OVERVIEW OF FISCAL DECENTRALISATION
Finland has a governmental system based on three levels: the central government, 19 regions and 320 municipalities.
Legal acts governing fiscal decentralisation
The Finnish Constitution grants autonomy to municipalities. The division of powers between central government and the municipalities is covered by the Law on Local Self-governance.
Qualifying fiscal decentralisation
Finland is characterised by a highly decentralised governance system. Regions are mainly administrative bodies and should not be considered as fully-functioning local governments. Municipalities are granted control over their revenues through the setting of local tax rates, which represented 51% of total local revenues in 2017. The rate of the municipal tax on earned income can be set under full autonomy by each municipality. Real estate tax also accrues to municipal budgets and local authorities are free to set a rate within the boundaries prescribed by law. Other revenues come from charges and fees applied on local services (21% of total revenues in 2017) and transfers from the central government (19% of total revenues in 2017). Local expenditures totaled euros 50,752 million in 2018, representing 40.8% of total government expenditures.
Source: authors’ elaboration on EUROSTAT data. For further details, see
methodology.
Fiscal equalisation mechanisms
The central government manages an equalisation mechanism transferring resources to municipalities that are not able to raise the necessary resources to perform the tasks prescribed by the law. Equalisation transfers are made when the estimated tax income of a municipality is below 91.86% of the national average. The amount of these transfers is determined through a formula which takes into consideration a centrally estimated cost for the provision of each local service, demographic factors and population density, geographic location (e.g. islands, distance from main economic centres) and unemployment rates.
LEVEL OF FISCAL DECENTRALISATION
Revenue autonomy (own revenues relative to total resources available) at the local level (municipalities) is frequently higher than the EU average (70% versus 53% in 2018), which entails a rate of dependency on central government transfers that is often lower than the EU average (29% versus 48% in 2018). Local own revenues in 2018 represented 28% of total government revenues, which was higher than the EU average (13%).
Source: authors’ elaboration on EUROSTAT data. For further details, see methodology.
The composite ratio, which captures aspects of fiscal decentralisation of both revenue and expenditure, suggests the governmental structure in Finland has had a degree of fiscal decentralisation which is substantially above the EU average (45% versus 16% in 2018).
The indicator measuring the level of tax autonomy also points towards a high level of autonomy for local governments in Finland, as 86.1% of total local tax revenues are under the full control of local authorities.
Source: authors’ elaboration on OECD data. For further details, see methodology.
Fiscal rules and borrowing capacity
Municipal autonomy over drafting their budgets is limited by the condition of approval of a balanced budget over a programming period of a minimum of four years (the current financial year plus a budget framework of three years). The great majority of lending to local governments is granted by the Municipality Finance Corporation (MFC), a credit institution owned by the state and by municipalities themselves that provides loans at market conditions to municipalities and municipally controlled organisations. Borrowings from the MFC are guaranteed by the Municipal Board Guarantee (MBG), of which almost all Finnish municipalities are members. The MFC has never suffered any loan defaults.
Deficit and debt at sub-national levels
In 2018, the consolidated gross debt of the Finnish local government sector amounted to 8.8% of GDP. The average debt between 2015 and 2018 was 8.9% of GDP.
Source: authors’ elaboration on EUROSTAT data. For further details, see methodology.
EXPENDITURE BY GOVERNMENT LEVEL AND BY POLICY AREA
Expenditures of municipalities represent a significant part of total general government expenditures in the fields of health (83% in 2017), education (66% in 2017), recreation culture and religion (61% in 2017), and housing and community amenities (58% 2017).
Source: authors’ elaboration on EUROSTAT data. For further details, see methodology.
In 2017, the concentration of municipalities' spending was higher than the EU average in the fields of health (27% of total local spending), and general public services (18%). Other important areas of spending were in social protection (25%) and education (17%), both in line with EU averages in 2017.
Source: authors’ elaboration on EUROSTAT data. For further details, see methodology.
