culture have also been increased.
An increase in the spending limit of EUR 10 million at the 2007 level has also been designated for measures to increase security. This will be divided between the Ministry of Justice and the Ministry of the Interior. For the Ministry of Justice, priority is on securing the operating prerequisites for the prison administration. Three emergency response centres for Uusimaa and East Uusimaa will be set up for the administrative sector of the Ministry of the Interior instead of the two planned previously. An increase of EUR 20 million in the spending limit has been allocated for development of the regional expertise base.
To stimulate economic growth and improve the employment situation, increases in public research funding were already included in the 2003 supplementary budget proposal. Out of a total increase of EUR 77 million in the spending limit, additional resources will be allocated to Tekes (National Technology Agency of Finland), and funding will be provided for technology ombudsmen at the Employment and Economic Development Centres and for business development via Tekes. Moreover, the increase in research funding reserved for various ministries and institutions will rise to a total of EUR 25 million in 2007.
Ministry of Transport and Communications appropriations can be re-designated to secure the functioning of less-used airports and year-round traffic across the Quark to Sweden.
Basic health and social services budget
It is estimated that the funding situation of the municipalities will remain stringent throughout the budget planning period. Due to pressure for higher expenditure, the latitude of local government financing has narrowed and annual margins will decrease substantially on recent years.
Considerable funding for improvements in welfare services has been set aside in the spending limits for central government finances. Appropriations for central government grants to local government will increase by EUR 550 million during the budget planning period, compared with 2003. In addition, an increase of EUR 370 million has been technically calculated for government grants. This will offset the effects of the EUR 1.12 billion cut in taxes on earned income in local government finances. An index increase in central government transfers to local government, amounting to 75 per cent of the full index will be made. The index increase will increase central government grants by a good EUR 100 million in 2004, some EUR 90 million of which will go to municipalities and joint municipal boards. Central government transfers to local government in the spending limits for the period 2005 to 2007 were calculated at 2004 prices.
By the end of the budget planning period, EUR 200 million of the increases in spending limits will have been designated to central government transfers for social welfare and health care. Most of this amount will be allocated to transfers to local government health care and care for the elderly and to increases in the home care subsidy. The earlier spending limits include an increase of EUR 200 million in central government transfers to local government for health care and an increase of EUR 22 million for health care projects. Hence, the central government transfers to local government for social welfare and health care will increase gradually by a total of EUR 422 million over the budget planning period. This will permit achievement of the EUR 700 million raise in overall resources for health care set as a target in central government transfers to local government.
EUR 122 million of the increase in the spending limit will be allocated via central government transfers to training and education services.
Efforts to control local government expenditure face major challenges. In particular, implementation of the National Health Care Project and the Social Welfare Development Project will also require input by local government to improve welfare services. The agreed reforms, such as the home care allowance, morning and afternoon activities for schoolchildren, and the school transport benefit for pre-school children, will increase the operating expenses of local government. Securing the availability and quality of basic local government services with a reasonable burden of taxes and payments will require investment in an effective and vital local government structure. Securing basic services will also require improvements in operating methods and efficiency.
For additional information:
Budget Director Tuomas Sukselainen, Ministry of Finance, tel. +358 9 1603 3105, Deputy Budget Director Hannu Mäkinen, Ministry of Finance, tel. +358 9 1603 3036 and Senior Adviser for Finance Helena Tarkka, Ministry of Finance, tel. +358 9 1603 4876.
Ministry of Finance P.O BOX 28 FIN-00023 GOVERNMENT Tel. +358 295 16001 E-mail: valtiovarainministerio@vm.fi
