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Finland Tempers Austerity as Tax Relief Softens Budget Cuts

March 22 (Bloomberg) -- Finland’s government tempered its commitment to austerity by providing tax cuts to companies to help create jobs without allowing the budget deficit to widen.

The six-party coalition agreed to lower the corporate tax rate to 20 percent from 24.5 percent, as part of a raft of measures that target 300 million euros ($387 million) in spending cuts and the same amount in overall tax increases, Prime Minister Jyrki Katainen said after talks on a budget framework for the next four years ended yesterday in Helsinki. Talks to draft Finland’s 2014 budget will be held in July.

“It’s a mixture,” Katainen told reporters. “We do austerity measures, but at the same time by doing structural reforms, especially to taxation, we stimulate the economy.”

Finland’s economy shrank last year as Europe’s debt crisis deepened, hurting exports and eroding consumer confidence in the northernmost euro nation. The country is now mired in its second recession in four years, making the government’s budget goals less attainable and adding to the cost of caring for Europe’s fastest-aging population.

“It’s a fitting amount” of austerity, Pasi Kuoppamaeki, chief economist at Danske Bank A/S in Helsinki, said by phone. “More tightening wouldn’t have been good at this point.”

The coalition, which yesterday cut its 2013 economic expansion forecast to 0.4 percent from 0.5 percent, reiterated its goal of ending debt growth by 2015. It also targets bringing the central government deficit to within 1 percent of gross domestic product from last year’s 3.4 percent.

Mounting Unemployment

Yesterday’s measures are enough to curb debt growth, Katainen said. Keeping to the 1 percent central government deficit target would have required 3 billion euros of tightening, he said.

Finland’s jobless rate climbed to 8.7 percent in January from 7.8 percent a year earlier as companies including Kemira Oyj, the maker of water-treatment chemicals, and crane maker Konecranes Oyj cut jobs to stay profitable.

“We want to send a clear message to the world -- we are determined to defend the Finnish welfare society based on work,” Finance Minister Jutta Urpilainen said. “We have taken decisions that support growth and help create the basis for new job creation.”

Corporate Taxes

The government’s plan to lower corporate taxes means Finnish companies will pay less than competitors elsewhere in the Nordic region. Sweden and Denmark have both cut their rates to 22 percent. The government, which will collect about 900 million euros less from companies because of the tax plan, estimates the measures will contribute to higher employment and faster economic growth, reducing the net revenue loss by about half, Urpilainen said.

“It’s quite a big cut,” Kuoppamaeki at Danske Bank said. “I expected a cut to 22 percent.”

The Confederation of Finnish Industries, Finland’s main employer organization whose members contribute more than 70 percent of national output, last month called for a 15 percent corporate tax rate to create 100,000 new jobs.

“We did maybe the biggest tax reform in two decades in Finland in order to strengthen competitiveness and in order to give companies more opportunities to employ people,” Katainen said. “This is extremely important.”

‘Act Responsibly’

Urpilainen, who heads the Social Democrats, said the government expects companies benefiting from lower taxes to “act responsibly” and hire more people. Her party has prioritized tax increases in previous fiscal policy decisions.

Tax exemptions will be removed from dividend payments, meaning all dividends will be taxed in the future, Katainen said. Other changes will contribute to making the dividend system more encouraging, he said. The amount the government plans to raise from windfall taxes on hydro and nuclear power generators will be cut by 120 million euros to 50 million euros. It didn’t say when the levy would be applied.

The government is also collecting more revenue from higher levies on alcohol, tobacco, sweets and electricity.

Finland is the only euro member with a stable AAA rating at Standard & Poor’s, Moody’s Investors Service and Fitch Ratings. Germany and Luxembourg have negative outlooks on their top credit grades at Moody’s, and the Netherlands faces a downgrade at all three companies.

Finland’s general government deficit, which includes municipalities and pension funds, was 1.9 percent last year, according to the statistics office. Finland hasn’t breached the European Union’s 3 percent deficit limit since 1996.

“We want to give companies better opportunities of growing and expanding their operations in Finland,” Katainen said. “These measures ensure we can stop debt growth. Finland won’t become an over-indebted country.”

To contact the reporter on this story: Kati Pohjanpalo in Helsinki at kpohjanpalo@bloomberg.net

To contact the editor responsible for this story: Tasneem Brogger at tbrogger@bloomberg.net

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