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 Ministry of Finance submits proposal for Finland's second centenary budget:Katainen delivers his second draft budget: emphasis on expertise, motivation and caring

30.07.2008  |  Press release 117/2008

The main emphasis in Minister of Finance Jyrki Katainen's budget proposal is on expertise, motivation and caring.

Skills and expertise are promoted through substantial investment in university education. EUR 13.9 million is allocated to cover the operating costs of Aalto University, with EUR 200 million invested in the university's capital assets. A one-off payment totalling EUR 50 million will be made to create better framework conditions for other universities. Furthermore, in line with the Government Programme, appropriations to cover universities' operating costs will be increased by EUR 20 million.

Appropriations for activities to improve the quality of basic education will be increased by more than EUR 20 million.

Around EUR 15 million will be set aside from funds earmarked for the expansion of the low-wage support scheme to address labour market mismatch. Funds will be allocated to increase the number of student places available in initial and continuing vocational training, to provide initial vocational training and preparatory training for initial vocational training for immigrants, and to provide further training for teaching staff. Furthermore, funds are allocated to activities aimed at preventing marginalisation and at promoting employment among youth. Youth workshops will receive an extra EUR 0.75 million.

Appropriations allocated to the redundancy protection funding will be increased by around EUR 9 million in 2009.

Family benefits will be raised in line with the Government Programme. The minimum level of maternity, paternity and parental allowance, daily sickness allowance and rehabilitation benefits will be raised to the level of labour market support as of 1 January 2009. This translates into an increase of around EUR 160 a month. As of 1 January 2009, the home care allowance will increase by 20 euros to EUR 314.28 and the private care allowance by EUR 22.67 to EUR 160 a month. To cater for these reforms, central government transfers to local government for social welfare and health will be increased by EUR 6.3 million. The child allowance will be increased by EUR 10 per month as of 1 January 2009, starting from the third child.

Central government transfers to local government for social welfare and health will be increased by EUR 21.3 million with a view to improving elderly care services and to providing personal assistance for the severely disabled. Support services for the long-term homeless will receive additional funding of EUR 2 million, half of which is a new appropriation. Rotavirus vaccinations for infants will be included in the national vaccination programme in 2009.

The social security of grant recipients will be arranged as of 1 January 2009. The reform applies to grants awarded under the new legislation. The object is to ensure that the amount of money remaining in the grant recipient's pocket is the same after payment of social security contributions.

In order to stabilise the housing market in the wake of the slowdown in owner-occupied housing production, state-subsidised housing production will be boosted among other things by increasing the interest subsidy loan authority from EUR 670 million to EUR 920 million. In addition, a new loan guarantee authority of EUR 250 million will be introduced for rented housing development.

Katainen plans to cut earned income taxes by EUR 800 million

Minister of Finance Jyrki Katainen suggests that earned income taxes be cut by around EUR 800 million in 2009. Further adjustments are made to compensate for tax rises due to rising incomes. Pensioners' taxes will be lowered accordingly. At the same time, taxes paid by pensioner spouses will be lowered to at least the same level as the tax rate for earned income.

As outlined in the Government Programme, VAT on foodstuffs will be reduced to 12 per cent as of 1 October 2009.

The tax cuts will help support purchasing power, employment and economic growth. It is projected that household purchasing power will increase by around 3½ per cent in 2009. The tax cuts will facilitate the continuation of favourable employment trends, in spite of the pessimistic cyclical outlook, and at the same time improve long-term economic growth prospects.

Adjustment is necessary to a period of slower growth

Given the growing uncertainty surrounding the global economy and the slowdown of economic growth, Minister of Finance Katainen is keen to stress the importance of the sustainability of public finances. This is also important in preparing for the escalating cost pressures from population ageing.

After a sustained period of strong growth, the Finnish economy is rapidly losing steam in the wake of the slowdown of the global economy. In Finland the basic factors have supported sustained growth, and so far we have done better than other countries. However, the sharp rise in inflation has eroded confidence in economic development, and output growth in 2009 is expected to fall back to 2 per cent.

Employment trends have remained favourable during the first half of the year. Projections for this year indicate that the number of jobs will increase by 40,000 and the employment rate will notch up to 70.6 per cent. In contrast to these positive employment trends, inflation has accelerated - as it has in other countries - to uncomfortable levels and will rise to 4 per cent this year. In 2009 inflation will slow down to an average of just under three per cent, but by the end of the year it should be down to around 2 per cent as some inflationary factors from the early part of this year are removed from the equation.

Accelerating international inflation and declining output in industrial countries have also been coupled with deteriorating terms of trade. The global redistribution of income is also weighing on the development of Finnish businesses' and households' real disposable income. The only viable options are to adapt and adjust and to increase productivity.

Draft budget comes to EUR 45.6 billion

Total expenditures under Minister of Finance Katainen's budget proposal for 2009 come to EUR 45.6 billion. The appropriations are predominantly in line with spending limits.

Draft budget shows slight surplus

Minister of Finance Jyrki Katainen's budget proposal shows a slight surplus. In national accounting terms, however, the central government surplus will be much greater, i.e. just over 1 per cent of GDP. At year-end 2009 central government debt is projected to stand at EUR 54 billion, or just over 27 per cent of GDP. Interest outlays on central government debt are estimated to total EUR 2.4 billion in 2009.

Robust economic growth over the past few years and the consequent rise in tax revenue and property income have combined to improve the financial position of general government in Finland. The general government surplus will begin to shrink with the loss of economic momentum, but it is still projected to remain at around 4 per cent of GDP. At the same time, the risks associated with the development of tax revenue have increased. The deeper and the more prolonged the slowdown in the international economy, the more important it is to ensure that the domestic economy sits on solid pillars, i.e. that public finances and price competitiveness are strong.

The tax cuts on labour aimed at fostering job creation, as set out in the Government Programme, fit in well with the weakening cyclical outlook. Overall, with the tax reforms that are incorporated in the Ministry of Finance draft budget, fiscal policy in 2009 may be described as being geared to support aggregate demand and growth. Furthermore, in the worsening cyclical environment, there should be no concerns that the tax cuts will stoke inflation; in this situation their main impact is to attenuate the slowdown in aggregate demand.

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The draft budget will be published in full online (www.vm.fi/budjetti) on Friday afternoon, 1 August 2008.

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Ministry of Finance P.O BOX 28 FIN-00023 GOVERNMENT Tel. +358 295 16001 E-mail: valtiovarainministerio@vm.fi