CENTRAL GOVERNMENT BUDGET 2004
MINISTRY OF FINANCE
CENTRAL GOVERNMENT BUDGET 2004
4/2004
BUDGET
19 December, 2003
CONTENTS BUDGET FOR 2004 FISCAL POLICY ................................................................................... 3 Table
General government finances .................................................................. 3
Table
Trends in the national economy ............................................................... 4
FISCAL POLICY IN THE GOVERNMENT PROGRAMME
(JUNE 2003) ................................. 5
BUDGET FOR 2004
REFORMED SPENDING RULES ................................................................................. 7 Figure
Central government debt .......................................................................... 8
Table
On-budget revenue and expenditure ....................................................... 9
REVENUES ........................................................................................ 10 Figure
Total tax wedge of an employee ............................................................ 10
Table
Income tax scale and value added tax rates in 2004 ......................... 11
Figure
Tax revenue in 2004 ................................................................................ 13
EXPENDITURES ................................................................................ 15 Figure
Change in the on-budget entities’ expenditure 2003 - 2004 by function .................................................... 16
Figure
General government total expenditure by function ............................ 17
Table
Cash flows between EU and Finland ..................................................... 18
KEY BUDGET MEASURES .............................................................. 19
2
BUDGET FOR 2004 FISCAL POLICY The budget for 2004 carries out the economic policy line that pursues the primary objective of boosting employment and reducing the indebtedness of central government finances so as to strengthen general government finances in order to meet the challenges of an ageing population and an increasingly global economy.
General government finances key figures measured in terms of national accounting 2000
2001*
2002*
2003** 2004**
Tax revenue, % of GDP
47.6
45.7
45.8
44.7
44.1
General government expenditure, % of GDP
49.0
49.1
50.0
50.9
50,8
7.1
5.2
4.2
2.2
1.7
3.4
2.0
1.4
- 0.1
- 0.7
- local government
0.3
- 0.4
- 0.3
- 0.5
- 0.5
- employment pension schemes
3.2
3.5
3.0
3.0
2.9
- other social security funds
0.2
0.1
0.0
- 0.2
- 0.1
Net lending, % GDP - central government
General government debt, euro bn
58.0
59.4
59.6
64.0
65.4
- % of GDP
44.6
44.0
42.7
45.1
44.8
Central government debt, euro bn
63.4
61.8
59.3
63.3
64.5
48.7
45.7
42.4
44,6
44.1
- % of GDP
3 3
BUDGET FOR 2004
By far the most important future challenge is the ageing of the population and the resultant growing liabilities for general government finances. Finland’s population will age the fastest of any country in Europe up to 2030. The population of working age, 20 to 64 year-olds, will head into decline in 2010. This has not occurred in Finland during the past two centuries, save in exceptional conditions.
Trends in the national economy
GDP at market prices (euro bn)
2001*
2002*
2003**
2004**
130.1
135.2
139.7
141.9
146.2
GDP, change in volume (%)
5.1
1.2
2.2
1.2
2.7
Unemployment rate (%)
9.8
9.1
9.1
9.1
8.8
66.9
67.7
67.7
67.4
67.5
Employment rate (%)
BUDGET FOR 2004
2000
Consumer price index (%)
3.4
2.6
1.6
1.0
0.7
Interest rate (10 year bonds) (%)
5.5
5.0
5.0
4.1
4.5
The paramount objective of the Government’s economic policy is to put 100,000 more people in employment by the end of the election period. To achieve this, the Government will continue its economic policy of promoting stable economic growth, improving market efficiency and ensuring an internationally competitive operating environment for business. The objective of fiscal policy is to maintain strong central government finances that are in balance towards the end of the election period, as measured in national accounting terms. This will call for a policy of expenditure restraint as well as measures to raise the employment rate. The Budget continues the process, launched in the first supplementary budget for 2003, of reducing the tax on labour by further lowering the tax on earned income. The tax cuts will serve to increase households’ purchasing power, reinforce consumer confidence and support the longer term foundation for economic growth. The tax reduction in the supplementary budget affected all income levels by relatively the same factor. The €775 million tax cut implemented in 2004 will favour people with small and medium labour incomes but will extend to all income brackets. It will raise the total amount of reductions in taxes on earned income during the current election period to €1,070 million (0.7 per cent of GDP). The timing of the tax cuts is intended to bolster economic growth, which has been weakened by the problems besetting the international economy. A number of reforms aiming at reaching the employment objective will be started during 2004. In order to lengthen people’s time in employment, solutions will be sought that promote earlier entry into working life and postpone retirement. Better incentives will be created for both offering and accepting employment, particularly in
4 4
FISCAL POLICY IN THE GOVERNMENT PROGRAMME !
!
!
The Government’s fiscal policy objective is to maintain strong central government finances. This is essential so that general government, over the next few decades, can cope with its mounting liabilities in view of population ageing in a way that does not place on future generations’ shoulder an unreasonable rise in the tax burden and it will furthermore afford the Government, in all circumstances, sufficient fiscal policy latitude for ensuring economic growth. Achieving these objectives calls for lowering central government debt-to-GDP ratio, excluding cyclical deviations. To ensure the sustainability of general government finances, the Government’s objective is that in conditions of ordinary economic growth, central government finances will be in balance towards the end of the election period, as measured in national accounting terms. Cyclical or other short-term deviations from the path of balanced central government finances are permitted, provided that they do not jeopardize overall reduction of the central government debt-to-GDP ratio. The Government undertakes to observe the spending limits for central government finances over the period 2004 to 2007, which were submitted as a report to Parliament in May 2003. Over the election period the Government will ease particularly the tax on labour. The cyclical situation will be taken into account in timing the tax measures and they will be dimensioned in a way that does not jeopardise the objective of keeping central government finances in balance. Including the tax cuts provided for in the 2003 supplementary budget, tax bases can be reduced by at least 1.120 billion euros even in conditions of comparatively moderate economic growth.
5 5
BUDGET FOR 2004
!
June 2003
low-productivity fields. In November 2003 the Government gave a statement on the reform of company and capital income taxation. The reform will promote companies’ investment, growth and their capacity to generate employment. It will also constitute a spur for entrepreneurship.
BUDGET FOR 2004
On the Budget’s expenditure side, additional general government resources will be allocated as efficiently as possible from the standpoint of improving job creation and thereby augmenting economic growth potential. In order to combat unemployment, measures for promoting active labour market policy will be increased and a cross-administrative programme targeted at breaking the hard core of unemployment will be launched. Labour service centres spanning administrative boundaries will be established, and in order to provide further incentives, the means testing applied to a spouse’s income will be eased up in determining labour market subsidies. The Government Programme and the decision on spending limits set out quite exactly the central government’s financing for the development of welfare services and the principles of transfers over the current election period. On this basis, a substantial portion of general government finances has been dimensioned, in a disciplined and predictable manner, over the next four-year period. Improved co-ordination of central government expenditures will also be assured through the reformed spending limits procedure, which has been streamlined from the standpoint of managing and analysing fiscal policy (a summary of the reformed spending limits procedure is given on page 7). The expenditure limits decided for the election period set an absolute ceiling on about ¾ of central government budget expenditures, including the supplementary budgets. Total expenditures in the Budget amount to €37.1 billion, or nearly 4 per cent more than the expenditures in the 2003 Budget. Real interest expenses will decrease by 19 per cent. Expenditures net of interest expenses will increase by €2 billion or 6 per cent. About half of the increase is due to statutory expenditures and to decisions taken in the previous election period. Just under a quarter of the growth in expenditures is required to compensate the municipalities and the Social Insurance Institution for the revenue loss caused by the tax cuts that were made in the first supplementary budget for 2003 and those that are now included in the Budget. The remainder, just over a quarter, is attributable to the Government Programme’s measures
6
REFORMED SPENDING RULES !
!
About ¾ of the Budget appropriations are dimensioned for the binding spending limits over the election period, which amount to €28.1 billion for 2004, €28.3 billion for 2005, €28.5 billion for 2006 and €28.6 billion for 2007. The spending limits over the election period are expressed in terms of the 2004 price and cost level and they are revised as necessary in line with technical changes in the structure of the Budget. Excluded from the spending limits are – housing subsidies and unemployment security expenditures as well as the guarantee payment to the Social Insurance Institution, all of which vary according to business cycles and the financing mechanism. The effects of changes in the bases of these expenditures are nevertheless factored into the binding spending limits. – interest expenses on central government debt
– expenditures corresponding to revenue received from the European Union – profits generated by Finnish National Lottery Ltd and expenditures corresponding to the revenue entered for the Slot Machine Association – financial investment expenditures
! !
The supplementary budget proposals will be included in the spending limits. The Government’s guiding premise is that the deficit in central government finances, as measured in national accounting terms, must not exceed 23/4 per cent of gross domestic product even in conditions of weak economic growth.
that increase expenditures. All in all, the Budget’s fiscal policy line will support domestic demand in 2004. The stimulatory effect of general government finances is estimated to be slightly greater in 2003 than it will be in 2004. To provide for the supplementary budgets, the government’s spending limits decision set aside an €120 million reserve for 2004. On-budget expenditures within the spending limits will come in €316 million below the technically revised spending limits for 2004, thus
7 7
BUDGET FOR 2004
– expenditures compensating other tax recipients for the effects of tax changes
affording greater leeway for covering the supplementary budgets. The reserve thus created still cannot be considered large, because in recent years the expenditures provided for in the supplementary budget have been somewhat greater than the leeway now created.
BUDGET FOR 2004
On-budget revenue is estimated at €35.8 billion. To cover the budget, €1.3 billion of new borrowings will be required. Central government debt as a ratio of gross domestic product will nevertheless decline in 2004 by about half a percentage point from the 44.6 per cent estimated for 2003. Central government finances include on-budget items as well as offbudget activities, which are expected to run a surplus in 2004 of about €0.9 billion owing to the surplus which is being built up in the State Pension Fund for the future pensions of central government employees. The most important of the central government funds are the National Housing Fund, the State Pension Fund, the Development Fund of Agriculture and Forestry and the Intervention Fund of Agriculture. In addition, the central government has six unincorporated state enterprises (Senate Properties, the Forest and Park Service, the Civil Aviation Administration, Finnish Road Enterprises, the Finnish State Shipping Enterprise and the Finnish
Central government debt EUR bn 80
80
70
70
60
60
50
50
40
40
30
30
20
20
10
10 0
0 94
95
96
97
98
99
00
01
02* 03** 04**
Euro-denominated/markka-denominated Other currencies Per cent of GDP
8 8
State Pilotage Enterprise), all of which operate within an extrabudgetary financial regime. The aggregate revenue entry objective for the unincorporated state enterprises is set at €82 million in the Budget. In national accounting terms, the central government is estimated to run a financial deficit of 0.7 per cent of gross domestic product in 2004. General government finances include central government along with local governments, the employment pension schemes and the other social security funds. The entire general government finances will remain in surplus, but in 2004 the surplus will contract to 1.7 per cent of gross domestic product. The surplus is entirely attributable to the employment pension schemes.
2001 Final
2002 Final
2003 2004 Budgeted Budgeted
Income and wealth taxes
12.1
12.5
11.8
12.2
Other taxes
17.3
17.7
18.1
18.1
6.1
6.2
5.4
5.4
* of which privatisation proceeds
(0.0)
(1.3)
(0.4)
(0.4)
TOTAL
35.4
36.4
35.4
35.8
Use of accumulated surplus
-
-
1,0
-
Net borrowing and debt servicing
-
-
1.1
1.3
35.4
36.4
37.4
37.1
Consumption and capital expenditure
11.7
12.0
12.6
13.0
Transfers
18.0
18.8
20.1
21.2
* of which to municipalities
(5.6)
(5.8)
(6.4)
(6.9)
4.1
3.6
4.7
2.8
-
-
(1.6)
-
33.8
34.5
37.4
37.1
REVENUE
Other revenue
TOTAL REVENUE
EXPENDITURE
Debt interest payments and other expenditure * of which change of recognition principle TOTAL Net debt redemption and debt servicing TOTAL EXPENDITURE
2.3
1.0
-
-
36.1
35.5
37.4
37.1
9 9
BUDGET FOR 2004
On-budget revenue and expenditure, EUR bn
REVENUES
BUDGET FOR 2004
Central government revenue net of borrowings in 2004 is estimated at €35.8 billion. The growth in on-budget revenue is estimated to be well over 1 per cent. Of on-budget revenue, 85 per cent consists of taxes and tax-like revenue. Other revenue is expected to amount to €5.4 billion. This includes, notably, revenue from the EU budget, proceeds from the sale of shares owned by the central government, the proportion of the profits from the Finnish National Lottery Ltd and lottery profits, the proceeds from the Slot Machine Association, interest and dividend income as well as profits entered as the revenue of unincorporated state enterprises.
Total tax wedge of an employee, % % 70 65 60 55 50 45 40 1990
1992
1994
1996
1998
2000
Well-paid 1) Average-paid Low-paid 2) Source: Government Institute for Economic Research 1) Twice the APW salary 2) 2/3 of the APW salary
10
02*
04*
Income tax scale and value added tax rates in 2004 RATES OF INCOME TAX Taxable earned income
Basic tax amount
€
Rate within brackets
€
%
11 700 - 14 500
8
11
14 500 - 20 200
316
15
20 200 - 31 500
1 171
21
31 500 - 55 800
3 544
27
10 105
34
55 800 -
BUDGET FOR 2004
Municipal income tax and social security contributions, on average 20 %
Tax rate on capital income and corporate income 29 %
VALUE ADDED TAX RATES Normal rate
22%
Foodstuffs
17%
Medicines, books, passenger transportation, accommodation, TV-licenses, admission fees to cultural and entertainment events, cinema performances and use of sporting facilities
8%
Subscribed newspapers and periodicals
0%
11 11
BUDGET FOR 2004
The taxation on earned income will be eased at the annual level by a total of €775 million (0.5 per cent of GDP), of which central government income tax accounts for about €364 million. The tax measure is clearly weighted in favour of small and medium income earners: -
at an annual income of €12,000, the tax cut is about 1.7 percentage points
-
at an annual income of €21,000, the tax cut is about 1.5 percentage points
-
at an annual income of €58,000, the tax cut is about 1.1 percentage points
Because of the tax reductions, the total tax wedge for wage and salary earners will narrow in 2004 by about a percentage point at the different income levels. The total tax wedge refers to the difference between companies’ labour costs (price of work) and employees’ purchasing power net of tax. The tax wedge is composed of an employee’s income taxes, the social insurance contributions paid by the employer and the employee and indirect employee-paid taxes on consumption. The tax wedge is often expressed as a ratio of the company’s labour costs (%). For example, the tax wedge of an industrial employee receiving an average wage is about 55 per cent, i.e. the company’s labour cost, is over double the disposable income which the employee receives after taxes on consumption. Apart from wage-earners, the changes made in the state income tax scale will also lower the taxation of other recipients of income – pensioners who pay national income tax, for instance. The pension income allowance in municipal taxation is indexed automatically with a rise in a full national pension. The tax reduction will lower the tax revenues of the municipalities and congregations and the premium income of the Social Insurance Institution owing to the increase in the earned income allowance and the standard deduction for work-related expenses in municipal taxation. The central government will compensate the municipalities in full for the loss of revenue by raising transfers to local government. The loss which the congregations incur will be alleviated by raising the congregations’ share of corporate tax receipts. The loss in the Social Insurance Institution’s premium income will lead to an increase in the central government budget transfer to the Institution.
12
Tax revenue, 44.1 % of GDP (64.5 EUR bn) in 2004
Capital tax €0.5 bn
Social insurance contribution - employee €4.6 bn
Social insurance contribution - employer €13.6 bn
€26.0 bn
Direct taxes
€19.9 bn
BUDGET FOR 2004
BY TAXES AND PAYMENTS
Indirect taxes
Other social security funds €4.7 bn
Employment pension schemes €12.1 bn €34.5 bn
Local government
Central government1)
€13.2 bn
BY TAX RECIPIENTS
1) Including tax revenue to congregations about €90 million.
13 13
BUDGET FOR 2004
Receipts from income and net wealth tax in 2004 are estimated to amount to €12.2 billion. Households will pay about two thirds of this, and one third will be paid by companies in the form of corporate tax. Taxes based on turnover are expected to yield tax receipts of about €10.7 billion. Alcohol taxation will be lowered on average by 33 per cent so as to maintain as well as possible the bases of taxation on the consumption of alcohol in Finland. From the beginning of 2004, after the transition period provided under EU accession rules, Finland will have to remove the restrictions on the importation of alcohol intended for the personal use of travellers arriving from other member states. Despite the reduction in alcohol taxation, imports by travellers are expected to grow further, which means that the excise duty on alcoholic beverages are expected to decline in 2004 by about €300 million to €1,050 million, with tobacco tax revenue falling by about €150 million to €452 million. Tax receipts from value-added tax will decline as well.
14
EXPENDITURES The Budget includes a total of €37.1 billion of appropriations, of which €2.8 billion consists of interest expenses on the central government debt. Of the appropriations in the Budget, €27.8 billion comes within the spending rules, i.e. the central government spending limits, and €9.3 billion is outside the spending limits.
An increase of €90 million is used for improving social and healthcare services. Central government transfers to local government will also include an increase of €20 million for children’s morning and afternoon activities, and an increase of €5 million for pre-school transport allowance. Inputs on behalf of children and youth will also increase by raising child allowances and by allocating extra appropriations for youth work. Appropriations for children’s and youth’s psychiatric care and rehabilitation will be increased. The position of pensioners will be improved by investing in welfare services and upping appropriations for developing care for the aged.
15 15
BUDGET FOR 2004
To improve services, central government transfers to the municipalities will be increased significantly. In addition, the compensation of revenue losses due to the tax cut will lead to an increase in central government transfers of €359 million and furthermore an index increase of €97 million will be made. Central government transfers to local government will increase from the 2003 level by about 8 per cent to €6.4 billion. The new basic public services budget review is intended to improve the transparency, within the central government budget, of the financing of local government functions and obligations. The basic public services budget covers an estimate of statutory basic services within municipal finances as a whole. Basic public services include social and healthcare as well as services related to education and cultural activities, i.e. notably, special nursing, care of aged, daycare, comprehensive schools and upper secondary schools. Apart from minor exceptions, central government transfers to local government are universal revenue which the municipalities are free to allocate to different purposes.
Change in the on-budget entities’ expenditure 2003 - 2004 by function, % 19.5 % Health Environmental protection
14.8 %
BUDGET FOR 2004
General public services
6.4 %
Social protection incl. statutory employee pensions
6.0 %
Public order and safety
5.9 %
Recreation, culture and religion
5.6 %
Defence
5.6 %
Economic affairs
Education
Housing and community amenities
4.3 %
3.8 %
2.5 %
- 18.8 % Debt interest payments
16 16
General government total expenditure in 2001 by function, EUR bn, % of GDP
Social protection incl. statutory employee pensions
20.7 % of GDP
6.4 %
Education
6.0 %
Health
4.6 %
Economic affairs
3.8 %
General public services
2.6 %
Debt interest payments
1.5 %
Public order and safety
1.4 %
Recreation, culture and religion
BUDGET FOR 2004
Defence
1.2 %
Housing and community amenities
0.6 %
0.3 %
Environmental protection
0
5
10
15
20
25
30 EUR bn
Financing from the central government budget1) Total expenditure2)
1) Source: Ministry of Finance. Transfers to other government sectors are included in the numbers as well as the direct transfer of VAT to the Social Insurance Institution of Finland 2) Source: Statistics Finland, National Accounts, COFOG classification of expenditure according to purpose
17 17
Cash flows between EU and Finland, EUR million 2002
2003**
2004**
1 123
1 376
1 415
-
35
40
1 123
1 411
1 455
Payments from the Finnish budget to EU Payments to the EU budget Capital investments (European Development Fund)) TOTAL
Revenue from the EU budget Payments to the Finnish budget European Regional Development Fund and Social Fund
173
265
265
European Agricultural Guidance and Guarantee Fund
747
835
886
1
6
6
76
61
56
Intervention Fund of Agriculture
108
103
107
Development Fund of Agriculture and Forestry
140
12
13
1 245
1 282
1 333
Income for fisheries guidance Other revenue Payments to the off-budget activities
BUDGET FOR 2004
TOTAL
18 18
KEY BUDGET MEASURES REVENUE ESTIMATES
! All the marginal tax rates in state income tax scale will be lowered by one percentage point and the scale’s income brackets will be raised by one per cent.
! The
maximum amount of the standard deduction for work-related expenses will be raised from €590 to €620, and the maximum amount of the earned income allowance in municipal taxation will be increased from €2,550 to €3,550. sliding tax allowance will be introduced for the obligation to pay value-added tax such that the final amount of taxes to be remitted will rise gradually to the full amount at the turnover level of €20,000. Less than €8,500 turnover remains tax-free.
! The
excise duty on alcoholic beverages will fall on average by 33 per cent. The tax on spirits will be lowered by 44 per cent, that on mild wines by 10 per cent and the tax on beers by 32 per cent.
! The vehicle tax will be increased by 10 euros.
19 19
BUDGET FOR 2004
!A
APPROPRIATIONS
! Appropriations
for active labour market policy will be increased by €126 million compared with the Budget for 2003.
! The maintenance allowance payable during active labour
BUDGET FOR 2004
market policy measures will be increased from 7 euros to 8 euros per day and the increased maintenance allowance will rise from 14 euros to 16 euros per day. The maintenance allowance payable during rehabilitating work activity will also rise to 8 euros. Means testing for labour market subsidies will be alleviated such that income exceeding €536 per month will be taken into account as the income reducing a spouse’s labour market subsidy. Previously the limit was €236 per month.
!A
1.8 per cent index increase will be made in central government subsidies to local government. This corresponds to 75 per cent of the estimated rise in the level of costs.
! Financing
for projects to develop healthcare will be increased by €22 million.
! Central government transfers to local government include an increase in funding for developing care for the aged by €14 million and an increase of €13 million for healthcare’s further education.
! The municipalities will introduce a service voucher as a new method of arranging home services.
! Child allowances and the partial home care allowance will be raised. The child allowance payable for the first child will rise from €90 to €100 per month, and lone parents will receive an additional three euro monthly increase. The partial home care allowance will be increased from €63.07 to €70 per month and eligibility for the benefit will be expanded to cover those parents who shorten their working hours when their children attend school for the first and second year.
20
... appropriations
! In
accordance with the spending limits decision, just over €14 million has been reserved for subsequently specified development needs connected with the structure of agriculture and other designated purposes.
! Development
co-operation appropriations will be increased to the level of €39 million, corresponding to 0.37 per cent of gross domestic product forecast for 2004.
! Financing for universities’ operating expenses will rise by €70 million.
! University students’ meal subsidy will be increased by 0.2 euros to 1.47 euros. number of pupils in apprentice vocational supplementary education will be increased by 1,500 pupils.
! More than €100 million will be added to research and development appropriations.
! Environmental
subsidies will be increased by €6 million, serving partly to ensure that the Baltic Sea Protection Programme is carried out.
! Finland’s oil clean-up capabilities will be improved. ! If necessary, the Government will take part in financing disposal costs of end-of-life vehicles with a fixed-term disposal grant reserved for it.
! Development subsidies for the provinces will go up by €14 million.
! The
Finnish Defence Forces will be developed in accordance with the Security and Defence Policy Report that was approved by Parliament in 2001. The Finnish Defence Forces will receive an extra €67 million for their operating expenses.
21 21
BUDGET FOR 2004
! The
... appropriations
! The
Police Department’s operations will be enhanced and additional resources will be provided for preventing economic crime.
! The
shipping operations and pilotage service of the National Maritime Administration will be turned into unincorporated state enterprises. The Finnish State Shipping Enterprise and the Finnish State Pilotage Enterprise will go into operation from the beginning of 2004.
! Housing finance authorisations totalling €1,060 million
BUDGET FOR 2004
will make possible the production of 10,000 new rental and tenancy entitlement homes.
22
BUDGET FOR 2004
23 23
CENTRAL GOVERNMENT BUDGET 2004
4/2004
BUDGET
19 December, 2003
CONTENTS BUDGET FOR 2004 FISCAL POLICY ................................................................................... 3 Table
General government finances .................................................................. 3
Table
Trends in the national economy ............................................................... 4
FISCAL POLICY IN THE GOVERNMENT PROGRAMME
(JUNE 2003) ................................. 5
BUDGET FOR 2004
REFORMED SPENDING RULES ................................................................................. 7 Figure
Central government debt .......................................................................... 8
Table
On-budget revenue and expenditure ....................................................... 9
REVENUES ........................................................................................ 10 Figure
Total tax wedge of an employee ............................................................ 10
Table
Income tax scale and value added tax rates in 2004 ......................... 11
Figure
Tax revenue in 2004 ................................................................................ 13
EXPENDITURES ................................................................................ 15 Figure
Change in the on-budget entities’ expenditure 2003 - 2004 by function .................................................... 16
Figure
General government total expenditure by function ............................ 17
Table
Cash flows between EU and Finland ..................................................... 18
KEY BUDGET MEASURES .............................................................. 19
2
BUDGET FOR 2004 FISCAL POLICY The budget for 2004 carries out the economic policy line that pursues the primary objective of boosting employment and reducing the indebtedness of central government finances so as to strengthen general government finances in order to meet the challenges of an ageing population and an increasingly global economy.
General government finances key figures measured in terms of national accounting 2000
2001*
2002*
2003** 2004**
Tax revenue, % of GDP
47.6
45.7
45.8
44.7
44.1
General government expenditure, % of GDP
49.0
49.1
50.0
50.9
50,8
7.1
5.2
4.2
2.2
1.7
3.4
2.0
1.4
- 0.1
- 0.7
- local government
0.3
- 0.4
- 0.3
- 0.5
- 0.5
- employment pension schemes
3.2
3.5
3.0
3.0
2.9
- other social security funds
0.2
0.1
0.0
- 0.2
- 0.1
Net lending, % GDP - central government
General government debt, euro bn
58.0
59.4
59.6
64.0
65.4
- % of GDP
44.6
44.0
42.7
45.1
44.8
Central government debt, euro bn
63.4
61.8
59.3
63.3
64.5
48.7
45.7
42.4
44,6
44.1
- % of GDP
3 3
BUDGET FOR 2004
By far the most important future challenge is the ageing of the population and the resultant growing liabilities for general government finances. Finland’s population will age the fastest of any country in Europe up to 2030. The population of working age, 20 to 64 year-olds, will head into decline in 2010. This has not occurred in Finland during the past two centuries, save in exceptional conditions.
Trends in the national economy
GDP at market prices (euro bn)
2001*
2002*
2003**
2004**
130.1
135.2
139.7
141.9
146.2
GDP, change in volume (%)
5.1
1.2
2.2
1.2
2.7
Unemployment rate (%)
9.8
9.1
9.1
9.1
8.8
66.9
67.7
67.7
67.4
67.5
Employment rate (%)
BUDGET FOR 2004
2000
Consumer price index (%)
3.4
2.6
1.6
1.0
0.7
Interest rate (10 year bonds) (%)
5.5
5.0
5.0
4.1
4.5
The paramount objective of the Government’s economic policy is to put 100,000 more people in employment by the end of the election period. To achieve this, the Government will continue its economic policy of promoting stable economic growth, improving market efficiency and ensuring an internationally competitive operating environment for business. The objective of fiscal policy is to maintain strong central government finances that are in balance towards the end of the election period, as measured in national accounting terms. This will call for a policy of expenditure restraint as well as measures to raise the employment rate. The Budget continues the process, launched in the first supplementary budget for 2003, of reducing the tax on labour by further lowering the tax on earned income. The tax cuts will serve to increase households’ purchasing power, reinforce consumer confidence and support the longer term foundation for economic growth. The tax reduction in the supplementary budget affected all income levels by relatively the same factor. The €775 million tax cut implemented in 2004 will favour people with small and medium labour incomes but will extend to all income brackets. It will raise the total amount of reductions in taxes on earned income during the current election period to €1,070 million (0.7 per cent of GDP). The timing of the tax cuts is intended to bolster economic growth, which has been weakened by the problems besetting the international economy. A number of reforms aiming at reaching the employment objective will be started during 2004. In order to lengthen people’s time in employment, solutions will be sought that promote earlier entry into working life and postpone retirement. Better incentives will be created for both offering and accepting employment, particularly in
4 4
FISCAL POLICY IN THE GOVERNMENT PROGRAMME !
!
!
The Government’s fiscal policy objective is to maintain strong central government finances. This is essential so that general government, over the next few decades, can cope with its mounting liabilities in view of population ageing in a way that does not place on future generations’ shoulder an unreasonable rise in the tax burden and it will furthermore afford the Government, in all circumstances, sufficient fiscal policy latitude for ensuring economic growth. Achieving these objectives calls for lowering central government debt-to-GDP ratio, excluding cyclical deviations. To ensure the sustainability of general government finances, the Government’s objective is that in conditions of ordinary economic growth, central government finances will be in balance towards the end of the election period, as measured in national accounting terms. Cyclical or other short-term deviations from the path of balanced central government finances are permitted, provided that they do not jeopardize overall reduction of the central government debt-to-GDP ratio. The Government undertakes to observe the spending limits for central government finances over the period 2004 to 2007, which were submitted as a report to Parliament in May 2003. Over the election period the Government will ease particularly the tax on labour. The cyclical situation will be taken into account in timing the tax measures and they will be dimensioned in a way that does not jeopardise the objective of keeping central government finances in balance. Including the tax cuts provided for in the 2003 supplementary budget, tax bases can be reduced by at least 1.120 billion euros even in conditions of comparatively moderate economic growth.
5 5
BUDGET FOR 2004
!
June 2003
low-productivity fields. In November 2003 the Government gave a statement on the reform of company and capital income taxation. The reform will promote companies’ investment, growth and their capacity to generate employment. It will also constitute a spur for entrepreneurship.
BUDGET FOR 2004
On the Budget’s expenditure side, additional general government resources will be allocated as efficiently as possible from the standpoint of improving job creation and thereby augmenting economic growth potential. In order to combat unemployment, measures for promoting active labour market policy will be increased and a cross-administrative programme targeted at breaking the hard core of unemployment will be launched. Labour service centres spanning administrative boundaries will be established, and in order to provide further incentives, the means testing applied to a spouse’s income will be eased up in determining labour market subsidies. The Government Programme and the decision on spending limits set out quite exactly the central government’s financing for the development of welfare services and the principles of transfers over the current election period. On this basis, a substantial portion of general government finances has been dimensioned, in a disciplined and predictable manner, over the next four-year period. Improved co-ordination of central government expenditures will also be assured through the reformed spending limits procedure, which has been streamlined from the standpoint of managing and analysing fiscal policy (a summary of the reformed spending limits procedure is given on page 7). The expenditure limits decided for the election period set an absolute ceiling on about ¾ of central government budget expenditures, including the supplementary budgets. Total expenditures in the Budget amount to €37.1 billion, or nearly 4 per cent more than the expenditures in the 2003 Budget. Real interest expenses will decrease by 19 per cent. Expenditures net of interest expenses will increase by €2 billion or 6 per cent. About half of the increase is due to statutory expenditures and to decisions taken in the previous election period. Just under a quarter of the growth in expenditures is required to compensate the municipalities and the Social Insurance Institution for the revenue loss caused by the tax cuts that were made in the first supplementary budget for 2003 and those that are now included in the Budget. The remainder, just over a quarter, is attributable to the Government Programme’s measures
6
REFORMED SPENDING RULES !
!
About ¾ of the Budget appropriations are dimensioned for the binding spending limits over the election period, which amount to €28.1 billion for 2004, €28.3 billion for 2005, €28.5 billion for 2006 and €28.6 billion for 2007. The spending limits over the election period are expressed in terms of the 2004 price and cost level and they are revised as necessary in line with technical changes in the structure of the Budget. Excluded from the spending limits are – housing subsidies and unemployment security expenditures as well as the guarantee payment to the Social Insurance Institution, all of which vary according to business cycles and the financing mechanism. The effects of changes in the bases of these expenditures are nevertheless factored into the binding spending limits. – interest expenses on central government debt
– expenditures corresponding to revenue received from the European Union – profits generated by Finnish National Lottery Ltd and expenditures corresponding to the revenue entered for the Slot Machine Association – financial investment expenditures
! !
The supplementary budget proposals will be included in the spending limits. The Government’s guiding premise is that the deficit in central government finances, as measured in national accounting terms, must not exceed 23/4 per cent of gross domestic product even in conditions of weak economic growth.
that increase expenditures. All in all, the Budget’s fiscal policy line will support domestic demand in 2004. The stimulatory effect of general government finances is estimated to be slightly greater in 2003 than it will be in 2004. To provide for the supplementary budgets, the government’s spending limits decision set aside an €120 million reserve for 2004. On-budget expenditures within the spending limits will come in €316 million below the technically revised spending limits for 2004, thus
7 7
BUDGET FOR 2004
– expenditures compensating other tax recipients for the effects of tax changes
affording greater leeway for covering the supplementary budgets. The reserve thus created still cannot be considered large, because in recent years the expenditures provided for in the supplementary budget have been somewhat greater than the leeway now created.
BUDGET FOR 2004
On-budget revenue is estimated at €35.8 billion. To cover the budget, €1.3 billion of new borrowings will be required. Central government debt as a ratio of gross domestic product will nevertheless decline in 2004 by about half a percentage point from the 44.6 per cent estimated for 2003. Central government finances include on-budget items as well as offbudget activities, which are expected to run a surplus in 2004 of about €0.9 billion owing to the surplus which is being built up in the State Pension Fund for the future pensions of central government employees. The most important of the central government funds are the National Housing Fund, the State Pension Fund, the Development Fund of Agriculture and Forestry and the Intervention Fund of Agriculture. In addition, the central government has six unincorporated state enterprises (Senate Properties, the Forest and Park Service, the Civil Aviation Administration, Finnish Road Enterprises, the Finnish State Shipping Enterprise and the Finnish
Central government debt EUR bn 80
80
70
70
60
60
50
50
40
40
30
30
20
20
10
10 0
0 94
95
96
97
98
99
00
01
02* 03** 04**
Euro-denominated/markka-denominated Other currencies Per cent of GDP
8 8
State Pilotage Enterprise), all of which operate within an extrabudgetary financial regime. The aggregate revenue entry objective for the unincorporated state enterprises is set at €82 million in the Budget. In national accounting terms, the central government is estimated to run a financial deficit of 0.7 per cent of gross domestic product in 2004. General government finances include central government along with local governments, the employment pension schemes and the other social security funds. The entire general government finances will remain in surplus, but in 2004 the surplus will contract to 1.7 per cent of gross domestic product. The surplus is entirely attributable to the employment pension schemes.
2001 Final
2002 Final
2003 2004 Budgeted Budgeted
Income and wealth taxes
12.1
12.5
11.8
12.2
Other taxes
17.3
17.7
18.1
18.1
6.1
6.2
5.4
5.4
* of which privatisation proceeds
(0.0)
(1.3)
(0.4)
(0.4)
TOTAL
35.4
36.4
35.4
35.8
Use of accumulated surplus
-
-
1,0
-
Net borrowing and debt servicing
-
-
1.1
1.3
35.4
36.4
37.4
37.1
Consumption and capital expenditure
11.7
12.0
12.6
13.0
Transfers
18.0
18.8
20.1
21.2
* of which to municipalities
(5.6)
(5.8)
(6.4)
(6.9)
4.1
3.6
4.7
2.8
-
-
(1.6)
-
33.8
34.5
37.4
37.1
REVENUE
Other revenue
TOTAL REVENUE
EXPENDITURE
Debt interest payments and other expenditure * of which change of recognition principle TOTAL Net debt redemption and debt servicing TOTAL EXPENDITURE
2.3
1.0
-
-
36.1
35.5
37.4
37.1
9 9
BUDGET FOR 2004
On-budget revenue and expenditure, EUR bn
REVENUES
BUDGET FOR 2004
Central government revenue net of borrowings in 2004 is estimated at €35.8 billion. The growth in on-budget revenue is estimated to be well over 1 per cent. Of on-budget revenue, 85 per cent consists of taxes and tax-like revenue. Other revenue is expected to amount to €5.4 billion. This includes, notably, revenue from the EU budget, proceeds from the sale of shares owned by the central government, the proportion of the profits from the Finnish National Lottery Ltd and lottery profits, the proceeds from the Slot Machine Association, interest and dividend income as well as profits entered as the revenue of unincorporated state enterprises.
Total tax wedge of an employee, % % 70 65 60 55 50 45 40 1990
1992
1994
1996
1998
2000
Well-paid 1) Average-paid Low-paid 2) Source: Government Institute for Economic Research 1) Twice the APW salary 2) 2/3 of the APW salary
10
02*
04*
Income tax scale and value added tax rates in 2004 RATES OF INCOME TAX Taxable earned income
Basic tax amount
€
Rate within brackets
€
%
11 700 - 14 500
8
11
14 500 - 20 200
316
15
20 200 - 31 500
1 171
21
31 500 - 55 800
3 544
27
10 105
34
55 800 -
BUDGET FOR 2004
Municipal income tax and social security contributions, on average 20 %
Tax rate on capital income and corporate income 29 %
VALUE ADDED TAX RATES Normal rate
22%
Foodstuffs
17%
Medicines, books, passenger transportation, accommodation, TV-licenses, admission fees to cultural and entertainment events, cinema performances and use of sporting facilities
8%
Subscribed newspapers and periodicals
0%
11 11
BUDGET FOR 2004
The taxation on earned income will be eased at the annual level by a total of €775 million (0.5 per cent of GDP), of which central government income tax accounts for about €364 million. The tax measure is clearly weighted in favour of small and medium income earners: -
at an annual income of €12,000, the tax cut is about 1.7 percentage points
-
at an annual income of €21,000, the tax cut is about 1.5 percentage points
-
at an annual income of €58,000, the tax cut is about 1.1 percentage points
Because of the tax reductions, the total tax wedge for wage and salary earners will narrow in 2004 by about a percentage point at the different income levels. The total tax wedge refers to the difference between companies’ labour costs (price of work) and employees’ purchasing power net of tax. The tax wedge is composed of an employee’s income taxes, the social insurance contributions paid by the employer and the employee and indirect employee-paid taxes on consumption. The tax wedge is often expressed as a ratio of the company’s labour costs (%). For example, the tax wedge of an industrial employee receiving an average wage is about 55 per cent, i.e. the company’s labour cost, is over double the disposable income which the employee receives after taxes on consumption. Apart from wage-earners, the changes made in the state income tax scale will also lower the taxation of other recipients of income – pensioners who pay national income tax, for instance. The pension income allowance in municipal taxation is indexed automatically with a rise in a full national pension. The tax reduction will lower the tax revenues of the municipalities and congregations and the premium income of the Social Insurance Institution owing to the increase in the earned income allowance and the standard deduction for work-related expenses in municipal taxation. The central government will compensate the municipalities in full for the loss of revenue by raising transfers to local government. The loss which the congregations incur will be alleviated by raising the congregations’ share of corporate tax receipts. The loss in the Social Insurance Institution’s premium income will lead to an increase in the central government budget transfer to the Institution.
12
Tax revenue, 44.1 % of GDP (64.5 EUR bn) in 2004
Capital tax €0.5 bn
Social insurance contribution - employee €4.6 bn
Social insurance contribution - employer €13.6 bn
€26.0 bn
Direct taxes
€19.9 bn
BUDGET FOR 2004
BY TAXES AND PAYMENTS
Indirect taxes
Other social security funds €4.7 bn
Employment pension schemes €12.1 bn €34.5 bn
Local government
Central government1)
€13.2 bn
BY TAX RECIPIENTS
1) Including tax revenue to congregations about €90 million.
13 13
BUDGET FOR 2004
Receipts from income and net wealth tax in 2004 are estimated to amount to €12.2 billion. Households will pay about two thirds of this, and one third will be paid by companies in the form of corporate tax. Taxes based on turnover are expected to yield tax receipts of about €10.7 billion. Alcohol taxation will be lowered on average by 33 per cent so as to maintain as well as possible the bases of taxation on the consumption of alcohol in Finland. From the beginning of 2004, after the transition period provided under EU accession rules, Finland will have to remove the restrictions on the importation of alcohol intended for the personal use of travellers arriving from other member states. Despite the reduction in alcohol taxation, imports by travellers are expected to grow further, which means that the excise duty on alcoholic beverages are expected to decline in 2004 by about €300 million to €1,050 million, with tobacco tax revenue falling by about €150 million to €452 million. Tax receipts from value-added tax will decline as well.
14
EXPENDITURES The Budget includes a total of €37.1 billion of appropriations, of which €2.8 billion consists of interest expenses on the central government debt. Of the appropriations in the Budget, €27.8 billion comes within the spending rules, i.e. the central government spending limits, and €9.3 billion is outside the spending limits.
An increase of €90 million is used for improving social and healthcare services. Central government transfers to local government will also include an increase of €20 million for children’s morning and afternoon activities, and an increase of €5 million for pre-school transport allowance. Inputs on behalf of children and youth will also increase by raising child allowances and by allocating extra appropriations for youth work. Appropriations for children’s and youth’s psychiatric care and rehabilitation will be increased. The position of pensioners will be improved by investing in welfare services and upping appropriations for developing care for the aged.
15 15
BUDGET FOR 2004
To improve services, central government transfers to the municipalities will be increased significantly. In addition, the compensation of revenue losses due to the tax cut will lead to an increase in central government transfers of €359 million and furthermore an index increase of €97 million will be made. Central government transfers to local government will increase from the 2003 level by about 8 per cent to €6.4 billion. The new basic public services budget review is intended to improve the transparency, within the central government budget, of the financing of local government functions and obligations. The basic public services budget covers an estimate of statutory basic services within municipal finances as a whole. Basic public services include social and healthcare as well as services related to education and cultural activities, i.e. notably, special nursing, care of aged, daycare, comprehensive schools and upper secondary schools. Apart from minor exceptions, central government transfers to local government are universal revenue which the municipalities are free to allocate to different purposes.
Change in the on-budget entities’ expenditure 2003 - 2004 by function, % 19.5 % Health Environmental protection
14.8 %
BUDGET FOR 2004
General public services
6.4 %
Social protection incl. statutory employee pensions
6.0 %
Public order and safety
5.9 %
Recreation, culture and religion
5.6 %
Defence
5.6 %
Economic affairs
Education
Housing and community amenities
4.3 %
3.8 %
2.5 %
- 18.8 % Debt interest payments
16 16
General government total expenditure in 2001 by function, EUR bn, % of GDP
Social protection incl. statutory employee pensions
20.7 % of GDP
6.4 %
Education
6.0 %
Health
4.6 %
Economic affairs
3.8 %
General public services
2.6 %
Debt interest payments
1.5 %
Public order and safety
1.4 %
Recreation, culture and religion
BUDGET FOR 2004
Defence
1.2 %
Housing and community amenities
0.6 %
0.3 %
Environmental protection
0
5
10
15
20
25
30 EUR bn
Financing from the central government budget1) Total expenditure2)
1) Source: Ministry of Finance. Transfers to other government sectors are included in the numbers as well as the direct transfer of VAT to the Social Insurance Institution of Finland 2) Source: Statistics Finland, National Accounts, COFOG classification of expenditure according to purpose
17 17
Cash flows between EU and Finland, EUR million 2002
2003**
2004**
1 123
1 376
1 415
-
35
40
1 123
1 411
1 455
Payments from the Finnish budget to EU Payments to the EU budget Capital investments (European Development Fund)) TOTAL
Revenue from the EU budget Payments to the Finnish budget European Regional Development Fund and Social Fund
173
265
265
European Agricultural Guidance and Guarantee Fund
747
835
886
1
6
6
76
61
56
Intervention Fund of Agriculture
108
103
107
Development Fund of Agriculture and Forestry
140
12
13
1 245
1 282
1 333
Income for fisheries guidance Other revenue Payments to the off-budget activities
BUDGET FOR 2004
TOTAL
18 18
KEY BUDGET MEASURES REVENUE ESTIMATES
! All the marginal tax rates in state income tax scale will be lowered by one percentage point and the scale’s income brackets will be raised by one per cent.
! The
maximum amount of the standard deduction for work-related expenses will be raised from €590 to €620, and the maximum amount of the earned income allowance in municipal taxation will be increased from €2,550 to €3,550. sliding tax allowance will be introduced for the obligation to pay value-added tax such that the final amount of taxes to be remitted will rise gradually to the full amount at the turnover level of €20,000. Less than €8,500 turnover remains tax-free.
! The
excise duty on alcoholic beverages will fall on average by 33 per cent. The tax on spirits will be lowered by 44 per cent, that on mild wines by 10 per cent and the tax on beers by 32 per cent.
! The vehicle tax will be increased by 10 euros.
19 19
BUDGET FOR 2004
!A
APPROPRIATIONS
! Appropriations
for active labour market policy will be increased by €126 million compared with the Budget for 2003.
! The maintenance allowance payable during active labour
BUDGET FOR 2004
market policy measures will be increased from 7 euros to 8 euros per day and the increased maintenance allowance will rise from 14 euros to 16 euros per day. The maintenance allowance payable during rehabilitating work activity will also rise to 8 euros. Means testing for labour market subsidies will be alleviated such that income exceeding €536 per month will be taken into account as the income reducing a spouse’s labour market subsidy. Previously the limit was €236 per month.
!A
1.8 per cent index increase will be made in central government subsidies to local government. This corresponds to 75 per cent of the estimated rise in the level of costs.
! Financing
for projects to develop healthcare will be increased by €22 million.
! Central government transfers to local government include an increase in funding for developing care for the aged by €14 million and an increase of €13 million for healthcare’s further education.
! The municipalities will introduce a service voucher as a new method of arranging home services.
! Child allowances and the partial home care allowance will be raised. The child allowance payable for the first child will rise from €90 to €100 per month, and lone parents will receive an additional three euro monthly increase. The partial home care allowance will be increased from €63.07 to €70 per month and eligibility for the benefit will be expanded to cover those parents who shorten their working hours when their children attend school for the first and second year.
20
... appropriations
! In
accordance with the spending limits decision, just over €14 million has been reserved for subsequently specified development needs connected with the structure of agriculture and other designated purposes.
! Development
co-operation appropriations will be increased to the level of €39 million, corresponding to 0.37 per cent of gross domestic product forecast for 2004.
! Financing for universities’ operating expenses will rise by €70 million.
! University students’ meal subsidy will be increased by 0.2 euros to 1.47 euros. number of pupils in apprentice vocational supplementary education will be increased by 1,500 pupils.
! More than €100 million will be added to research and development appropriations.
! Environmental
subsidies will be increased by €6 million, serving partly to ensure that the Baltic Sea Protection Programme is carried out.
! Finland’s oil clean-up capabilities will be improved. ! If necessary, the Government will take part in financing disposal costs of end-of-life vehicles with a fixed-term disposal grant reserved for it.
! Development subsidies for the provinces will go up by €14 million.
! The
Finnish Defence Forces will be developed in accordance with the Security and Defence Policy Report that was approved by Parliament in 2001. The Finnish Defence Forces will receive an extra €67 million for their operating expenses.
21 21
BUDGET FOR 2004
! The
... appropriations
! The
Police Department’s operations will be enhanced and additional resources will be provided for preventing economic crime.
! The
shipping operations and pilotage service of the National Maritime Administration will be turned into unincorporated state enterprises. The Finnish State Shipping Enterprise and the Finnish State Pilotage Enterprise will go into operation from the beginning of 2004.
! Housing finance authorisations totalling €1,060 million
BUDGET FOR 2004
will make possible the production of 10,000 new rental and tenancy entitlement homes.
22
BUDGET FOR 2004
23 23
