Reform of central government transfers for basic public services as part of the health, social welfare and regional government reform

Via the healthcare, social welfare and regional government reform, over half – around 17.4 billion euros based on 2017 levels – of costs associated with municipal operations will be transferred to the counties, due to a marked reduction in the municipalities’ statutory duties.   

To prevent a rise in the overall tax rate, when the state begins funding the counties, municipal revenues corresponding to the costs of the transferred duties will be reallocated to county funding.

Around 5.8 billion euros will be transferred to county funding from the system of central government transfers for basic services. In addition, 11.1 billion euros, plus a share of municipal corporate tax revenue (0.5 billion euros), will be transferred from the municipalities to the counties.

At national level, the transfer of costs and revenue associated with the change in municipal duties will be cost neutral, but because the transferred costs and revenues will not match at the level of individual municipalities, the changes at municipal level will be dramatic in principle. Efforts will therefore be made to limit the differences between municipalities through proposed changes to the central government transfer (CGT) system.

Proposed changes to the system of central government transfers (CGT)

One of the key aims of reforming the CGT system is to secure funding for the duties remaining with local government and to retain the impact of financial allocation criteria used within the CGT system. The basic criteria of the system would still react to changes in the needs and circumstances of local government. In addition, the basic logic behind tax-based equalisation would be preserved, despite the proposed changes in the equalisation supplement and deduction rates.

When the duties covered by the reform are transferred away from the municipalities, most funding allocated for basic services via the CGT system will be determined on the basis of the under-16 age group. Since, after the change, the municipalities will continue to play an important role in promoting well-being and health and preventing unnecessary social and healthcare expenditure, it is proposed that the promotion of well-being and health be added to the criteria based on differences in needs/circumstances within the CGT system. The reform would also involve eliminating the current employment self-sufficiency criterion. In addition, the unemployment rate would be transferred from computed costs to supplementary transfers.

As part of the changes, half of the revenue from property tax would be retained in the tax-based revenue equalisation system. The general property tax rate would be used for power plants as part of the equalisation transfer (other power plants than nuclear power plants are included out of the equalisation system). The equalisation supplement rate would be raised to 90 percent, to the benefit of municipalities affected by the reduction in the equalisation limit. A fixed rate of 15 percent is proposed as the equalisation deduction percentage, which would benefit municipalities subject to the largest proportional transfer of tax revenue to the counties. The equalisation limit would remain at 100 percent.

In addition to the above-described changes, a ‘health and social services transfer change limiter’, to be permanent for the time being, would be added to the CGT system. This limiter would not take account of the actual new changes in the CGT system criteria, but only purely financial changes due to the transfer of health and social service tasks i.e. it would be defined on the basis of a ‘cross-section’ of the period during which it entered into force. The size of the change limiter would be symmetrically set at 60 percent, meaning that municipalities would be left financially responsible for 40 percent of the changes, whether negative or positive.

Changes in the financial situation of the municipalities would be heavily limited

In order to minimise major changes at municipal level, the transfer to the new system described above would, in principle, occur via a temporary (although partly permanent) change equalisation.  During the year in which the  healthcare, social welfare and regional government reform enters into force, the change in the balance of municipal finances will be limited to zero, in other words the balance (the ‘balance situation’ refers to the margin after deductions) will remain at the pre-reform level.  The level of the change equalisation would be reduced each year in order to limit the change to +/- 25 euros per resident per year. In the fifth year, 2023, the change would be capped at +/- 100 euros per resident, which would remain in force for the time being. The resulting change in the balance situation of the municipality would therefore permanently be +/- 100 euros per resident, which would not exceed the amount corresponding to the revenue generated by one income tax percentage point within any municipality.

Once the reform has entered into effect, the pre-reform situation of the municipalities will have a major effect on their post-reform financial situation. Change equalisation will not balance out imbalances in municipal finances that existed prior to the reform. Nor will it eliminate previously accumulated municipal deficits.

The reform includes factors which will stabilise municipal finances

The healthcare, social welfare and regional government reform includes factors intended to stabilise municipal finances, helping to balance them and improve the anticipation of changes. Despite the reduction in income tax rates, municipal tax revenues would not reduce correspondingly due to the reform, but would actually strengthen slightly. 

At the same time, relatively unpredictable costs, such as those for specialist hospital care, would be transferred from municipal finances, making budgeting and financial management easier during each budgetary period. A large proportion of investment needs related to social and health care would also be eliminated. In addition to these, local government finances would be stabilised by the partial transfer of municipal corporate tax revenue, which is susceptible to economic fluctuations, to county financing. Reducing the municipalities' share of corporate taxation would also reduce the need to lower municipal income tax rates.