Local government finances

Local government finances are an important part of Finland’s general government finances. Finnish cities and municipalities have a large degree of autonomy, for example the right to levy taxes and freedom to manage their own finances.

The strategic objective of the municipalities’ policy on enhancing the area's vitality is to improve the competitiveness of the local economy and thereby increase the resources needed to produce municipal services. These resources are channelled to local government finances in the form of income tax, corporation tax, real estate tax and charges collected for services.

The majority of municipal expenditure consists of the costs of statutory basic public services which the local authorities have the responsibility to organise. Wages, salaries and other wage-related payments account for a substantial proportion of the costs of local authorities. The main source of income for local government in Finland is tax revenue. Other income items include operating revenue, for example fee and sales income, and central government transfers to operational finances.

The central government guides the activities of local authorities through legislation and funding. It decides on, for example, the general tax bases and annual central government transfers to local government. A programme for local government finances is prepared as part of the general government fiscal plan. The programme focuses on assessing the trend in local government finances and the impact of central government measures on local government finances.

Industrial policy measures play a key role in promoting municipal vitality. They are not statutory functions of local authorities but ones that the local authority may take upon itself by its own decision.

The industrial policy instruments typically used by local authorities are the provision of business advisory services, business development projects, construction and rental of premises for business use, the supply of plots for enterprises and the marketing of the region.

Business activities, the employment and skills of local residents, a sustainable and functional living environment and vibrant communities are elements of vitality on which a sustainable local and regional economy is built. Local authorities contribute to vitality through various development and investment projects where they make use of EU co-financed and national regional development funding and help the companies in the region make the most of the state’s enterprise financing instruments.

A municipality's operations and finances are guided by a budget and a financial plan approved for three or more years. The budget year is the first year of the financial plan. The indicators used for assessing the balance of local government finances include the annual margin, the financial result for the accounting period and the cash flow from operations and investments.

A municipality can establish companies, cooperatives or foundations for performing the municipality’s functions. These corporate entities may also include joint municipal authorities and associations. The municipality and its subsidiaries together constitute a local authority corporation. The municipal council guides the activities of local authority subsidiaries by setting objectives for them in the municipal strategy and budget. The corporate governance principles applying to the local authority corporation are a key instrument for guiding the subsidiaries. The principles are approved by the municipal council.