Growth in commerce will slow down next year – taxation on services limits growth

Even though Finland is currently at the peak of its economic cycle, the growth in wholesale and retail sectors’ turnover* will not match the figures of the late 1990s and early 2000s. The growth in wholesale trade this year will be 3.5 per cent due to investments and procurements in construction and industry but, next year, the growth will slow down. Digitalisation and automation, international competition and customers’ need to make their supply chains more efficient encourage the wholesale sector to improve its operations. This limits the availability of employment opportunities in the wholesale sector.

The growth of the volume of turnover in the retail sector will also be equivalent to last year, roughly three per cent, but the growth will slow down similarly next year. The growth of retail trade has been due to specialty goods trade of household appliances, interior decorations and sports equipment, in particular. Specialty goods trade and department store trade (including major hypermarkets) have also promoted employment in the retail sector. This year, employment is predicted to rise by four per cent. In 2020, however, it will start to decline.

The Finnish retail market is limited by the declining rate of consumption

The fact that the Finnish population is ageing may have an adverse effect on private consumption and the dynamics of economy. This poses a significant threat to the growth of retail trade, as well. For example, food and clothing consumption is predicted to start declining already in the next few years.

“While several consumer markets are declining due to ageing, digital purchases are becoming more commonplace, including purchases from abroad. For example, a fifth of cosmetics bought are now purchased digitally, but, already in three years, the proportion of digital purchases will amount to a third,” says Jaana Kurjenoja, Chief Economist of the Finnish Commerce Federation, describing the current trend.

Because of the ageing population, the Finnish commerce and consumer goods industry cannot pursue growth by relying on a growing rate of consumption. Growth must be sought with products that have a significant margin or from abroad.

Tax authorities claim most of the service chain’s value

Taxation increases the price of labour input and weakens the purchasing power of Finnish consumers. The average Finnish wage earner’s purchasing power after taxes is merely six per cent more powerful than the average in all OECD countries and weaker than in any other Nordic country. Weak purchasing power in proportion to high labour input prices is one of the main issues that slow down the development of services and employment in Finland.

“All consumer services from delis to mobile game development, banking, network operator services and restaurants include at least a double tax wedge in the price of the goods or service,” says Kurjenoja.

Kurjenoja provides a simplified example of the service chain and the accumulated triple taxation: An employee, such as a hairdresser, is selling a service which in order to purchase, a consumer, such as a tailor, is working and earning money. In order to succeed, there must be a demand and a buyer with purchasing power, such as a data analyst, for the tailor’s labour input. The tax authorities grab a share of all the steps in the service chain so that the hairdresser in the final step is left with almost nothing. Over 80–90 per cent of the price of the entire service chain paid by the employer of the data analyst is comprised of taxes and various parafiscal charges.

The tax wedge** must be adjusted by tax cuts

Consumers with real purchasing power are required to form service chains and increase employment in the service sector. However, the price for the work should not become too high in order to sustain the benefits of employment in Finland and make it internationally competitive.

Multiplied tax wedges increase the price of services and consumer goods sold in Finland and weaken the purchasing power available. Taxation encourages consumption where prices are more affordable and generate more purchasing power for the regular consumer. Finns, for example, might choose to shop at Chinese online stores or visit Estonia.

“If the development of consumer services is not an attractive option in Finland, these services cannot generate viable ecosystems, such as research and development to new logistic and purchasing services,” reminds Kurjenoja.

If an increase in employment is one of the main objectives of the forthcoming Government, issues related to the private service sector are in a key position: the price of the service work, purchasing power and the ecosystems generated around the services. Another alternative is stagnation due to high taxes.

The tax wedge is wider for jobs with higher wages because of progressive taxation. This contributes to the slow development of high-paid service sector jobs in Finland. In order to make the tax wedge smaller, the labour taxes of all income levels must be lowered.

“Taxation policies should not be made in the light of economic cycles, but they should be regarded as structural policies. Tax-financed business subsidies have not been able to diversify the structure of export, and high labour taxation cannot enable a viable service sector that is capable of providing jobs,” says Kurjenoja.

Further information: Jaana Kurjenoja, Chief Economist of the Finnish Commerce Federation, tel. +358 (0)40 820 5378, jaana.kurjenoja(at)kauppa.fi

* Turnover adjusted for price fluctuations

** The difference between the overall cost of the consumer’s labour input needed to purchase a service (or the service work included in the price of a product, for example, design and customer service) and the net income of the service provider. The tax wedge includes all income-related direct and indirect taxes and parafiscal charges, as well as VAT.

The Finnish Commerce Federation represents commerce – the largest sector of economic life. Commerce employs around 300,000 people in Finland. The Federation has around 7,000 member companies and represents both retail and wholesale commerce in industry policy and labour market lobbying. www.kauppa.fi