Public finance | Tax increases should not be ruled out, states the Economic Policy Evaluation Council in its recent report

Prime minister Petteri Orpon (kok) the government will probably not achieve its goal of stabilizing the debt ratio of the public finances with the actions listed in the government program. This is the assessment of the Economic Policy Evaluation Council in its report published on Wednesday.

The central goal of the government is to stabilize the public debt ratio by the end of the election period. In the opinion of the Evaluation Council, this is a good goal if there are no major changes in the economic environment.

In its program, the government has committed to take actions that will strengthen Finland's public finances by six billion euros. The means include spending cuts and structural reforms.

According to the Evaluation Council, the measures included in the government program will indeed strengthen the public finances, but they are hardly sufficient to stabilize the debt ratio.

Evaluation Council chairman, professor of economics Niku Määttanen according to there are several reasons independent of the government that weaken the public finances. The economic cycle has weakened, and the rise in interest rates has increased the costs of servicing the government debt.

Määttänen also highlights the decrease in the total tax rate, which is largely due to the electrification of transport. For example, the revenue from fuel taxes will decrease when rechargeable cars become more common.

In addition, the Ministry of Finance now predicts that the total tax rate will fall significantly more this election period than was predicted when the government program was drawn up.

The Evaluation Council draws attention to the entry in the government program, according to which the government does not tighten the overall tax rate by its own decisions. According to the council, this entry seems to rule out tax increases in a situation where tax revenues decrease without government decisions.

“In a situation like this, where the total tax rate is decreasing for reasons beyond the control of the government, it is a rather difficult limitation. It makes it significantly more difficult to achieve the goals regarding the public finances,” Määttänen says.

According to Määttänen, the government could improve the credibility of its economic policy goals if it were a little more flexible about taxation.

“Compensatory tax increases could also be made in a situation where taxation is otherwise structurally lighter.”

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“The biggest problem is that the cuts in different social benefits partly target the same people.”

Evaluation Council according to the government's adjustment measures are largely based on cuts in social benefits.

The council says some low-income people will see their incomes cut significantly, although the government has said it will aim to make the cuts “in a way that takes into account the situation of the most vulnerable”.

“The biggest problem is that the cuts in various social benefits are partly aimed at the same people,” the council's press release says.

The evaluation council considers the effects of employment policy to be very uncertain. The government aims to raise the employment rate to 80 percent by 2031.

The ambitious employment goal may be difficult to achieve, the evaluation council believes. The employment rate is already relatively high, and increasing it further is more difficult than before.

In addition, the evaluation council points out that the government's employment program focuses on financial incentives. According to the council, other obstacles to employment, such as insufficient professional skills, health problems and problems with the labor market, receive too little attention.

“It would be justified to try to intervene in these other factors in the future, although it is undoubtedly more difficult than strengthening financial incentives,” says Määttänen.

The government the decisions on housing taxation are justified in the assessment council's opinion. According to the council, reducing the property transfer tax can improve the operation of the housing market, when it is easier for households to choose an apartment that better suits their preferences and needs.

“Removing the transfer tax completely should be set as a future goal,” the report says.

The Assessment Council considers that the root cause of high housing costs is the insufficient supply of apartments in relation to demand. The council considers it important that the government encourages cities where housing prices are high to zone land for residential use with the help of land use, housing and transport agreements, or MAL agreements.

According to the evaluation council, reducing the construction of state-subsidized Ara apartments is justified. The production of Ara apartments displaces private housing supply and does not increase the total supply of housing, says the council.

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The government intends to decide on new adjustment measures during the spring framework rush

Report also highlights Finland's carbon sinks, which have been particularly affected by the collapse of the forest carbon sink. According to the evaluation council, the government should strive to create incentives to maintain and increase carbon sinks.

In the Council's opinion, it would be good for these incentives to be at least partially based on the fact that landowners or the forest industry have to pay for the reduction in carbon sinks they cause.

According to the evaluation council, Finland may not be able to fulfill its commitments regarding emission reductions according to EU climate legislation, which causes new economic policy risks.

“At some point in time, this could result in a bill for taxpayers if Finland has to buy compensating carbon sink units from other member countries,” says Määttänen.

“It would be quite problematic if we were just ready to pay such a bill without thinking about effective measures to strengthen carbon sinks.”

Government plans to decide on new adjustment measures in the framework rush of spring, in order to curb Finland's rapid indebtedness. Prime Minister Orpo has said that the need for further adjustment is estimated at 1–1.5 billion euros.

According to Määttänen, the size category of the additional adjustment is more or less right if the government wants to stick to its own public finance goals.

“Additional savings of that magnitude or correspondingly increasing tax revenues would at least bring the government's goals significantly closer.”

The Treasury minister Riikka Purra (ps) said on Tuesday In Yle's A-studio, that the need for additional adjustment in the framework crisis may rise to two billion euros. According to Purra, the government needs to consider tax increases in addition to spending savings.

“I can guarantee that it will be a very challenging spring,” Purra said.

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According to the evaluation council, the government should strive to create incentives to maintain and increase carbon sinks.

According to Määttänen, it is of course a political choice how the government emphasizes spending cuts and tax increases. However, he believes that it is difficult to make further adjustments with spending cuts alone, at least without compromising the other goals that the government has set for its economic policy.

Based on the current social security cuts, according to Määttänen, it is questionable how the government has taken into account those in the weakest position.

“The incomes of some low-income earners will inevitably decrease quite significantly.”

Purra flashed in December In an interview with Talouselämä magazine the possibility of increasing the value added tax on food. Määttänen considers this an option worth considering.

“There are, of course, issues of income distribution, but if so desired, the increase in the value added tax on food could be compensated by slightly increasing some of the income transfers clearly aimed at low-income earners,” says Määttänen.

Sovereign the economic policy evaluation council annually publishes an assessment of the economic policy implemented. The evaluation council consists of the chairman and four other members. Four of the members are economists and one represents expertise from other social sciences.

The current members of the council are economics professors Niku Määttänen (chairman), Hilde Björnland and Tuukka Saarimaa and working life professor Seija Weather and professor of social policy Liisa Häikiö. The current composition of the council began its term of office last spring.