TAX NEWS - June 2010

Finland Tax: IMF says Finland should consider abolishing tax deductibility of home loan interest

The International Monetary Fund (IMF) recommends that Finland consider cancelling the possibility to deduct interest on home loans from income taxes.

Lorenzo Figliuoli, the head of an IMF delegation, said in Helsinki on Monday that a gradually implemented cancellation of tax deductibility would benefit the Finnish economy by simplifying taxation and putting a damper on the rise in housing costs.

Figliuoli presented a statement drawn up by the IMF on the state of the Finnish economy.


The deductibility of home loan interest has cut Finnish state revenues by about EUR 500-900 million a year in recent years. The amount varies according to the prevailing interest rates.

The proposal is a politically loaded issue, and the idea would provoke considerable resistance.

Figliuoli emphasised that the IMF is not trying to dictate what Finland should do, but he feels that the question should nevertheless "be brought into open debate".
     

Reconsideration of aspects of taxation was one of the recommendations put forward by the IMF on ways in which Finland might best balance its economy.

In the recession that began last year, Finnish GDP - the combined value of goods and services produced in the country - declined by a record eight per cent.

At the same time, public finances went into the red. In 2008, before the slump, Finland's public economy had a 4.1 per cent surplus in proportion with its GDP, according to the Ministry of Finance.

The deficit emerged partly because the state has used public money to boost demand for goods and services, which has slowed the growth in unemployment. Figliuoli sees this kind of economic stimulus to have been appropriate and well-founded.

However, now he says that Finland should establish a credible plan to balance its public finances.

Tax increases and giving up tax breaks are seen as one way, according to the IMF. Other proposals are familiar: cutting spending and lowering the retirement age.
     

Structural savings in public expenditure should start already next year, in the view of the IMF, and should involve a sum that is equivalent to 0.5 - 0.75 per cent of Finland's GDP.

From then on, structural cuts should be implemented annually to the tune of about 0.5 per cent in proportion to GDP.

Figliuoli calculates that if Finland implements the recommendations, it would be able to close the sustainability gap that threatens the Finnish economy by 2020.
     

Balancing public finances is possible either by cutting spending, or increasing revenue through tax increases.

Figliuoli said that spending cuts offer "a more sustainable, stronger, longer-lasting and more successful" way to balance the public economy than tax increases.

He based his views on observations on what means have worked best in the past. One other aspect supports spending cuts, according to Figliuoli: taxation in Finland, and in many other European countries is already fairly severe, making it difficult to increase revenues through more tax increases.