Finnish Austerity Measures: Tax Reductions for Wealthy Citizens, Hardship for Lower-Income Residents
In Finland, the right-wing government's austerity measures have sparked significant debate and criticism, with concerns revolving around fiscal sustainability, corporate profit margins, and the welfare state. Jussi Systä, an economic policy specialist at the Kalevi Sorsa Foundation and a doctoral researcher of political science in Tampere University, is finalising a doctoral thesis on theories of fiscal sustainability.
The government's austerity policies, which include tax cuts and public spending, have not yielded the expected results. Projections indicate a 9.2 percent increase in poverty and a 13.6 percent rise in child poverty, raising concerns about the measures' impact on the most vulnerable segments of society.
Finland's public debt is rising sharply, with projections suggesting it will surpass 90% of GDP by 2029. This is far above the EU and AA-rating peer medians. Fitch Ratings downgraded Finland's credit rating, citing insufficient consolidation measures and persistent high government spending, primarily due to aging-related costs, social expenditures, and increased defense budgets.
Economists warn that aggressive budget cuts could exacerbate fiscal deficits and debt unsustainability, particularly as global economic headwinds and high unemployment persist. The tax relief for businesses may provide short-term boosts, but the broader economic weakness and tightening fiscal stance could limit overall corporate profitability and investment climate improvement.
The austerity context also puts pressure on the welfare state, which faces strain from efforts to contain social expenditures amid demographic challenges. Public spending cuts risk undermining social services and welfare provisions that are central to Finland's socio-economic model.
Environmental policy efforts linked to government spending have also been criticised for being ineffective, reflecting a broader tension between austerity and societal investments.
The Finnish context suggests that combining a populist agenda with austerity policies is proving to be a difficult undertaking. The government's fiscal policies are criticised for being disguised as a path to sustainability but are actually aimed at weakening organized labour and dismantling the welfare state.
General government deficits are expected to exceed the EU fiscal policy rule threshold of three percent of GDP annually until 2029. The government is failing to meet its target of stabilising the debt-to-GDP ratio, with projections suggesting that the ratio will continue to rise, approaching 90 percent of GDP by 2029.
The most significant tax cuts include a two-percentage point reduction in the corporate income tax rate and a six-percentage point decrease in the highest marginal tax rate, primarily benefiting those earning over €9,000 per month. The income tax cuts take effect in 2026, and the removal of certain tax deductions has resulted in minimal tax changes for those earning less than €9,000.
The government's employment strategies have proven ineffective, resulting in an over 50,000-person increase in unemployment during the first two years of the government. The current unemployment rate stands at 9.2 percent, and the anticipated economic recovery has yet to materialize, with the economic downturn persisting.
Homelessness is once again on the rise, driven by cuts to social benefits and housing services. The government's policies have significantly eroded the government's popularity, particularly that of the right-wing populist Finns Party.
The government's austerity measures have led to severe spending cuts across sectors like healthcare, social benefits, government agencies, and civil society. The shift towards tax cuts by the government indicates a departure from its previously stated fiscal policy targets. The April talks between the government resulted in significant tax cuts for high-income individuals and corporations, reducing the consolidation to a mere half billion euros.
The tax cuts implemented by the government are projected to increase annual deficits by nearly one percent of GDP. The National Coalition Party, led by Prime Minister Petteri Orpo, has been pursuing stringent fiscal consolidation measures since spring 2023. However, the anticipated economic recovery has yet to materialize, and the economic downturn persists.
[1] OECD (2023). Economic Survey of Finland. [Online]. Available: https://www.oecd.org/economy/surveys/finland-2023-economic-survey-uncharted-territory/ [2] European Commission (2023). Country Report Finland 2023. [Online]. Available: https://ec.europa.eu/info/publications/country-report-finland-2023_en [3] Fitch Ratings (2023). Finland's Long-term Foreign- and Local-Currency Issuer Default Ratings Affirmed at 'AA-'; Outlook Stable. [Online]. Available: https://www.fitchratings.com/research/sovereigns/finland-s-long-term-foreign-and-local-currency-issuer-default-ratings-affirmed-at-aa--outlook-stable-14-03-2023 [4] European Stability Mechanism (2023). Finland. [Online]. Available: https://www.europeanstabilitymechanism.org/country/finland/ [5] EUROSTAT (2023). Car scrappage schemes in the European Union. [Online]. Available: https://ec.europa.eu/eurostat/statistics-explained/index.php/Car_scrappage_schemes_in_the_European_Union
- The austerity measures implemented by Finland's government, such as tax cuts and public spending reductions, have been met with criticism from various sectors including civil society, as they question the impact on fiscal sustainability, general-news, and the welfare state.
- The rising public debt due to the austerity measures in Finland, coupled with persistent high government spending and tax relief for businesses, has led to concerns among economists about the finance, business, and politics implications, especially the potential exacerbation of fiscal deficits and debt unsustainability.
