Tuesday, October 3, 2023

The Economist on Orpo and Partners’ Savings List: “Why Business Subsidies Haven’t Been Brought Up in Government Negotiations?”


For the time being, there is silence around trade subsidies and tax subsidies, even though it is a batch of billions of euros to be spent – ​​and partly subsidies that have been found to be harmful or their effectiveness is unknown.

Government negotiators are currently exploring savings targets to counter the increase in public spending, especially Social Security spending, and debt. The wallpaper features both banana benefits, development cooperation funds and bulk other cuts that have been presented as potential savings targets by Ministry of Finance (MoF) surveys.

On the other hand, it has been quiet around a major spending spree, at least based on discussions and background papers that have been leaked to the public. For the parties, the delicate subject, i.e. renewal of trade subsidies, seems slim.

In particular, criticism of so-called harmful trade subsidies has been widespread, and much research has accumulated over the years on which subsidies should be cut. Successive governments have tried to cut subsidies, but companies are mostly silent.

So-called harmful subsidies do not encourage companies to renew themselves, for example, in a carbon-neutral direction.

Read more: Huge amounts of business subsidies have been paid out in the 2010s – in a budget crunch, at least one is about to be triggered

Back in November, the coalition’s shadow budget cuts list also included trade subsidies, with 343.4 million euros. Still, the cut back didn’t seem very concrete, as it was dismissed as saying that “cutting business subsidies has been too politically difficult to put into practice”.

Steel plant in Tornio.

Steel plant in Tornio. Photo: Antti Johansson

In the coalition’s election programme, business support was not mentioned at all, but there were other measures promoting the functioning of markets and competition. Business support was also not on the list of questions for the coalition government’s allies.

The alliance did not want to comment on the issue of trade subsidies during the talks. This does not mean that subsidies cannot be considered for the coming government term.

There will hardly be any major opening from basic fins, but business subsidies could be another point of contention.

In the coming government term, all contributions should be made to improve the operating conditions and competitive position of the domestic manufacturing and export industry, which the party has outlined in the election programme.

Atla Research Director Haley Kosky.

Atla Research Director Haley Kosky. Photo: Etla

– Cutting business subsidies has always been a difficult matter and certainly not easy even for a bourgeois government, explains Helly Kosky, research director at the Institute for Economic Research Atla.

– Let’s hope that business support will be on the renewal agenda as a means of adjusting public spending. Business subsidies are talking about spending in the billions, says Kosky, and cutting ineffective subsidies will not only lead to savings, but also make market operations more efficient.

In addition to Etla, Koski works as head of the Research Division of Business Subsidies of the Ministry of Employment and Economy (TEM).

Professor Joukko Vilmunen, who led the Economic Evaluation Council in the last term, says he has a fundamentally negative attitude towards business subsidies.

This question must be brought into the discussion whether the issue of business subsidy is also being raised in the government talks. What is the opinion of the parties.

Professor Jouko Vilmunen

Professor Joukko Vilmunen Photo: Markku Ulander / Lehtikuva

Vilmunen considers it understandable in itself that savings are sought from social spending, because the pot is so large. And the potential incentive problems of social benefits must be taken seriously. In 2021, social security expenditure was 78 billion euros.

– Let’s say the famous six billion euros, which seems relatively small in relation to social spending. But business subsidies are also a big draw. You can even get a billion out there. Yes, you have to go through it with a tight comb.

According to Vilmunen, the climate line of the original Finns creates a fear that some deadline will be pushed forward. An example of a rare reduction in business support is a tax refund for energy-intensive companies, which has been decided to be completely waived in 2025.

– This (original Finns line) may mean that we try to loosen the schedule.

Read more: IS inputs: This is how the savings list is prepared for government talks

According to information received from IS, the savings list of government interlocutors is prepared largely on the basis of (VM) expenditure and structure mapping. The ministry published the survey in early March. Tax subsidies for companies were controlled by the VM in the tax survey.

In none of these do business and tax subsidies figure prominently. The VM actually recommends cuts in business support, especially with regard to so-called maintenance business support, and directing support to R&D funding, ie research and development and improvement support.

According to Atlan Koski, most harmful to the Finnish economy is maintenance subsidies, ie subsidies that are allocated to activities other than R&D, and which result in skilled labor being allocated to activities other than R&D, says Koskikin. Are.

Examples of corporate subsidies considered harmful are corporate electrification subsidies, regional transport subsidies, energy subsidies and shipping company subsidies. Last year, 63.3 million euros were paid out in electrification subsidies. The regional transport subsidy was six million.

Finland will receive more than two billion euros in sustainable development RRF grants from the EU in the years 2021-2023.

Finland will receive more than two billion euros in sustainable development RRF grants from the EU in the years 2021-2023. Photo: Vesa Ranta

The total amount of support is a mystery

A Yale report a few years ago stated that trade subsidies lead to a loss of up to 8-9 billion euros per year. According to Yale, VM estimated that the amount of tax subsidies for companies was about seven billion and business aid about one billion. VM calculated subsidies more widely than Tem and included, among other things, tax breaks on dividends from unlisted companies, in addition to a reduction in VAT rates.

Read more: Here are the biggest recipients of business subsidies – a researcher ponders the strangest cases

The ministry says that the amount of business and tax subsidy cannot be predicted as of now.

– Over the past few years, we have increasingly identified problems related to computation, and so far no easy solutions have been found. The ministry said, we are considering the issue.

Instead, the Ministry of Finance publishes reports that detail the problems with tax subsidies. The Research Division of Trade Subsidies also criticizes VM in this regard and does not consider it appropriate to calculate the total amount of direct subsidy and tax subsidy.

Tax subsidies should be assessed on the basis of lost tax revenue, as there is no data on them.

Tax subsidy for large companies in 2022

Tax subsidies included in the depreciation of the acquisition cost of movable fixed assets 942 million

Tax relief for dividends of unlisted companies 680 million

Lower than the standard rate of tax for light fuel oil used in machinery 472 Me

Lower rate of electricity tax for industry and greenhouse in 831

730 million tax rate lower than standard for diesel fuel

“Traditional” direct business subsidies in normal times (in 2021:) 1.94 billion

Source: Business Support Research Division 2022 / TEM report

Many business subsidies are intended to support Finland’s carbon neutrality goals and industry competitiveness in the green transition. Finland will receive more than two billion euros in sustainable development RRF grants from the EU in the years 2021-2023.

Subsidies in the energy sector have increased their share of the support pot. For example, on the energy side, there are 15 different energy tax subsidies.

– There are over 90 different tax support instruments that can be considered as business support. Tax support once implemented is permanent, and their main goal is not always defined and the system becomes difficult to manage, criticizes the Research Division.

– In general, it is difficult for me to understand why production should be constantly supported. Benefit to society is too loose a criterion. Vilmunen says the risk is the withdrawal of support even for self-profitable companies.

– We have (otherwise) very little competition in many areas, with only a few odd large companies dominating the market.

There is research evidence that trade subsidies have reduced the exit of inefficient firms from the market in Finland and slowed down structural change, Koski says.

Read more: EK is ordering new comprehensive support packages for companies

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