Finland: Business-Positive Budget‏

The Finnish government announced on March 21 a budget framework for 2014-17. The framework targets EUR300m in spending cuts and the same amount in overall tax increases. We think this is quite a fitting amount of austerity measures that should help Finland to maintain its Aaa rating and low borrowing costs.

The framework was more business-friendly than expected with the corporate tax rate lowered from 24.5% to 20.0%. The move takes the Finnish rate below Swedish and Danish plans (22%) and is a new sign of tax competition. This is expected to create a positive investment climate and more jobs in the process.

Other measures include a rise in vice taxes such as alcohol, tobacco and sugar, changes in dividend taxes as well as a reform of the local administration. Given the business-positive tone, the framework puts pressure on employers to allow wages to rise in coming labour agreement negotiations instead of a wage freeze that could result in labour disputes.

The cornerstone of the six-party coalition government has been to reduce the state debt ratio by the end of 2015. Before yesterday the government had agreed on over EUR5bn in new annual tax revenue and savings to take place gradually by 2015. Now the additional austerity brings the total amount to a little under EUR6bn or close to 2.5% of GDP. Although the government stated optimistically that the debt ratio will now decline, we remain more guarded of this possibility.

The new austerity measures were in line with our projection and as such we see no need to adjust our forecast after yesterday’s news. New cuts and taxes will put a mild additional burden to the Finnish economy in the short term. Some of the reforms have the potential to generate positive dynamic effects in the medium and long term.

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