Helsinki is preparing its budget under extraordinary circumstances. The global coronavirus pandemic has impacted the economy both globally and locally. Despite the difficult economic situation, it is possible for Helsinki to prepare a budget that boosts operational economy and maintains a high investment level. Mayor Jan Vapaavuori’s budget proposal for 2021 aims to stimulate and stabilise.
Helsinki has managed its finances responsibly, so the foundation for the City’s economy was strong at the outset of the coronavirus pandemic. This means that there is no need for a sudden stop to all financial activity. That being said, no one knows how long the crisis will last and how deep the decline will be. The coming years will be marred by significant uncertainties especially with regard to the City’s revenue base, as the epidemic is driving Helsinki’s service and care debt upwards.
“The situation is certainly challenging but not desperate. Helsinki’s economy has been managed responsibly for years, which is why we can prepare a budget that is as stimulating as it is. We should also extend our thanks to the state for its significant assistance in mitigating the challenges of the coronavirus crisis. However, city economies must always be managed in a forward-looking manner, which is why we cannot waste time in ensuring continued responsibility in our financial management, so that Helsinki can weather any unexpected crises to come,” Mayor Jan Vapaavuori says.
Many investments will need to be financed with loans
The coronavirus epidemic is increasing the City’s expenses and reducing its tax revenue. The City’s annual margin and profit/loss will be weaker in next year’s budget compared to previous years. In the financial plan period 2021–2023, many investments will need to be financed with loans.
This will lead to the City’s loan portfolio increasing by MEUR 180 in 2021. In the 2022–2023 period, the loan portfolio will increase by an average of MEUR 240. At the end of 2023, the loan portfolio will stand at about 1.7 billion, which is EUR 2,500 per capita. At the end of 2019, the loan portfolio was 1.0 billion, i.e. EUR 1,550 per capita.
The starting point for next year’s budget is to ensure that the loan portfolio cannot more than double between 2019 and 2024. The goal thereafter must be to halt debt accumulation and gradually reduce the loan portfolio.
Investment level remains high
The investments for the budgetary years 2021–2023 stand at roughly MEUR 835 per year. This figure includes the investments of Helsinki City Transport (HKL) and other City enterprises. In accordance with the City Strategy, a substantial portion of the investments will be aimed at reaching the housing production target (construction started on 7,000 housing units). Efforts will be made to maintain the condition of built assets and curb the renovation debt related to buildings. The implementation of the Jokeri Light Rail project will be continued, and provisions will be made for the beginning of the Kruunusillat construction project.
It has been necessary to review certain investments due to the weakened economic situation, as compared to previous autumn’s budget. Despite this, the investment level of the 2021 budget is higher than the value of the investments completed in previous years.
Service production expenditures are increasing
The City’s operating expenses will increase by 2.69% from the 2020 budget. The largest increases in the 2021 budget will be seen in the costs of basic services, which are most directly affected by population increase. In addition to this, operations that have been placed under special cost pressures due to the coronavirus epidemic have been taken into account.
Municipal tax rate to remain unchanged
In the 2021 budget, the annual margin stood at MEUR 568 and the profit for the financial period was MEUR 174. In the 2019 financial statements, the annual margin was MEUR 741, which was enough to cover 98% of the investments. In the 2021 budget, the internal financing percentage will drop to 71%.
In the 2021 budget, the municipal tax yield is estimated to be MEUR 2,750, which is 0.5% more than the 2020 forecast. Some tax accounts have not been rendered until 2020, pushing the municipal tax income higher than suggested by the overall development of wage sums. The municipal tax rate of 18.0 will remain unchanged in the 2021 budget proposal.
In the 2021 budget, the corporate tax yield is estimated to be MEUR 598, which is 17.3% more than the 2020 forecast. The high rate of increase is explained by the 2020 corporate tax yields lagging behind the budget levels and the fixed-term 10% increase to the municipal distributive share of the corporate tax persisting through to 2021.
In 2021, the accumulation of central government transfers is estimated to drop from more than MEUR 400 in 2020 to MEUR 312. The appropriation intended to balance the inter-municipal differences in tax revenue base, which is covered by Helsinki’s central government transfers, will about MEUR -380 for 2021. The increase in the balancing amount, i.e. tax revenue transferred from Helsinki to other parts of the country, has been fast in recent years: the amount stood at MEUR -289 in 2017.
Helsinki to initiate measures to stabilise the economy
The uncertainty caused by the coronavirus crisis, the planned social welfare and health care reform, the legal amendments increasing municipal obligations and the rapid ageing of the population will pose significant challenges to the City’s economy in the near future. Responsible financial management will require the City to take determined action to stabilise the economy in the medium term.
Over the course of next year, the City will work to improve productivity and economy by initiating measures mostly focused on digitalisation, personnel, the service network, operating premises and operational development. For example, the budget proposal suggests that Helsinki should abolish its result-based bonus system as of the beginning of 2021 and continue the development of more impactful reward methods. The city-level economic stabilisation measures will be spread across several years. More detailed measures will be prepared during 2021.
Helsinki is in the middle of an acute economic crisis and needs to build a foundation for new growth while working to stabilise the economy. The budget proposal includes investments in the more efficient utilisation of digitalisation as well as forward-looking economic development policies. The aim is to ensure that the benefits of digitalisation expedite the City’s recovery from the coronavirus crisis and produce better services for residents. Economic development policy will be leveraged to improve employment and entrepreneurship among recent graduates in particular.
City Board to decide on the 2021 budget on 9 December
The Helsinki City Board processed the budget proposal in an extraordinary meeting on 29 October. The processing will now continue with negotiations between the political groups represented in the Board. The results of these negotiations will then be used by the City Board to prepare a budget proposal on 9 November. The budget will be presented to the City Council in November, and the Council will decide on the following year’s budget on 9 December.
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Caption: The infrastructure for the Jokeri Light Rail line will be City of Helsinki’s largest investment in the 2021–2023 period. Photo: Jokeri Light Rail photo bank.