Finland to increase VAT rate

The Finnish government has confirmed that the proposed increase in the Value Added Tax (VAT) from 24% to 25.5% will proceed as planned on 1 September 2024, pending Parliamentary approval. This change will elevate Finland's standard VAT rate to the second highest in the European Union, surpassed only by Hungary. Alongside the general VAT rate, the Insurance Premium Tax rate will also be adjusted to 25.5%.

Additionally, sweets and chocolate, currently taxed at a reduced rate of 14%, will be subjected to the new general VAT rate of 25.5%. This specific increase forms part of broader fiscal measures aimed at addressing Finland's economic challenges.

Background and Rationale

The announcement follows the initial confirmation made on 16 April by the Finance Minister. The urgency behind the implementation of the VAT hike is largely driven by the need to prevent Finland from breaching the Eurozone's government deficit rule, which caps the deficit at 3% of GDP. The VAT increase, along with other austerity measures, aims to raise €3 billion, thus contributing significantly to the country's fiscal stabilization efforts.

Finland has faced mounting economic pressures, with public debt relative to GDP more than doubling since 2008. Projections indicate that economic growth will remain sluggish between 2024 and 2026 due to cyclical factors, and the longer-term growth outlook does not promise significant relief. Consequently, the government has opted for immediate and substantial fiscal interventions to curb the deficit and stabilize the economy.

Impact on Consumers and Businesses

The VAT increase will have a noticeable impact on consumers and businesses alike. The standard VAT rate affects a broad range of goods and services, making the hike a pervasive influence on the economy. For businesses, this change will necessitate adjustments in pricing strategies, accounting practices, and potentially, customer relations as they navigate the implications of the increased tax burden.

Particularly affected will be the confectionery sector, with sweets and chocolate transitioning from the 14% reduced rate to the full 25.5% rate. This steep increase may lead to higher retail prices, which could dampen consumer demand in this segment.

Future Adjustments to Reduced VAT Rates

Further changes to reduced VAT rates are set to take effect on 1 January 2025. While the 14% and 10% reduced VAT rates will remain unchanged, several reclassifications announced last year are expected to proceed:

From 10% to 14%:

  - Books (excluding journals and magazines)

  - Hotel services

  - Public transport

  - Pharmaceuticals (currently at 10%)

  - Entrance fees to cultural and sporting events

  - Film screenings

  - Royalties for television and public radio activities

From 24% to 14%:

  - Tampons

  - Nappies

These adjustments reflect a re-evaluation of the classification of various goods and services, potentially aiming to align tax policies with broader social and economic goals. For instance, the reduced rate for tampons and nappies could be seen as an effort to alleviate the financial burden on essential hygiene products.

Economic Context and Future Outlook

The Finnish economy has faced a challenging trajectory over the past decade. Public debt has risen significantly since the 2008 financial crisis, and the recent pandemic has further strained fiscal resources. The government's decision to raise VAT is part of a larger strategy to ensure fiscal sustainability in the face of these challenges.

Economic growth in Finland is projected to be modest in the coming years, constrained by both domestic and international factors. Cyclical slowdowns, coupled with structural issues, suggest that the country will need to maintain a delicate balance between stimulating growth and enforcing fiscal discipline.

The VAT increase is a clear indicator of the government's commitment to addressing its fiscal deficit. However, it also underscores the broader economic issues that Finland must navigate. As the country moves forward, the interplay between tax policy, economic growth, and fiscal stability will remain a critical area of focus for policymakers, businesses, and citizens alike.

In conclusion, the upcoming VAT increase represents a significant shift in Finland's fiscal policy landscape. While it aims to address pressing economic challenges, its impact on consumers and businesses will be closely monitored. As Finland continues to adapt to its evolving economic environment, these changes will play a pivotal role in shaping the country's financial future.