March 22, 2012 / 9:21 PM / in 5 years

Finland to raise VAT but opts for modest budget cuts

3 Min Read

Finland's Prime Minister Jyrki Katainen speaks during a news conference at the end of a European Union leaders summit in Brussels March 2, 2012. REUTERS

HELSINKI (Reuters) - Finland, seeking to retain its triple-A credit rating, will raise VAT in 2013 but has opted for modest budget cuts in the next few years after the government bowed to pressure from left-leaning coalition parties.

Unveiling a budget framework for 2013-2016 on Thursday, conservative Prime Minister Jyrki Katainen, who promised drastic fiscal reforms when he was sworn in last year, said the government will cut the budget by 2.7 billion euros ($3.6 bln) from 2013 through 2016. That is nearly half the amount recommended by treasury officials after left-leaning coalition parties argued against bigger tax rises and tinkering with welfare benefits.

The general value-added tax rate will rise to 24 percent from 23 percent next January, still 1 percentage point lower than 25 percent VAT in neighbours Denmark, Norway and Sweden.

Finland has one of the strongest balance sheets in Europe with public debt estimated at 49 percent of gross domestic product (GDP) at the end of 2011, and the government ran a budget deficit of just 0.5 percent of GDP last year.

Some economists, however, say weak growth and a rapidly ageing population make it a fiscal time bomb. Central government debt, which was around 80 billion euros at the end of 2011, is estimated to increase by 18 billion euros over the 2013-2016 period, the finance ministry forecast on Thursday.

The Nordic country is one of few euro zone members to have retained a top-notch credit rating in the wake of the bloc's debt crisis, but Standard & Poor's has a negative outlook on Finland, meaning a ratings downgrade is possible this year or next.

Katainen said the multi-year plan, which combines 1.2 billion euros in spending cuts and 1.5 billion in tax hikes, aimed to strike a balance between securing economic growth and maintaining Finland's standing in the eyes of international investors.

"These actions will not hurt the economy," he told reporters. "With this package we can maintain our outside credibility essential for keeping the credit rating."

The government said it will announce its latest economic outlook in early April, with economists expecting weak growth in the next few years. In 2011, Finnish GDP grew 2.9 percent.

Thursday's budget plans follow weeks of negotiations between Katainen's conservative National Coalition party and other members of the six-party coalition government.

The popularity of the Finns Party, the anti-euro opposition group, has made Katainen and his party heavily dependent on its coalition partners.

($1 = 0.7582 euros)

Writing by Ritsuko Ando; Editing by Susan Fenton and Andrew Hay

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