Finland decides against VAT increase as taxes rise

Sat 29th Mar 2014

The Finnish government announced a raft of tax rises and benefits cuts on 25 March as it aimed to bring its deficit down to 1% of the GDP. The Euro currency target is 3%, but Finland has always insisted that all member of the currency union should take a hard line on austerity measures.

VAT rise avoided

There was a debate about raising the Finnish VAT rate, which is currently at 24%. Neighbouring Scandinavian countries such as Sweden and Norway are mostly at 25% VAT. The Finnish VAT rate was increased from 23% to 24% at the start of 2013.

Having decided against a VAT rise, which could have generated €0.3bn, the government instead chose to raise income taxes on the rich taxpayers, and increase Capital Gains Tax. There will also be extensive cuts to child benefits, unemployment benefits and international aid budgets. The mix of tax rises vs spending cuts is 40:45, which is relatively high. Economists typically recommend only 30% share of austerity measures coming from tax rises since they have a dampening effect on the wider economy and restrict the ability, or motivation to invest and grow for businesses.