Many Finns are in for a cold ride – The government is postponing an embarrassing reform –

In Finnish municipalities, a development process is now underway to resolve it Petteri Orpon The (kok) government has only bad options. The government announced that it would postpone the much-awaited reform by many municipalities by a year, but that is not the only one of the municipalities’ woes.

The financial situation of the municipalities is drifting into a bad slide, which is estimated to be visible to many citizens in the form of reduced services or higher tax rates.

In this story, we open up what the government’s postponement decision is about and what is happening in the municipalities now.

The government of Orpo announced this week that it will postpone the reform of the municipalities’ state share system by one year, i.e. until 2027.

The system needs to be reformed, because after the social security reform, the tasks of the municipalities have changed, and the state shares of basic services should be distributed on different bases in the future.

The preparation group for the reform already started its work at the end of August 2023. In February, two gurus of the municipal field were hired as surveyors for the preparation of the reform, i.e Arto Sulonen and Eero Laesterä.

According to IL’s information, the law preparation process proceeded without political processing until autumn. The surveyors brought up several alternatives for the implementation of the reform.

However, the government decided to pull the handbrake.

The government came to the conclusion that it was not yet possible to find a model that would be logical enough, perceived as at least in some way fair, and would fulfill the government program’s records of the goals set for the reform.

The government wanted more time, for example, to examine the situation of each municipality in more detail, so that unreasonable situations would not arise. For example, increasing discretionary grants is under consideration.

According to IL’s information, the closeness of the elections was also a factor in the postponement decision, although it does not eliminate the fact that politically, the reform is difficult to implement at any time. Municipal and regional elections will be held in April 2025.

The government has outlined that the reform will be carried out in a cost-neutral manner, i.e. it must not increase public expenditure. Because of this, it is impossible to carry out the reform without major municipal changes. To compensate for unreasonable changes, different compensators must be developed.

In any case, just before the elections, it could have been fatal to publish the lists of “winners and losers”.

A big question mark is still what will happen to the “social security installments” of the state co-operation system, which have equalized the changes in the municipalities’ finances caused by the social security reform.

The ruling parties only have difficult choices ahead of them. A significant reduction or even elimination of SOTE installments would reduce the financing of Espoo, for example, but at the same time the situation of Tampere, which suffers from the current system, would improve.

According to IL’s information, part of the preparation group has been upset by the fact that more detailed calculations by the surveyors have not been presented even to the members of the preparation group. There have also been demands from the opposition party center for the publication of calculations and plans.

The postponement of the state share reform causes the Chief Economist of the Municipal Association Minna Punakallion according to the fact that the problems of the municipalities that are already in trouble will continue and deepen. This applies especially to small, aging municipalities.

– Many municipalities have already taken heavy adaptation measures. We have to save more there, Punakallio says.

According to Punakallio, several large cities, such as Helsinki and Espoo, which have traditionally done well, will also suffer from the SOTE reform. The reform of the state share system is a threat to these cities.

This is due to the fact that with the social security reform, the income tax rates of all municipalities were cut by 12.64 percentage points. The social security reform took significantly more tax revenue from municipalities with strong tax revenue bases than from municipalities with weak tax revenue bases due to, for example, an aging population.

Some municipalities, on the other hand, had more social security costs transferred out than what income was transferred. These differences are now equalized with social security installments.

If social security contributions were to be removed, it would create a big dent in the finances of many cities and municipalities. According to IL’s information, the government has been concerned about the effects of the changes in the state share system on the cities’ ability to invest.

State share reform is not the only headache for municipalities. The deteriorating economic situation of the municipalities has been overshadowed by the plight of the welfare regions in the public debate.

According to the survey of the local union, there is pressure to increase the municipal tax for next year in every other municipality. The Association of Municipalities has warned that in the next few years municipalities will have “exceptionally great adjustment pressure”, which will be reflected in service cuts and tax increases.

Punakallio believes that the situation will start to become more apparent next year.

– Smaller municipalities with costs that are difficult to reduce, and the tax revenue side are weak, Punakallio says, are especially at the threshold of the crisis.

He refers to the fact that municipal services, for example in terms of education, are strictly standardized in terms of group sizes, among other things, so it is difficult to calculate costs from there.

Punakallio estimates that the municipalities are looking for savings from the service network, i.e. for the number of schools, as well as from not filling vacant posts. Punakallio estimates that municipalities also reduce the quality of services, such as reducing opening hours, or postponing investments or building renovations.

Punakallio estimates that in the next few years a significantly larger number of municipalities will have to go through crisis procedures than has been seen in recent years. Based on the pressure calculation prepared by the Ministry of Finance, Punakallio estimates that there will be around 40 such municipalities by 2028.

The crisis procedure can lead to the merger of the municipality with another municipality.

It seems that the situation of the municipalities will become even more different in the next few years. Even now, municipal income tax rates vary between 4.4 and 10.8.

The deepening problems of municipalities are a difficult topic for the government: more money for municipalities is not coming in this economic situation. Although the savings in welfare areas and the problems of social security services have dominated the public discussion for the time being, the smoldering crisis in the municipalities will rise to the surface during the elections.

By postponing the state share reform, the government can at least try to reduce the opposition’s assault weapons just before the elections.