Katainen continues defence of tax cut stimulus policy

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Minister of Finance Jyrki Katainen (Nat. Coalition Party) has continued to rebut criticism according to which the government is relying excessively on tax cuts as a means of economic stimulus. According to Katainen, the government has used all available means to boost the economy, and that tax cuts account for only 15 to 30 per cent of them.
      The European Commission calculates that tax cuts account for 80 per cent of Finland’s total stimulus measures, and the OECD puts the figure at 85 per cent.
      In a recent article in Helsingin Sanomat group of economic experts also criticised the government’s focus on tax cuts in stimulating the economy.
     
Katainen held a press conference on Tuesday on the issue of stimulus policy.
      According to Katainen, the government has made decisions on stimulus for the coming two years “worth about 20 million euros”.
      He said that he was to blame for the perception that Finland is primarily stimulating its economy through tax cuts.
     
The European Commission calculates Finland’s stimulus measures over two years to be about EUR 10 million - about half of what Katainen claims.
      In his EUR 20 million figure, Katainen includes items such as state loan guarantees, which have not been included in figures put out by various countries.
      Loan guarantees turn into expenditure only if a borrower fails to pay back a loan.
     
Katainen said that income tax cuts and the lowering of contributions to the Social Insurance Institution account for about EUR 2 billion of the EUR 20 billion that he says is budgeted for stimulus.
     Katainen says that there is broad consensus in Finland that income taxes should be cut, and that he does not understand why this should not be done simply because there is a recession.
      “Since half of the economy is based on exports, and exports are not moving, and half of the economy is from the home market, then shouldn’t the home market be stimulated?” he asks.
     
Stimulus through taxation has been criticised as being less efficient at stimulating the economy than simply increasing public spending.
      At the press conference, Katainen brought out Jukka Pekkarinen, Director General of the Economics Department of the Ministry of Finance to compare the two different types of stimulus.
      “It appears that there is an impression that it would be self-evident that decisions on the spending side would be the effective solutions in stimulus. There is no kind of independent consensus on this question within the sphere of research”, Pekkarinen said.
      However, Sixten Korkman, director of the Research Institute of the Finnish Economy (ETLA), said in an ETLA cyclical review that “generally speaking, it would seem to be undeniable that stimulus through spending is more effective in the short run than tax stimulus.”
      Matti Tuomala, Professor of Economics at the University of Tampere, has also spoken of a broad consensus on the matter in the field of economics.
     
Katainen took the news that the Financial Times newspaper now sees him as the 12th best finance minister in the European Union with a sense of humour. Last year he was ranked number one.
      “Terribly awkward. It really brings a tear to my eye, but what can you do, when exports are not moving”, he smiled.
      This year’s FT best EU finance minister was France’s Christine Lagarde.


Previously in HS International Edition:
  Katainen defends government’s tax cut stimulus policy (16.11.2009)
  Finance Minister criticises EU Commission’s poor knowledge of Finnish stimulus policy (11.11.2009)

Helsingin Sanomat