Finance minister warns of likely spending cuts and tax hikes next year

The Finnish government plans to cut spending and raise taxes next spring; Minister of Finance Jutta Urpilainen (SDP) says that the measures probably cannot be avoided.


The belt-tightening stems from a government decision according to which the state debt is to be brought down by 2015, and the budget deficit must be cut to one per cent of GDP.
Market development in recent months have made that goal more difficult to reach. According to a forecast put out by the Ministry of Finance on Tuesday, the Finnish state debt will continue to grow in the upcoming two years. Reversing the trend would require tax hikes and spending cuts worth billions and euros, unless there is a significant improvement in the economic situation.
      
Economic growth next year should be 0.4 per cent, according to the most recent forecast by the Ministry of Finance. In the autumn, the expectation was for 1.8 per cent growth.
The forecast extends to 2013, when Finland is to borrow nearly eight billion euros. The government’s target for a deficit of one per cent would be the equivalent of about EUR 2 billion.
If the situation were the same two years later, the government’s policy programme would require spending cuts and tax increass worth about EUR 6 billion.
      
The government will be examining the economic situation on Wednesday evening. Decisions are to be made in March when the budget framework for the following year is set up.
The further spending cuts and tax hikes are expected to be difficult. The EUR 2.5 billion that was decided last summer caused considerable pain among the six government parties. The measures are to strike an even balance between lower spending and higher taxes.
      
Finance Minister Urpilainen would not say on Tuesday how far the balancing efforts would go and what they would target. Not even the National Coalition Party, which generally puts a high priority on financial discipline, is expected to push for as severe measures as the forecasts would indicate.
      
The chairman of the Finance Committee of the Finnish Parliament, Kimmo Sasi (Nat. Coalition Party), says that while EUR five billion would be an optimum goal, three billion would be realistic.
“On the tax side the goal is relatively easy, if VAT were raised by two percentage points”. Raising the VAT rate to 25 per cent would bring in about a billion euros more in tax revenue.


The Social Democrats have been opposed to Sasi’s proposed VAT hike. Urpilainen said on Tuesday that she was not taking a stand on the matter yet.
      
In addition to budget cuts and tax increases, Urpilainen emphasised the importance of municipal reform and other structural changes. “We mustn’t make any more cuts than is absolutely necessary”, Urpilainen said.


Source: HELSINGIN SANOMAT - INTERNATIONAL EDITION - BUSINESS & FINANCE