Orpo’s Government: Decisions aim to prevent public finances from spinning out of control

General Government Fiscal Plan for 2025-2028
Orpo's Government: Decisions aim to prevent public finances from spinning out of control

Prime Minister Petteri Orpo's Government has agreed on the General Government Fiscal Plan for 2025-2028. The Government has made decisions that will improve the sustainability of public finances and create conditions for reversing the trend in indebtedness. The decisions aim to safeguard the key factors for future prosperity: employment, security, and knowledge and competence. Fairness has been one of the guiding principles of the decisions.

The objective of the Government is to safeguard the welfare society and its vital services for present and future generations alike. Finland must continue to be a country that provides high-quality education, well-functioning health services and care for anyone who needs it. A sustainable economy is a prerequisite for achieving this objective.

In the Government Programme, the Government committed to making decisions that would improve general government finances by a net EUR 6 billion at the 2027 level. However, Finland's general government finances have deteriorated. The adjustment measures already decided are not enough to ensure the stabilisation of the general government debt ratio by 2027. Without additional measures, general government debt will amount to almost 90 per cent of GDP in 2028. New measures to improve public finances are also required to ensure compliance with EU fiscal rules. To this end, the Government has decided on additional measures that will strengthen public finances by approximately EUR 3 billion. The objective is to prevent the Finnish economy from spinning out of control and Finland from triggering the EU's excessive deficit procedure.

Employment, security, and knowledge and competence are at the heart of the Government Programme. The adjustment measures will be implemented without compromising these cornerstones of our wellbeing and future. Sustainable prosperity is built on work and entrepreneurship. Finland will ensure both its internal and external security. Safeguarding favourable conditions for agriculture is part of ensuring the security of supply. Finland's success will continue to be based on a high level of expertise and competence in the future. The Government will stand by the permanent increase of EUR 200 million to the level of funding for primary and lower secondary education. This increase will enable the implementation of the Government Programme objective of increasing the minimum number of lessons in primary and lower secondary education by two to three weekly lessons per year to strengthen the basic skills of pupils. It will also enable the reform of learning support and make it possible to put the level of appropriations for equality funding on a permanent footing. The Government will also stand by the record-high additional investment of EUR 1 billion in research and development by 2027 in accordance with the R&D Funding Act.

The difficult economic situation is straining people's trust in society. The Government has chosen the necessary additional adjustment measures with due regard to intergenerational fairness. The measures will affect people in all income brackets, but efforts have been made to safeguard the position of the most vulnerable people. The Government has paid special attention to families, children and young people. Significant savings will be targeted at administration.

The Government will prepare a separate package of measures concerning children and young people with a permanent appropriation of EUR 5 million allocated to it. The package includes the development of a hybrid model for child welfare as proposed by the Ombudsman for Children and additional funding for youth work in schools and educational institutions, low-threshold mental health chat services and mother and child homes and shelters. Additional funding will also be allocated to the implementation of the action plan for combating youth and gang crime. The Government also decided on separate one-off funding of EUR 5 million for combating school bullying.

The Government will allocate EUR 10 million to the model replacing the adult education allowance with respect to the most critical sectors. In addition, the conditions for employment of women with an immigrant background will be improved by EUR 5 million.

In its spending limits discussion, the Government also made a decision concerning the hospital network. The Government will implement a solution that to a large extent corresponds to the first phase of the hospital network reform. The solution will affect night-time emergency services in primary healthcare and the service range and emergency services in certain hospitals providing specialised healthcare. The purpose of the reform is to balance public expenditure and, for its part, to ease the shortage of healthcare personnel.

The Government decided to reject the following phases of the hospital network reform proposed by the working group. In its spending limits discussion, the Government decided to implement alternative savings measures instead of the rejected phases of the reform in order to reach the savings outlined in the Annex of the Government Programme on financial decisions. These alternative savings amount to approximately EUR 75 million. The Ministry of Social Affairs and Health will provide more detailed information on the decision.

Finland will not recover through adjustments to general government finances alone. To this end, the Government decided in its spending limits discussion to accelerate investments as part of a growth package.

The Government made no changes to the investment programme agreed in the Government Programme. The investment programme will have an expansionary effect and will boost economic growth, which is important in the current economic cycle. The Government will make decisions on the next transport projects to be launched in connection with the May supplementary budget proposal and in the autumn government budget session.

New savings measures decided by the Government

In the new set of measures for strengthening general government finances decided by the Government, savings account for approximately EUR 1.6 billion at the 2028 level. Due to the difficult state of general government finances, adjustment measures are being directed broadly at all branches of government.

The number of central government employees has increased in recent years. At the end of 2023, the number was 81,696, which is around 12 per cent more than in 2017. The number has grown steadily over the years. Savings targeted at central government operational expenditure will be further significantly increased to improve the efficiency of central government activities. Ministries will prepare reductions to the duties and obligations of agencies within their branches of government as part of the productivity programmes they are preparing. Savings targeted at operational expenditure will likely have to be sought through reductions of personnel and through improving the efficiency of operational units.

The obligations of the wellbeing services counties will be scaled back as a savings measure. The Government has made efforts to secure health and social services, for example, by alleviating the skills shortage and improving the wellbeing services counties' possibilities to produce statutory services with the personnel resources available. The minimum staffing level required in 24-hour care for older people will be lowered, the stricter requirements recently introduced regarding the maximum waiting times for access to care will be revoked, and certain services will be excluded from the scope of public service provision.

Efforts to raise the level of competence will be safeguarded regardless of the additional adjustment measures. Funding or student places for education of young people completing their comprehensive school education or education of those without an initial vocational qualification will not be reduced. Accumulation of vocational education and training will be decreased through reducing funding for vocational education and training of adults who already have completed a vocational qualification or a tertiary degree. Students will be returned within the scope of the student housing supplement instead of the general housing allowance as of 1 August 2025. The level of the student housing supplement will be raised in proportion to the 2017 level; the maximum amount will be specified during further preparation.

The Government will moderately adjust the housing allowance for pensioners so that the savings impact will be targeted at the wealthiest pensioners receiving the allowance. Savings will also be directed at reimbursements for medicines and the financial base of pharmacies as part of a broader reform. The sickness allowance will be adjusted with a greater impact on the higher income brackets. Payment of national pensions to people residing abroad will end in accordance with EU practices. Furthermore, overlaps in vocational rehabilitation benefits resulting from the extension of compulsory education will be eliminated in accordance with the Government Programme by raising the age limit for the rehabilitation allowance and national pension from 16 to 18 years in respect of new beneficiaries. The Government does not propose any changes to the index increases for national pensions or earnings-related pensions.

Business subsidies will be cut. The Government will decrease the regional financial support for transport and Business Finland's Budget authority for grants other than RDI grants. The collection of fairway dues at full rate will be resumed. The employer tax deduction for training will be abolished, as the objectives set for the deduction have not been reached. Työkanava Oy, a wholly state-owned company, will cease its operations because its employment service operations have not met the objectives set for this special assignment company. The Government will seek more effective means to find employment for people with impaired capacity to work.

Other savings will be allocated to, for example, development cooperation and the project provision for unspecified transport projects.

On-budget revenue will grow as a result of implementing a moderate increase in the recognised revenue received from Metsähallitus without having to increase the scale of forest harvesting. Integration reimbursements to municipalities will also be reduced.

In addition to the savings from discretional government grants decided in the Government Programme, new savings will be allocated to central government transfers to municipalities in every area of responsibility.

Furthermore, the schedule for implementing certain savings specified in the Government Programme will be brought forward so that Finland can avoid triggering the excessive deficit procedure. For example, savings directed at the development of the transport infrastructure, development cooperation, discretionary government grants of the Ministry of Education and Culture, and grants promoting health and wellbeing will be brought forward.

The new savings will fully increase the amount of savings agreed in the Government Programme

Tax decisions made in the government spending limits discussion

The goal of Government taxation policy is to boost the purchasing power of households, improve incentives to work, and strengthen conditions for economic growth. Taxation must encourage people to start businesses and must support domestic ownership.

Due to the serious situation in public finances, the Government is implementing tax measures to strengthen public finances. These tax measures will have an impact of EUR 1.4 billion on public finances. The Government has chosen measures that treat people fairly and do as little harm as possible to economic growth. The Government also decided on tax measures to promote investments.

The tax ratio will not increase compared to 2023.

As new measures, the general value-added tax rate and the rate of tax on certain insurance premiums will be increased from the current 24 per cent to 25.5 per cent.

No index adjustment will be made to earned income taxation in 2025 to the two highest brackets of the central government income tax scale. In addition, the pension income allowance will be scaled back, but in such a way that the taxation of the smallest pensions will not increase. The tax increase on pension income will apply to people with a pension of EUR 23,000-57,000 per year. No changes will be made to the supplementary tax on pension income. The tax subsidy for voluntary pension savings will be discontinued from the start of 2027. The tax credit for household expenses will be reduced by EUR 100 million.

The validity of the tax subsidy for zero-emission, employer-subsidised cars will be extended, and the motor vehicle tax on electric vehicles and plug-in-hybrid vehicles will be increased. The tax on mined minerals, excise duty on tobacco products and excise duty on soft drinks will be increased more than previously decided. The tax on strong alcoholic beverages will be tied to the consumer price index. The tax subsidy for camper vans will be gradually discontinued over a 15-year transition period.

Starting in 2026, the deduction for donations will be expanded to donations to youth, culture, physical activity and sports organisations and to child organisations that meet certain criteria. The income base of municipalities will be bolstered by replacing the earned income allowance with an earned income deduction. This change will increase the tax revenue of municipalities and decrease those of the central government.

In accordance with the Government Programme, earned income tax bases are subject to an index adjustment in all income brackets in 2026 and 2027. The index adjustment will also be included as a technical assumption in 2028. Taxation of work will be gradually eased over the electoral period, with an emphasis on low and middle-income earners. A child increase to the earned income deduction based on the number of children will be adopted in 2025.

In its taxation decisions, the Government will take into account the Finnish Institute for Health and Welfare's recommendations concerning health-based taxation. The reduced value-added tax rate for sweets and chocolate will be increased from 14 per cent to the general value-added tax rate of 25.5 per cent.

Economic growth package

The Government will take measures to support sustainable economic growth in all of Finland. Boosting economic growth is vital to the sustainability of public finances. The Government Programme includes several decisions that will boost economic growth. These include improving permit procedures for investments, improving market competitiveness and boosting R&D investments in the national economy. The programmes for northern and eastern Finland, which will be ready by the end of 2024, will contribute to opportunities for growth in these regions. In addition to the growth measures set out in the Government Programme, the Government will take significant new measures to speed up investments.

In the current geopolitical situation and in the context of the EU's changed state aid policy, competition for industrial investments has intensified, and Finland's competitive position has weakened. Finland's inbound investment plans and projects largely relate to the production of electricity. To speed up investments, the Government is preparing to adopt a tax credit for large-scale industrial investments that support the transition to a net zero economy, for example, investments in battery and hydrogen projects and fossil-fuel free steel industry. This kind of tax credit is permitted by the EU's Temporary Crisis and Transition Framework. The goal is to get large-scale, electricity-intensive industrial investments off the ground and to support the creation of an industrial ecosystem for the clean transition in Finland.

The Government will bolster the ability of the new Finnish Industry Investment group to promote investment by reallocating a total of EUR 300 million of state investment assets to it (EUR 100 million/year) for direct investments. This investment in growth aims, together with private financing, to assemble a financing package of about EUR 900 million for growth companies during the current parliamentary term.

There are currently a significant number of investments in energy production and energy-intensive investments being launched across Finland. In this situation, it is important to ensure that power grids do not become a bottleneck for investments needed by the market anywhere in Finland. The Government is committed to ensuring the Fingrid and Gasgrid are able to make investments. This will be achieved through good ownership steering and, if necessary, by strengthening the capital structure of these companies to meet the needs of energy-intensive industrial investments. The Government is also committed to ensuring the capacity of the main grid in all of Finland and to ensuring that investments are made.

The Government will investigate an expansion of the infrastructure exception to the cap on the deductibility of interest expenses with respect to major energy projects, and implement this where possible. The Government will also look into improving the ability of non-profit corporations to invest in investment funds incorporated as limited partnerships starting in 2026. The Government will also invest in the growth, competitiveness and profitability of the bioeconomy sector with additional money for food exports, security of supply and forest sector value chains.

The Government will adopt occupational diesel for heavy goods vehicles when the EU's new emissions trading scheme for fuel distributors enters into force in 2027.

Major new investments in research and development

The Act on State Funding of Research and Development (R&D Funding Act) provides for an increase in central government Budget authorities and appropriations intended for R&D operations to a total corresponding to 1.2 per cent of GDP by 2030. It has now been decided to increase R&D funding by EUR 194 million in 2025, EUR 367 million in 2026, EUR 592 million in 2027 and EUR 562 million in 2028.

The Government will increase Business Finland's Budget authority for R&D funding by EUR 85 million in 2025, EUR 200 million in 2026 and EUR 360 million in 2027 and from then on. Funding will be allocated particularly to supporting corporate R&D activities and to cooperation between businesses and researchers. The Government is reserving EUR 250 million in funding for the replacement of the EuroHPC LUMI supercomputer with a new supercomputer.

The Research Council of Finland's Budget Authority for research projects will be increased by EUR 15 million in 2025-2026 and by EUR 45 million starting in 2027. A permanent annual increase of EUR 15 million will be made to the Budget authority for applications to the Research Council of Finland for thematic research infrastructure funding. In addition, new targeted funding will be created for the Research Council of Finland for joint research infrastructures (incl. testing platforms). This targeted funding will be allocated a EUR 20 million Budget authority in 2026 and a EUR 50 million Budget authority from 2027 onwards. The Government will allocate a total of EUR 40 million to the fixed-term post doc programme for research institutes. The funding will enable the hiring of a total of 85 post doc researchers for three years.

The national co-financing of EU-financed R&D projects for higher education institutions and government research institutes will be increased by EUR 15 million in 2025, EUR 20 million in 2026 and EUR 25 million from 2027 onwards in addition to the EUR 35 million previously decided. Central government funding for university-level medical and social work research in healthcare units will be permanently increased by EUR 5 million. An annual increase of EUR 4 million will be made to bioeconomy research and development.

According to the R&D Funding Act, state R&D funding must increase in 2025-2028 by about EUR 280 million each year compared to the previous year. The Government will not allocate all of this increase at this point, but will leave some room for manoeuvre in the coming years. The increase for 2028 will not be allocated, because it falls within the next parliamentary term.

The Government recognises that the cultural and creative sectors are industries that have significant growth potential. Business Finland will promote the growth and exports of the creative sector. As part of R&D funding, the Government will promote an increase of the R&D intensity of the creative sector and will promote the commercialisation of research-based innovations created in the fields of art and culture.

Outlook for the Finnish economy

The Finnish economy is in recession and production fell last year more than previously forecast. The increase in prices and interest rates has reduced investments and household consumption. However, the economy is expected to return to growth in 2025, when slowing inflation and a downward turn in interest rates, together with fairly good income development, will increase the disposable income of households.

Investments will also grow when the construction sector recovers from its current slump and the outlook for the global economy improves. However, the Government's adjustment measures will reduce domestic demand and dampen economic growth in the next few years. The Ministry of Finance's Economic Survey, which includes its new forecast, will be published on 25 April 2024.

State of public finances

Subdued economic growth and the weak trend in employment mean that the growth in tax revenue will remain slow this year. At the same time, expenditure is growing fast. The general government deficit was 2.5 per cent last year and will grow to well over 3 per cent this year without any additional measures. The Government is committed to taking additional measures to ensure that Finland does not trigger the excessive deficit procedure in 2024. Without additional measures, the general government deficit will remain very deep. The additional adjustment measures now decided by the Government will improve the general government deficit starting in 2024. Based on the calculations under the policy scenario, the adjustment measures of the Government Programme together with the additional measures decided now are expected to stabilise the debt ratio trend.

The Government will curb the growth in expenditure. The additional adjustment measures will ensure that the expenditure ceiling decided in the General Government Fiscal Plan in autumn 2023 will not be exceeded. As a result of the additional adjustment measures, the Government has also taken a discretionary decision to reduce the expenditure ceiling during the parliamentary term by EUR 430 million in 2025, EUR 612 million in 2026 and EUR 492 million in 2027. The Government has also decided to reduce the supplementary budget provision by EUR 100 million per year and the unallocated reserve by EUR 197 million in 2025, EUR 175 in 2026 and EUR 331 million in 2027. In addition, the criteria changes to be made to expenditure outside the spending limits will reduce expenditure by about EUR 100 million per year. The criteria changes will not be considered structural corrections that raise the expenditure ceiling and, therefore, these measures will reduce the expenditure of on-budget entities accordingly.

Savings to be used for reducing indebtedness

The Government Programme's solution of channelling savings in off-budget entities towards strengthening the public debt ratio will be implemented in 2025 in accordance with the entries in the minutes of the Government's budget session on 19 September 2023. The contributions of employees and employers will be balanced in line with the decision made in the government budget session of 2023. The solution will not increase taxes paid by employees and enterprises on average starting in 2023.

The channelling solution will allow unemployment insurance contributions to change as usual. The employers' share of the solution will be implemented by increasing their health insurance contributions, which will lower the insurance contributions of employees correspondingly. The employees' share of the solution will be implemented by increasing their medical expenses contribution. The total amount to be channelled will be scaled in such a way that the effects of the proposals affecting the off-budget entities under Annex B of the Government Programme, which have been specified in the preparation, and the decisions made in connection with the General Government Fiscal Plan 2025-2028 will be channelled in their entirety to achieve the Government's economic policy objectives.

Funding of wellbeing services counties

Central government funding for the wellbeing services counties will total approximately EUR 26.2 billion in 2025. Compared to the previous General Government Fiscal Plan, the level of funding will increase by approximately EUR 1.8 billion. This growth is explained, in particular, by the ex-post control under the Act on the Funding of Wellbeing Services Counties, which will be implemented for the first time in 2025 and amount to around EUR 1.5 billion. The rising cost level, the anticipated growth in the need for services, and changes to the tasks of wellbeing services counties will also affect the changes in funding.

In 2028, central government funding for wellbeing services counties will be approximately EUR 25.1 billion at 2025 prices. It is estimated that the amount of the ex-post control will decrease in 2026-2028 as the finances of wellbeing services counties improve. Moreover, funding will be reduced due to the changes to the tasks of healthcare and social welfare agreed both in the Government Programme and now in connection with the General Government Fiscal Plan.
The measures in the Programme of Prime Minister Orpo's Government are, to a large extent, already included in the General Government Fiscal Plan of autumn 2023. Of the discretionary changes to duties, transferring the responsibility for funding the reimbursement of travel costs for emergency medical services to wellbeing services counties will affect the costs and funding of wellbeing services counties in particular. The impact will total about EUR 130 million starting 2026.

In addition, the General Government Fiscal Plan now outlines measures to scale back the obligations of wellbeing services counties related to, for example, the maximum waiting time guarantee in primary healthcare, the minimum staffing level in 24-hour care for older people, and limiting the range of services offered by social welfare and specialised health care. Client charges in healthcare and social welfare will be increased by an additional EUR 100 million on top of the increase of EUR 50 million already decided in the Government Programme.

The savings target for the division of responsibilities between hospitals and urgent and emergency health services has been reduced. In connection with the preparation of the changes to the funding model agreed in the Government Programme, transitional equalisations will be changed to achieve a one-off saving of EUR 15 million in 2026 and EUR 20 million in 2027. The entry into force of the maximum waiting time for access to therapy for children and young people will be pushed back four months to begin on 1 May 2025 to ensure smooth implementation.

These new decisions will lead to a net reduction in funding of wellbeing services counties of about EUR 350 million in 2025 and about EUR 550 million in 2028.

It is estimated that the changes in duties will reduce the costs and funding of wellbeing services counties in the same amount and, therefore, the measures will not strengthen the finances of wellbeing services counties. On the other hand, the poor availability of staff has challenged both the operations and finances of wellbeing services counties. The shortage of staff increases cost pressures and impairs the availability of services. When deciding on measures, one of the Government's objectives has been to ease the execution of statutory duties and reduce the pressure to recruit additional staff for social welfare and healthcare services.

Situation of municipal finances

In the next few years, there will be a serious imbalance between municipal revenue and expenditure, foreshadowing tax increases and tight budgetary discipline. Without new measures the loan portfolio of municipal finances runs a risk of substantial growth. In recent years, pandemic-related support paid by central government and tax revenue delays created by the health and social services reform have kept municipal finances close to balance. Following the health and social services reform, the room for manoeuvre in municipal finances decreased significantly, highlighting the importance of proactive planning of the service network and the assessment of the need for investments.

Central government transfers to municipalities for basic public services will be increased by EUR 277 million from 2025 onwards. This will cushion the effects of the 2023 year-end update to the transfer calculation on the revenue and expenditure transferred from municipalities to wellbeing services counties. The effectiveness of local income tax will be improved by abolishing the earned income allowance and by simultaneously adjusting the central government taxation of earned income to limit tax increases. As a result, local income tax revenue in mainland Finland will grow on an annual basis by EUR 340 million, while central government income tax revenue will fall by EUR 415 million. Compensations for municipalities' tax losses will be reduced proportionate to the growth in their local income tax revenue.

In addition, as part of the new adjustment measures, the duties and obligations of municipalities will be reduced, or the income from charges of municipalities will be increased, by EUR 100 million from 2025 onwards based on the preparation for the programme for reducing the duties and obligations of municipalities and on the further work to be carried out before the government budget session.

The Government's new adjustment measures also target the municipal sector. However, it is estimated that the measures decided by the Government will improve municipal finances by a total of about EUR 130 million. In addition, the solution of channelling savings in off-budget entities, presented in the Government Programme, will reinforce the municipal finances by a total of just under EUR 100 million.

On-budget revenue and expenditure

Central government on-budget revenue, expenditure and balance, EUR billion

On-budget expenditure in 2025 is expected to be approximately EUR 87.6 billion, which is roughly EUR 0.5 billion more than that budgeted for 2024 (including the first supplementary budget proposal). The expenditure level will be lowered by reforms and expenditure savings in line with the Government Programme. The new adjustment measures decided now will reduce the level of central government expenditure by EUR 1.3 billion in 2025. The increase in the level of appropriations compared to 2024 is due to the ex-post control of the funding of the wellbeing services counties (EUR 1.5 billion) and the statutory and contractual index adjustments in 2025 (EUR 1.3 billion).

The slowing of inflation has halted the growth of general interest rates. However, annual debt interest payments are expected to rise from the EUR 3.1 billion projected for 2025 to EUR 4.0 billion by the end of the spending limits period.

The central government on-budget deficit is expected to total EUR 10.8 billion in 2025, which is EUR 2.1 billion more than that budgeted for 2024 (including the first supplementary budget proposal). In 2025-2028, the deficit will be EUR 8.5 billion on average per year.
Central government debt is expected to total around EUR 180 billion at the end of 2025, which is approximately 62 per cent in ratio to gross domestic product (GDP). Central government debt is estimated to be EUR 203 billion at the end of 2028, which is about 63 per cent in ratio to GDP.

The General Government Fiscal Plan will be adopted at the government plenary session on 25 April 2024. It will be published online on the same date.

Inquiries: Mikko Martikkala, Special Adviser to the Prime Minister in Economic Affairs, tel. +358 295 16001, Jussi Lindgren, Special Adviser to the Minister of Finance in Economic Affairs, tel. +358 295 530 514, Laura Ollila, Special Adviser to the Minister of Education, tel. +358 295 330 130, Marjo Loponen, Special Adviser to the Minister of Agriculture and Forestry, tel. +358 50 308 5411

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