Government promises tax cuts in return for strong wage restraint

In September 2004, the government announced its objectives for Finland's forthcoming round of wage negotiations. It advocates a three-year centralised settlement with wage increases averaging 0.7% per year, combined with income tax cuts worth EUR 1.5 billion. Trade unions have rejected the proposition and insist that disposable income should be raised by wage increases, not by tax reductions. Employers have been critical of the government's decision to make the tax cuts conditional on a moderate wage settlement.

The current two-year central incomes policy agreement (FI0212103F) expires in February 2005. Following standard procedure, a tripartite committee convened to consider the general premises on which next round wage negotiations might be conducted. The committee report, published on 17 September 2004, concluded that at present the two main goals of economic policy should be to raise the employment rate and to lower structural unemployment. To achieve these objectives, the social partners and the government agreed that wage moderation is required.

In calculations attached to the report, the government announced its particular views on what the level of wage moderation should be. It recommends a three-year centralised settlement in which wages would rise by 0.5% in both 2005 and 2006 and by 1% the following year. If such a settlement was reached, the government would be prepared to cut income taxes by a total of EUR 1.5 billion over the three-year period. According to the calculations, drawn up by the Ministry of Finance (Valtiovarainministeriö, VM), this level of wage moderation, combined with the tax cuts, would result in the unemployment rate falling from the current level of 9% to 5.5% in 2007.

The Central Organisation of Finnish Trade Unions (Suomen Ammattiliittojen Keskusjärjestö, SAK) and the Finnish Confederation of Salaried Employees (Toimihenkilökeskusjärjestö, STTK) do not agree with the level of wage increases proposed by the government, although they have not yet announced their official target levels. According to STTK, the pay rises under the current agreement, 2.9% for 2003 and 2.2% for 2004, would represent 'moderation' in the current economic situation. Furthermore, SAK insists that real wages should be raised mostly by increasing wages, not by lowering taxation. The government has already reached its original goal of cutting income taxes by EUR 1.12 billion during its term in office which started in June 2003. Several unions have voiced their concern over the effects of further cuts on the future funding of the welfare state.

The main employers’ confederation, Finnish Industries (Elinkeinoelämän keskusliitto, EK) (FI0403201N), has not objected to the level of wage increases proposed by the government. However, it does not agree with the government's decision to make the tax cuts conditional on a moderate wage settlement. EK argues that the cuts are needed regardless of any pay developments.

The social partners are currently exploring the possibility of conducting incomes policy negotiations. They are expected to announce their positions and objectives during October 2004.