Katainen defends government’s tax cut stimulus policy

Finance Minister responds to criticism by experts interviewed by HS

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Minister of Finance Jyrki Katainen (Nat. Coalition Party) has come out in defence of his government’s policy of economic stimulus through tax cuts.
     For Sunday’s edition, Helsingin Sanomat asked a number of of economists working in Finland, Sweden, and France for an evaluation of measures taken by the Finnish government to fight the effects of the ongoing recession.
     The general view among the economists interviewed was that the timing and size of Finnish stimulus measures are more or less on target, but the content is somewhat questionable. The methods of stimulus were seen to be inefficient, with insufficient attention on supporting municipalities.
      When the recession hit, investment programmes were not in place. Cuts are now being enacted at the municipal level, and there has been only a modest increase in public spending.
     
Responding to the criticism, Finance Minister Katainen disputed the assertion that tax policy had been proven a less effective way to stimulate the economy than increased public spending.
      Katainen pointed out that lower income taxes increase purchasing power immediately, whereas state-funded construction projects can take up to a year to have a noticeable effect on the economy.
      One of Katainen’s critics was Aki Kangasharju, a research professor at the Government Institute for Economic Research (VATT), would have liked to see a greater increase in public investments than has taken place. He notes that while there has been a slight growth in state investments, the decline in municipal investments is much greater, and is putting “too many jobs” at risk.
      “Municipal investment plans would have been ready”, Kangasharju points out, adding that they would have been a faster way at getting stimulus through spending on the move.
      Markus Jäntti, Professor of Economics at the University of Stockholm is also dissatisfied with Katainen’s response to the criticism that there has been “very little” real stimulus.
      “He does not even seem to try to open genuine debate on whether or not tax cuts are really the best possible measure, compared with bringing forward benefits that have already been decided.”
     
In addition to serving as a stimulus measure in the current recession, Katainen defended his tax cuts, saying that there is a structural need for tax reform independent of cyclical factors.
      This brought a response from Olli Koski, the head economist at the Central Organisation of Finnish Trade Unions (SAK):
     “Perhaps there was a structural need in the taxation of labour, but across-the-board tax breaks that come to everyone are not a very effective way to achieve structural change, because the tax cut applies to everyone equally.”
     
Katainen’s overall assessment is that the four-party government has been quite successful in dealing with the recession.


Previously in HS International Edition:
  Finance Minister criticises EU Commission’s poor knowledge of Finnish stimulus policy (11.11.2009)
  Finance Ministry expects slight economic improvement next year (15.9.2009)
  Minister of Finance suggests compromise over cutting VAT on food (18.8.2009)

Helsingin Sanomat