Finland's government has announced a series of tax cuts for companies and employees in a bid to revitalize its struggling economy, marking a shift from its earlier commitment to strict fiscal discipline.

The measures, revealed during the government's mid-term budget review concluded late Wednesday, include a reduction in the corporate tax rate from 20% to 18% and a €1.1 billion ($1.25 billion) cut in personal income taxes.

“In making Finland one of the most attractive destinations for investment in Europe, we are laying the foundation for future growth,” said Prime Minister Petteri Orpo following two days of intense budget discussions.

The move signals a departure from the administration's original plan to contain public debt, a central pledge since taking office in June 2023. Instead, the government is betting on growth to fund increasing expenditures—particularly in defense—as Finland aligns more closely with NATO objectives.

Balancing Growth and Fiscal Responsibility

The Finnish economy contracted by 0.1% in 2024, according to preliminary data, and the Bank of Finland has warned that this year's modest 0.8% growth forecast is at risk due to ongoing global trade tensions and protectionist policies.

To help finance the tax relief, the government will make a one-time withdrawal from the state pension fund. Finance Minister Riikka Purra emphasized that while the administration remains committed to stabilizing public debt by the end of 2027, it now expects to miss its original goal of narrowing the fiscal deficit to 1% of GDP.

Official estimates project that the deficit will temporarily decline in 2026 and 2027 due to the pension fund drawdown, before rising again in 2028 and 2029—after the current government's term ends.

Data released earlier this week by the national statistics office show that the 2024 deficit reached €12.2 billion, or 4.4% of GDP—well above the European Union's 3% limit and higher than the government's earlier estimate of 3.7%. The projected deficit for 2025 is now expected to rise slightly to €12.3 billion.

A Strategic Pivot Toward Defense and Investment

Earlier this month, Finland announced plans to raise defense spending from 2.4% of GDP to 3% by 2029, citing growing NATO demands and regional security concerns. The tax cuts are part of a broader strategic realignment aimed at sustaining this higher level of expenditure without undermining economic resilience.

The government's shift underscores the mounting challenges European economies face as they navigate sluggish growth, rising security obligations, and fiscal constraints.