Juho Kostiainen
As part of its mid-term budget proposal for 2025, the Finnish government has decided on reductions of EUR 2 billion in earned income and corporate tax. About half of the tax cuts will be covered by increases in other taxes and spending cuts. Nordea Chief Analyst Juho Kostiainen takes a look at the reforms and the expected economic impact.
In its mid-term spending limits discussion, the Finnish government introduced a major tax reform package, amounting to reductions of EUR 2 billion in earned income and corporate tax. The government is confident that the tax cuts will generate permanent economic growth, and thus higher tax revenue.
The government's tax cuts can be considered bold, considering that the general government deficit last year was 4.4% of GDP. At the end of the spending limits period in 2029, the central government deficit is expected to remain at this year's level at just over EUR 12 billion. The government has taken the view that Finland's public finances will not be corrected by savings alone, but that measures are needed to support economic growth structurally and cyclically.
The most significant measure is a reduction in earned income tax. Income taxation will be reduced by EUR 650 million for low- and middle-income earners. The upper limit of the highest marginal taxes will be lowered from 56 per cent to 52 per cent, which will result in a loss of tax revenue of EUR 335 million, as the tax reduction will affect those earning more than EUR 100,000 per year. In addition, the child increase in the income deduction will be increased by EUR 100 million.
The reduction in income tax will have a stimulating effect on the economy, as it will increase the real income of wage earners from next year. Growth in real earnings has recently been poorly channelled into consumption, as low consumer confidence has increased prudential saving. In addition, tax cuts improve incentives to work in relation to social security, which increases the supply of labour. On the other hand, even with the highest marginal tax rates, the incentives to get an education, change jobs or apply for more demanding jobs will improve. The growth effects of the tax cuts are positive, but the scale is very uncertain, so the government is taking a big risk in terms of future deficit development.
The growth effects of the tax cuts are positive, but the scale is very uncertain, so the government is taking a big risk in terms of future deficit development.
The corporate tax rate will be reduced from 20 per cent to 18 per cent from the beginning of 2027, which will reduce tax revenue to EUR 830 million in static terms. The corporate tax cuts aim to attract new investments in Finland and thus improve the conditions for long-term economic growth. Streamlining competitive corporate tax, affordable energy and permit processes are an excellent combination for attracting investments. Of course, the current uncertainty related to global trade policy may contribute to slowing down the start of investments.
Other tax cuts include raising the lower limit of inheritance tax to €30,000 (fiscal impact €67 million), lowering the value added tax on food from 14 per cent to 13.5 per cent (€145 million) and a special tax on foreign experts to 25 per cent.
Tax increases, on the other hand, will be seen in soft drinks, nicotine pouches, alcohol and the mining tax. The tax deduction will remove the home office and the commuter bike benefit (EUR 70 million) as well as the membership fees of labour market organisations (EUR 190 million).
Spending cuts will be made to central government (EUR 130 million), central government transfers to municipalities (EUR 75 million) and development cooperation (EUR 50 million).
As measures related to the housing market, the maximum maturity of housing loans will be extended from 30 to 35 years and it will be possible to raise the maximum loan-to-value ratio to 95 per cent. Cyclical relief will also be made possible for the terms and conditions of housing company loans.
See the original article on Nordea Corporate, Finland: Bold tax measures from the government.
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