Minister of Finance Riikka Purra and Prime Minister Petteri Orpo at the government’s budget framework negotiations press conference at the Government Palace in Helsinki. Photo: Markku Ulander / Lehtikuva
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A central claim by Finland’s Ministry of Finance that corporate tax cuts will largely pay for themselves lacks any supporting calculation, according to documents and expert assessments now made public.
The ministry’s internal memo, released on 30 April, stated that the government’s planned €2 billion in tax cuts, including lowering corporate income tax from 20% to 18%, would be 60% self-financing due to growth-stimulating “dynamic effects”.
That figure, however, is not derived from any specific model or formula. In a statement to Yle, Lauri Kajanoja, coordinator of economic policy at the ministry, confirmed the 60% figure is not based on calculations but rather taken as an assumption from the broader literature.
The estimate was attributed in part to the findings of Sebastian Gechert, a German economics professor known for a meta-study covering more than 40 research papers on corporate tax cuts. Gechert reviewed the ministry’s memo at Yle’s request and identified a key error.
According to the ministry’s illustrative example, the tax cut would be 60% self-financing. In reality, Gechert said, the cited data reflect GDP growth impacts, not actual tax revenue recoupment. When correctly interpreted, the likely payback ratio drops to 25%.
This distinction has major implications for the credibility of the ministry’s forecast. A 60% recovery rate suggests hundreds of millions in tax revenues could be recouped annually, helping justify modest spending cuts despite large tax relief. A 25% rate paints a much less optimistic picture.
Gechert said he was “irritated” that the ministry chose to focus on high-multiplier estimates rather than his study’s central finding, that average self-financing rates from corporate tax cuts are close to zero. “The number 60% is very high and overly optimistic,” he said.
While the ministry insists the illustrative example was never intended to justify the 60% assumption directly, the lack of any calculated basis for the figure has drawn criticism from economists. The memo contains no formal modelling to support the headline estimate.
Kajanoja acknowledged the confusion but said the example was only meant to reflect the broader range of outcomes in academic research. The chosen figure, he said, lies “closer to the upper bound” of estimates in the literature and reflects the government’s expectation that wider reforms, such as permitting changes, labour supply measures and R&D investment, will amplify the economic response.
The Finance Ministry has since revised the memo to clarify this point but did not withdraw the original assumption.
The government’s budget strategy heavily relies on the idea that growth sparked by tax cuts will increase revenues and keep debt in check. Prime Minister Petteri Orpo’s administration plans over €2 billion in tax reductions, offset by just €1 billion in new taxes and spending cuts. The remaining gap is meant to be covered by these projected dynamic effects.
If the payback rate is significantly lower than expected, the government’s claim that its policies will not increase debt comes under pressure. Independent economists have already questioned this assumption, warning that the tax cuts are likely to increase Finland’s structural deficit.
HT
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Source: www.helsinkitimes.fi
