The economy of Helsinki
Basic services consume city budgets
Finland is a municipal state. Two thirds of the public service production is in the hands of municipal self-government. In this respect, Finland differs rather significantly from many European countries, as Finland has entrusted the municipalities with the provision of many such services that in other countries are the responsibility of larger administrative units or the state.
In spite of municipal self-government, however, municipalities are very dependent on the state. When the national economy grows, municipalities also receive their share of the growth as increasing tax revenues. When the economy contracts, the state cuts its subsidies to municipalities. These subsidies are the biggest single item in the state budget.
The state requires municipalities to provide services for their residents. It participates in the costs arising from their provision by paying state subsidies.
This article examines on a broad level the development of Helsinki’s expenditure and income from 1950 to 2011. The increasing costs of the services required by the state have reduced the amount of leeway left for the city’s economy.
Since the turn of the millennium, there have been years when tax revenues and state subsidies have been inadequate for the funding of basic services and investments. The deficit has been filled mainly with surplus income entries by the city-owned utility Helsingin Energia and by increasing the tax percentage. Investments have partly been financed by debt.
Expenditure increases – more functions decentralised to municipalities
In the post-war period, Finland built a welfare state. Citizens were offered new services and previous ones were expanded. The state encouraged municipalities to expand their services by participating in the costs arising from them by granting state subsidies.
Nevertheless, the state was short of funds. At the beginning of the 1950s, several committees worked to reduce state expenditure. These were popularly called ‘slaughter committees’ (teurastuskomiteat). Methods proposed included the reduction of state aid to many municipalities as well as stopping it completely for some municipalities, or granting it only on a discretionary basis. The central organisations of the municipalities were unanimous in criticising the proposals. The criticism was fierce, but the division of costs between local and central government has been a perennial source of conflict.
In the current debate as to how to close the ‘sustainability gap’ related to ageing-related costs, the proposals to cut state subsidies to municipalities are again on the table. Because of this, it is worth revisiting an editorial in the local government journal Kuntalehti in 1951. It shows that the state policy and debate have not changed much in 60 years. There appear to have been calls to rethink the norms already in the early 1950s, even though the municipal functions at the time were far fewer than they are now.
Wrong kind of saving
The government’s proposals aimed at reducing expenditure have assumed their strangest form in the report by the so-called 'slaughter committee’, which was completed last spring…It must be said in short that the country’s municipal sector has hardly ever seen a document which has been prepared by an eminent state committee but which is so one-sided and so blind to the situation of the municipalities as the report of the said committee. It is quite simple to save state expenditure by cancelling or fundamentally reducing state subsidies paid to municipalities for specific administrative branches. It is easy to see that this kind of saving is like weaving a cloth by unravelling it from the other end. The same citizens are part of both the state and the municipalities. No real saving will take place by reducing the state’s expenditure and forcing the municipalities to correspondingly increase their expenditure. What will be achieved is that the tax burden will be increasingly transferred to the municipal taxation side and, owing to the nature of the apportionment tax of our present municipal taxation, will encumber those sections of the population not subject to state income taxation or only slightly subject to it. Significant economies will only be achieved by changing those regulations valid in different fields of administration, which set the level so high and, because of that, also make it as expensive as it is these days.
Suomen Kunnallislehti, No. 7, 1951, Editorial
Public health, basic education, children’s day care
In the 1970s in particular, services were expanded by virtue of the Primary Health Care Act, Children’s Day Care Act and the Basic Education Act. In the municipalities, the state subsidies covered on average one-third of the net costs. In Helsinki their share was lower than the average.
Central and local government gradually grew together into an integrated public administration entity. This development took place at the cost of the municipalities’ independence. The original wide-ranging autonomy of municipal self-government gradually gave way to the pressures of integration.
The municipal system was granted independence expressly to take care of local public services, in other words as a provider of public services based on the discretion and requirements of its own decision-making bodies.
According to Martikainen and Yrjönen (1977), the function for which the municipal system was given its independent position has, over time, also formed the justification for reducing its independence. More stringent demands to provide public services nationally in a uniform way have led to a requirement to standardise the activities of the municipal system providing public services, as well as the control and supervision of that activity.
Although the state took part in the costs arising from expanding obligations, an increasing share of the yield from Helsinki’s tax percentage went to the so-called basic services, as shown in Figure 1. Basic services here include social and health services as well as education, culture and leisure services. Not all the specified basic services are compulsory to the extent that they are organised in the municipalities.
Recession in the early 1990s cut more than one fifth of Helsinki’s tax revenues. At the same time, the state reduced its subsidies to municipalities in order to balance its economy. As a result, tax funding was no longer sufficient to cover the costs of basic services.
Helsinki’s expenditure has grown at a moderate pace. Services have been expanded when the income base has so allowed. People have taken a stoic attitude to the increase in tax percentage. The city's population growth and the new functions required of municipalities have necessitated an increase in the number of staff employed by the city (Helin 2002).
'Stabilising' municipal finances
Tax reform in 1993 severed the connection between taxes paid by corporations and the income tax percentage. Since 1993, the net costs of basic services have been proportioned to the city’s tax revenues and state subsidies (Figure 2). The sum of tax revenues and state subsidies is called tax funding.
Figure 2 shows the net costs of basic services from 1993 to 2011 and tax funding in euros per resident based on the value of money in 2011. The figure has some comparability issues on both the expenditure and income sides.
In the early 2000s, a change occurred in the economy of Helsinki: tax funding was insufficient to cover the net costs of basic services. Behind this was the ‘municipal economy stabilisation solution’ of the Lipponen Cabinet in 2002.
In a 2002 reform (Helin 2008), the state abandoned the recovery of value-added tax refunds, and in return decreased the municipal share of corporation tax yields by a corresponding amount. At the same time, the tax revenue equalisation of the state subsidy system was revised, which reduced the state subsidies of Helsinki and Espoo in particular. As a result of this reform, Helsinki lost about 1 billion Finnish marks (€170 million) in the year the system was introduced.
Thus began a review of the city's administration and a quest for savings. The figure also shows that expenditure was reduced and growth slowed down in the 2000s. Growth has been less than in many other cities. In spite of this, tax funding has not covered the costs of basic services.
In 2011, Helsinki increased its income tax percentage by one percentage point. That resulted in a situation where tax funding covered the costs of basic services for the first time. In 1993, the tax percentage was 16.00 and in 2011, 18.50.
Energy income entries and an increase in debt
Helsinki’s financial leeway has narrowed as the costs of the so-called compulsory functions have increased. Room for manoeuvre has been provided for Helsinki by the city-owned public utility Helsingin Energia, from which the city entered as income a surplus €1.5 billion between 2003 and 2012 (Figure 3).
In the long term, however, the funding of basic services cannot be based on the profits of utilities. Achieving the emissions targets of the City of Helsinki will make a hole of tens of millions of euros in the city’s revenues. Moreover, the state will take its share in taxes of any possible future incorporation of Helsingin Energia.
The city has had to fund part of investments through debt. In 2000, the city had loans amounting to €0.2 billion, and in 2012 €1.2 billion.
State to tighten the municipal economy in the coming years
In spite of Finland's municipal self-government, the municipal economy has been something of a left-over of the state economy. The underlying assumption has been that, whenever the benefit of the state so requires, the municipal economy can be flexible.
There are no great prospects of better times ahead for the municipal economy in the coming years, either. According to the Ministry of Finance, the Finnish economy has a 'sustainability gap' of 4.7% of gross domestic product, i.e. approximately 9.5 billion euro. The Government has said that half of this deficit must be covered by local government (Government’s structural package 29 August 2013).
For the period 2014–2017, in addition to decisions already made, the Government also specifies that the municipal sector will be obliged to save 2 billion euro. The intention is to save one billion by eliminating municipal functions and obligations. The municipal functions survey shows that Finnish municipalities have 535 statutory functions and almost 1,000 obligations, whose significance to the municipal economy varies.
At the turn of the 1990s, the Free Municipality Experiment introduced efforts to relax norms for municipal functions. In 2009 and 2010, the so-called ‘norm bee' (normitalkoot) project, was implemented, with the purpose to study, reform and – if necessary – abolish norms that hindered the improvement of municipal productivity.
The Ministry of Finance has constantly criticised municipalities for lax financial management. This criticism has not stopped either the Government ministers nor Parliament from coming up with ideas for new functions for municipalities. Well-meaning political projects are constantly underway but their final costs are often unknown or estimated too low. In the end, however, the municipality pays the bill. It is therefore no wonder that the municipal economy has tightened.
Structural reforms, the removal of norms and the pruning of municipal functions sound sensible, but for some reason the costs arising from new functions are not taken sufficiently seriously when decisions to adopt them are taken. As things are, one is easily mistaken into thinking that the municipalities are incapable of looking after their own finances, even though the tightening of the municipal economy largely stems from new functions imposed by the state and cuts to the state subsidies.
The Government, however, has failed to concretise where the discharging of functions should begin and which functions should possibly be discontinued. Major savings require, for example, an increase in group sizes in day care and schools, a lowering of the qualification requirements for municipal personnel and adjusting staff numbers.
The structural reform plans underway concerning municipalities and services will not save municipal expenditure, at least in the short term. On the contrary, they – and the state subsidy reform that is a standard part of every government programme – cause uncertainty in the municipalities, which doubtless has an effect on the operations and decision-making of the municipalities (Helin 2011).
The second billion will be raised through tax rises and, for example, by improving productivity. If that billion were to be raised completely through tax rises, that would mean an increase in the municipal tax percentage of more than one percentage point and a reduction in staff numbers. Municipalities have been forced into tax rises by record cuts to state subsidies; these cuts have already been agreed upon. Improving productivity is a staple concept of government bills, albeit one that is politically difficult to concretise. Government papers mention a reduction of 20,000 municipal employees.
According to Minister of Finance, Jutta Urpilainen, "we are in the middle of a fog and are trying to navigate." All we know for sure is that the municipal economy will tighten even further.
Heikki Helin has recently retired as Senior Researcher at the City of Helsinki Urban Facts. The present article is based on his article in the centennial publication of Urban Facts, "Helsingin talouden muutos 1950-2009" ("The Changes in Helsinki’s Finances 1950–2009").
Figure 1. Pennies/tax unit of net costs of Helsinki's basic services and tax unit 1950–1992.
Figure 2. Helsinki tax funding and the net costs of basic services from 1993 to 2011 in euros per resident (based on the value of money in 2011).
Figure 3. Income entries for Helsingin Energia.
Helin, H. (2002a) "Terveen ja varovaisen talouden linja. Helsingin kaupungin talous 1945–1999". ("A tradition of healthy and cautious economy. The municipal economy of Helsinki 1945–1999"). In Kolbe, L. & Helin, H. (Eds.). Helsingin historia vuodesta 1945. City of Helsinki. Edita.
Helin, H. (2008). Tapausten kulku. Valtionosuus- ja verouudistukset ja uudistussuunnitelmat 1990–2006 ja valtion toimenpiteiden vaikutus kuntien talouteen. (How it all happened. The state subsidy and tax reforms and reform plans 1990–2006 and the effect of state policies on municipal economy.) City of Helsinki Urban Facts, Research Series 2008:4.
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Helin, H. (2010b). Aina on ollut vaikeaa. Kuntien talouden kehitys 1988–2008. (Constant hardships. The development of the municipal economy 1988–2008). City of Helsinki Urban Facts, Study Reports 2010:6.
Helin, H. (2011). Miten tähän on tultu? Toisenlainen tulkinta kuntataloudesta. (How did it all end up this way? An alternative interpretation of municipal economy). City of Helsinki Urban Facts, Study Reports, 2011:1.
Helin, H. "Helsingin talouden muutos 1950–2009. Yhä suurempi osa verorahoituksesta kohdistuu peruspalveluihin." ("The change is Helsinki’s economy 1950–2009. An increasing share of tax funding is spent on basic services.") In: Cantell, T. & Lahti T. (Eds.). Helsinki tiedon kohteena. Helsingin kaupungin tietokeskus 100 vuotta. City of Helsinki Urban Facts.
Martikainen, T. & Yrjönen, R. (1977). Näkökohtia julkisten palveluiden tuotannosta ja organisaatiosta Suomessa. (Perspectives to the production and organisation of public services in Finland.) Helsingin yliopiston yleisen valtio-opin laitoksen tutkimuksia. Sarja A. No 46/1977. University of Helsinki.
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