Local authorities shall be entitled, within national economic policy, to adequate financial resources of their own, of which they may dispose freely within the framework of their powers.
Municipalities have real control of their finances and they can control their revenue base (taxation and fees) and debts with considerable freedom. The state grant system guarantees each municipality a calculated share of the overall grant without subsequent state control, risk of reimbursement or earmarking.
The municipalities in Finland have the right to collect municipal tax. Each year, the municipal council sets the income tax rate, which, for instance, is 22% in the town of Raasepori at the moment. Furthermore, the municipality collects 0.37-1.35% of real property tax depending on the nature of the real property, and a share of the corporate tax mainly corresponding to the portion of the corporate tax paid by local corporate taxpayers. In the case of Raasepori, for instance, these taxes, taken altogether, constitute 57% of the municipality’s income. Moreover, the municipalities have the right to collect dog licence fees but a very few municipalities actually do so.
The Finnish Tax Administration deals with taxation on behalf of the municipalities. The municipalities pay a part of the government’s tax-related expenses. The municipality is not entitled to collect any separate local taxes.
The current legislation describes the financial equilibrium quite clearly. If the yearly municipal financial account registers a cumulative deficit, the municipality must prepare a balancing plan for 4 years to bring it back into surplus. Municipalities are also very well aware of the economic indicators that show the need for an assessment procedure and can adjust their activities to prevent it from happening. The accounts must be in balance or in surplus. A deficit in a municipality’s balance sheet must be eliminated within no more than four years from the start of the year following adoption of the financial statements. In its financial plan, the municipality must decide on specific measures to eliminate the deficit during the stated period.
Municipalities have the power to change tax rates, take out loans, add fees, and control cost development through benchmarking, etc. Municipal financial departments usually have considerable expertise and they regularly make use of externally developed cost-control techniques and services. In optimal circumstances, civil servants and local politicians have a good mutual understanding of their responsibility to keep expenditure on a well-balanced course. This is a challenging task in circumstances where the public demands more and better services and measures targeting quality levels and the range of services available are unpopular.
With regard to the upcoming reform, according to the parliamentary Green party group, the municipalities are mainly concerned about their funding, the details of which are still undecided. The municipalities could lose more than half their functions and funding. It remains to be seen whether the remaining funding will be adequate to cover the necessary services, building and maintaining the infrastructure linked to them and managing debt already accrued. Municipalities are also concerned about the continuity of the chain of service when the municipality provides a certain part of a service and the region the rest. For example, employment services are linked to social services, etc. It is possible that regions will contract out some of their functions such as employment services to larger municipalities if these municipalities have established well-functioning practices. It is preferable to maintain flexibility in the division of labour. If the ongoing reform proceeds as planned, the self-government of regional bodies will be more restricted than that of the current municipalities, and their finances will be more tightly controlled.
The balance between responsibilities and finance (the commensurability principle, Article 9, para. 2, of the Charter) has been a much debated question in Finland for many years. The Constitutional Law Committee of the Parliament has stated: “When imposing legal obligations (on local authorities) it must be ensured that they have actual capacity to fulfil their duties” (25/1994). The Constitutional Committee often refers to this statement when evaluating the financial capability of local authorities to perform new functions. Furthermore, in Prime Minister Sipilä’s Government Programme of 2015 it is said that “The Government will not assign municipalities any new duties or obligations during the term of the government. If cuts are made in central government transfers to local government, the Government will reduce municipalities’ duties to the same extent”. During the visit, the Mayor of Raasepori pointed out that in the past it had happened that the State had delegated new tasks to municipalities but failed to compensate them adequately for carrying them out. During the consultation process, the Government expressed its intention to solve this problem. The current Government has promised to review and reduce municipal duties through the so called Reform 2: Cutting local government costs by removing tasks and obligations. A Rapid Response Query on the subject was also addressed to the Council of Europe Centre of Expertise for Local Government Reform in February 2016. Several of Finland’s national governments have made statements in government programmes at various times in which they attempted to make their stance on this issue as clear as possible, but it has sometimes been challenging to strike the right balance between the provision of funds to cover the costs of some new duties and the tendency for sectoral ministries to add substantial numbers of tasks while failing to investigate sufficiently what their impact will be on municipal finances. The AFLRA has made its opinion quite clear on this subject and has helped to establish clear guidelines on how funding of new duties should be arranged.
The government programme for local government finances contains a special section looking into the adequacy of funding in various municipalities. The analysis tool (Programme for Local Government Finances) has been developed over the last few years and is currently orientated towards various municipal size categories (by population) and the financial burden is expressed in terms of the need to raise local income taxes. The Ministry of the Environment and the Ministry of Transport and Communications are now involved in the preparation of this programme, in cooperation with the Ministry of Social and Health Care and the Ministry of Education and Culture, in order to provide a better guarantee that any legislation they prepare will take due account of local government and local financing. As the programme stands, there are obvious challenges concerning the balance between finances and duties. The programme highlights the groups of municipalities that must be especially careful over the next few years.
In the revised Local Government Act, financial issues are mainly dealt with in Part VI, from Sections 110 to 125. The emphasis in this part of the Act is on tighter control of local finance. Local councils are expected to assume a key role in managing municipalities and to exert greater control over the whole local authority as a corporate entity, including monitoring of municipal companies. The new legislation underlines the role of financial planning in striking a better economic balance, controlling debt and assessing the risks run by the municipality.
For municipalities facing particular economic challenges there has been a so-called assessment procedure that entered into force in 2007 (see Section 118 from the LGA). This procedure has focused on operational matters and helped municipalities to balance their finances through concrete measures and good co-operation with the State. In this way, Finland has also followed Recommendation 311 (2011) when dealing with this problem. According to the Finnish Ministry of Finance during the consultation process, a municipality must begin the procedure with regard to indicators related to indebtedness, the municipal income rate, the balance of budget and accumulated deficit. Section 118 of the LGA provides that the procedure can be started in case of excessive municipal budget deficit for more than four years or in the event that two successive annual financial statements of a municipality show some indicators as a deficit per resident of a certain amount, a relatively high local rate for the income tax or an accumulated deficit of local authority corporations. All indicators are defined by the law, and the Finnish authorities stressed that the new legislation of 2015 introduced some minor simplifications in the indicators as well as taking account of indicators covering the whole local authority corporation. Another major change is that joint municipal authorities will be included in the procedure in addition to single municipalities (see Section 119). Joint municipal authorities are assessed by one designated auditor and his/her report is sent to all the municipalities in the joint body rather than to a special working group consisting of ministry and municipality members as is the case when a single municipality is being assessed.
The updated state grant system has been in use since the beginning of 2015. The new system has made financing more open and transparent by reducing the number of factors entering into the calculation and refining cost factors to better reflect actual changes in costs in municipalities. The new system brought in some changes in state grants in the remotest areas, helping them to fill some gaps in financing and thus better guaranteeing basic services for citizens.
Through the new Local Government Act, the new programme for local government finances was introduced (Section 12). The aim of the programme is to evaluate the current situation of local government finances and to calculate possible changes over the next few years. The programme is part of a Public Sector Finances programme (based on and introduced under EU legislation) and it is intended to provide a picture of local government finances as a whole and an indication of the level of development in different-sized municipalities. The programme is not aimed at a specific municipality, but it provides a general economic framework for them to assess their current situation and how their finances may evolve in the future. The programme is linked to the state budget and restricted by an expenditure limit set by the government. This is a fixed framework for the term of government, whose goal is to strike a better balance between services and finances (in local authorities). The government has set key goals to reduce the burden of municipalities’ duties while at the same time achieving cost savings in social and health care services.
According to the Left Alliance Party the new regional authorities should have the right to collect taxes and hence have the best possible control over the funding and management of their responsibilities. The SD (Social Democrat) parliamentarians have also argued that if the new regional level is not given the right to collect taxes or to take out loans for investments, it is questionable whether this kind of reform can be called “regional” because in practice it will function in practice as a part of state government and the only aspect of self-government will be the election of regional councils. However, according to the legal advisor at the AFLRA, there is an outstanding question as to whether the regions are allowed by the constitution to levy taxes. Article 9, para. 3, of the ECLSG provides for the right to levy taxes but this right is denied to regions based on the argument that the Constitution does expressly allow this only for municipalities. During the consultation process, the Finnish Government acknowledged that, according to the draft legislative proposal, “the new regional level will have a sound base for financing” It will receive state grants on a calculatory base […] The regions could also freely define and set the level of user fees and charges”. Therefore, “the taxation right of the new regions can only be analysed in the next phase of the reform”. However, the rapporteurs wish to draw the attention of the Finnish authorities to the need of tangible guarantees in tax matters for genuine regional democracy. Both the Charter and the Reference Framework for Regional Democracy require that, in the implementation of their own competences, regional authorities shall be able to rely in particular on resources of their own of which they shall be able to dispose freely. These instruments also provide that the financial systems, on which resources available to regional authorities are based, shall be of a sufficiently diversified and buoyant nature.
From a public finance viewpoint, and in order to be successful, social welfare and health care reform requires clearer steering by the government. Above all, it requires all the stakeholders to take joint responsibility. This is the view of the rapporteurs appointed by the Ministry of Social Affairs and Health. While people's well-being and health need to be improved, it is also important to be aware of the limits of available financial resources. Proponents of the reform say that change is needed because of the growing need for services among the ageing population, the changing range of illnesses, wider possibilities for treatment and greater public expectations, which, when taken together, create strong pressure for mounting costs. Slow economic growth and a high total tax rate by international standards are an incentive to find new ways to curb rising costs. Lastly, there are major inequalities between different areas and groups.
The trend is towards an older age structure. Because of this, extra staff and infrastructure capacity is needed because of high retirement rates among staff, especially in many remote municipalities. Municipal services could be more efficiently set up in the larger areas, with tighter control on investments and duties, yet at the same time a better guarantee of public services for more vulnerable, risk-prone remote areas.
Because of tight public finances now and in the future, proper control must be exercised over cost development and investments in all parts of the country, preventing overlapping investments and channelling resources to the right measures. One of the key challenges is to find a capable workforce with essential economic and administrative skills and to prevent the unnecessary loss of good workers. Small municipalities are not always the likely winners – they are increasingly challenged by the shortage of capable staff, leading to increased workloads and compromises on the quality of the expertise provided in some cases. By curbing duties, improving organisation, developing planning and digitalising services, it is possible to make savings. The savings target for the healthcare and social welfare reform package is €3 billion by the year 2029. The projected annual growth in healthcare and social welfare costs has to be cut from 2.4% to 0.9% between 2019 and 2029. If the reform fails, it will leave many remote municipalities with the big challenge of balancing their budgets with limited means.
Moreover, the economic crisis has reduced the municipal tax base and increased unemployment and social security costs. The debt to GDP ratio has risen rapidly since 2008.
Finnish public finances have been running a deficit since the end of the last decade. The budgetary position is set to improve slowly in the years ahead, but still it threatens to remain in deficit. General government debt to GDP ratio has increased for several consecutive years, and there is no significant turnaround in sight. To achieve long-term sustainability in general government finances, the budgetary position would have to recover to show a surplus of around 2% of GDP by the end of the decade. The economic crisis has also had an impact on municipalities. High unemployment rates and structural unemployment have increased municipal expenditure and had an adverse effect on tax revenues. Central government has also cut its transfers to local government as part of the measures to strengthen central government finances. In addition to the economic crisis, the municipalities are burdened by the effects of the ageing population, which increases the demand for services. However, so far municipalities have been able to consolidate their finances and fulfil their tasks and services. The central government has also tried to limit the impact on municipalities by temporarily increasing local authorities’ share of corporate income tax. This temporary increase will end in 2016, however. Furthermore, according to the current government programme, central government transfers to local government will not be cut further without enabling a similar cut in local government expenditures by reducing municipalities' duties and obligations.
With the upcoming regional reform, it is currently planned to introduce some legislative restrictions, especially on investments. This is mainly the result of municipalities’ current actions. They have generally kept their finances reasonably under control, but there have been some cases of excessive investments in the social and health care sectors (hospital projects). These restrictions are necessary to prevent legal measures which may undermine the whole basis of public finances.
On the whole, Finnish local authorities have shown good understanding of the effects of the economic crisis at state level, including the increased burden on the national debt. The municipal sector has also understood its important role in keeping local investments and the economy as a whole going. It has been able to invest a great deal in municipal infrastructure, roads, other transport networks and hospitals and some renovation of other buildings. Lower demand has allowed better investment deals to be negotiated in many cases and the price of loans has also been very reasonable. There have been some exceptions, but most investments have been controlled and cost-effective. In addition to controlling investments, the municipalities have taken a very cautious approach in recent years, aiming to exercise better control over their finances, with positive results in many cases. Because finances are tight, the State has made some cuts to state grants, but it has partly offset this by giving municipalities a temporarily larger share of corporate tax (increasing from 5 to 10% between 2009 and 2015).
The rapporteurs conclude that at present, Finland fully complies with Article 9 of the Charter. As in most countries, there are some concerns regarding the commensurability principle (paragraph 2 of Article 9) as additional tasks have been transferred to municipalities and complaints have been made about the lack of corresponding financial resources. However, it is obvious that considerable efforts have been made to introduce appropriate criteria and procedures to provide for financial resources that are commensurate with municipal responsibilities, and progress has been made in this respect. The Finnish authorities have also tried to deal with the problem of over-indebted municipalities, which was highlighted in the Congress’s previous monitoring report and in the related Recommendation. New rules and procedures have been introduced to tackle the problem of indebtedness. The current financial situation of Finnish municipalities appears satisfactory from the Charter standpoint. With respect to the SOTE-reform, the Finnish Government acknowledged during the consultation process that regions will be “free to set all sorts of charges and fees for services they provide, within the limits of legislation”. Moreover, it stated that regions will have “ free control to use resources and hire personnel to manage the services or resources”, that the state grants to the regions will not be calculated on a discretionary basis and that “there will be no earmarked transfers to regions”. Nevertheless, the ongoing regional reform has given rise to some concerns as, under government plans, the new autonomous regions will be denied tax-levying rights (at least during the initial stage of their existence) and this would unlikely satisfy the requirements of paragraphs 1 and 3 of Article 9, and of the Reference Framework for Local Democracy. Furthermore, the rapporteurs express their concerns with regard to the financial system for the new SOTE regions that may fail to be of a sufficiently diversified and buoyant nature, while state grants and financial transfers to the new regions would be mostly used for a limited number of specific services and projects, leaving a narrow margin of discretion to the regions’ elected councils. Insofar as the regional competences for funding would remain limited, this might contravene de facto paragraph 7 of Article 9 of the Charter.
