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Finnish report Finnish report
by Euro Reporter
2012-02-17 09:38:56
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Finland’s economy stagnated in fourth quarter

Finland’s economy stalled in the fourth quarter as Europe’s deepening debt crisis hurt exports. Gross domestic product, adjusted for seasonal variations, was unchanged in the quarter, Helsinki-based Statistics Finland said today, citing preliminary data. In the year, the economy grew 0.7 percent.

“It would be unfathomable for such an export-led economy to grow in this global environment,” said Tuulia Asplund, an economist at Svenska Handelsbanken AB in Helsinki, by phone.  Europe’s sovereign debt crisis, now in its third year, is sapping demand for exports from Finland, home to companies such as Nokia Oyj. Exports make up about 40 percent of the northernmost euro member’s economy and a third of the exports are sold in the single-currency area.

Gross domestic product in Germany, Europe’s largest economy, fell 0.2 percent from the third quarter, when it increased 0.6 percent, the Federal Statistics Office in Wiesbaden said today. The data are adjusted for seasonal effects. Today’s quarterly data for Finland, calculated based on a monthly trend indicator of output, is “indicative” of the actual fourth-quarter GDP, Asplund said. The economy expanded 1.9 percent in December, accelerating from 1.3 percent in November, the trend indicator showed.


Finland urged to reduce labour taxes

The Organization for Economic Cooperation and Development (OECD) has urged Finland to accelerate the pace of tax reforms to support fiscal consolidation and tackle the fiscal challenges of an ageing population. The OECD said that while the nation's budget deficit is small, current fiscal plans are not ambitious enough to tackle future challenges. The Organization has called for the introduction of various measures to reform the tax system while undertaking reforms in the area of healthcare, pensions and welfare.

The Report says that Finland's longer-term fiscal challenge is severe compared to other EU nations. “A low deficit and debt level means that relatively small additional consolidation efforts would be needed to stabilize debt based on current spending pressures. However, a fast-ageing population and a low effective retirement age will increase spending pressures significantly over the coming decades. Age-related spending in relation to GDP is estimated to increase by 5.4% between 2012 and 2030, mostly reflecting rising pension costs." Based on government projections fiscal changes worth 4.5% of gross domestic product would need to be found to meet these demands, the OECD said. “The longer-term nature of the fiscal challenge and the bleak outlook for the economy mean that fiscal improvements should primarily be reached through labour market and pension reforms, rather than upfront consolidation, thus lowering spending and boosting revenues in the longer run,” the report states.

Presenting specific recommendations, the report advocates that the Finnish authorities should: Continue to lower the taxation of labour with priority given to lowering the top marginal tax rate on labour in order to keep and attract highly skilled jobs and to reduce incentives for income reclassification. To date, taxes on earned income have been adjusted to compensate for inflation and higher earnings; Remove the opportunities offered by the dual tax system for high income earners to reclassify labour income as capital income; and lower the threshold for taxation of dividends for closely held corporations; Raise property tax revenues by setting property assessment values (for tax purposes) equal to 100% of market valuations and by raising property tax rates; Raise the minimum municipal tax rates on all immovable property types and remove the maximum threshold. Extend the property tax base to agricultural and forestry land; To improve incentives for municipalities to raise more revenue from property taxation, apply a maximum tax rate on labour income (instead of to property as at present). To ease the transition, a relatively high maximum could be levied to start with, with gradual reductions over time. Alternatively, oblige municipalities to match any increases in income tax rates with proportional increases in property tax revenues; Eliminate the share of corporate income tax flowing to municipalities. Fill the resulting funding gap by a combination of higher property taxes and higher state grants. During the recession the share of corporate income tax revenues directed to municipalities was increased from 22% to 32%. Under government plans, this share is to be reduced to around 28% for the period of 2012-2013; Consider ways to further broaden the corporate tax base. The OECD voiced support for the reduction in the corporate income tax rate to 24.5% from 26% in 2012; Raise the revenue efficiency of the nation's value-added tax (VAT) regime by eliminating reduced VAT rates. Use the additional revenue to lower either the overall VAT rate or labour taxes more generally. Tax-cutting potential in the short-term should not be used to further lower reduced VAT rates as currently planned. Under current plans, the VAT rate for newspaper and magazine subscriptions is to be raised from 0% to 9% in 2012.


Connections main source of corruption

The most widespread form of corruption in Finland is getting things done through old boys’ networks, according to the National Integrity System report commissioned by the Finnish chapter of Transparency International. Old boys’ networks are often a source of conflicts of interest, especially in municipal politics, find researchers at the University of Vaasa, who carried out the study. They say the situation has improved in recent times as cases involving close ties between politicians and business interests have attracted much attention.

While Finland generally did well in the assessment, the report pointed out that information about the work of public officials is not always readily available to citizens. This results in a lack of transparency that can be a source of corruption.

”It is vitally important that civil society, the media and business are involved in the fight against corruption”, said Pentti Mäkinen, Chair of Transparency International Finland, in a press release. Transparency International Finland says that the authorities, including the tax office, the customs, the police and the Office of the Chancellor of Justice, should cooperate more in the fight against corruption.

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