Commerce is growing, but the tax wedge is decreasing consumers’ purchasing power

In early 2020, the Finnish Commerce Federation anticipated that the growth of the retail sector would slow down due to developments in the economy and employment. However, the COVID-19 pandemic changed this outlook, and the current annual growth of turnover[1], 4.3%, was nearly the same as the growth figures prior to the financial crisis.

Although private consumption decreased during the pandemic, the retail sector grew as a result of the shares of transport, leisure time events and restaurant services of the market basket decreasing.

“The retail sector is now attempting to assess the stability of consumption habits resulting from the pandemic as competition over customers’ time is increased,” says Jaana Kurjenoja, Chief Economist at the Finnish Commerce Federation, describing the future.

This autumn, the extra boost brought about by the pandemic will lose its effect as daily lives normalise once again. The Finnish Commerce Federation predicts growth of 3.5% in the retail sector’s turnover volume this year if no new significant limitations are imposed this autumn. In 2023, the rate of growth will slow down closer to the growth track of 1.5%.

Despite the rapid increase in employment in the retail sector, it will not return to the same level in 2019. Employment will not grow in the coming few years due to the need for more efficient operations enabled by automation and digitalisation resulting from international and domestic competition.

The largest share of prices is due to labour costs

The largest share of prices exclusive of VAT in the retail sector is due to domestic labour costs—either paid directly by the sector or included in the services and goods acquired by it.[2]

The products and services in the retail sector include a lot of domestic labour and multiple tax wedges from various service, supply and procurement chains. Multiple tax wedges increase salary costs and prices and weaken purchasing power.

“It is not surprising that the specialty goods trade sector considers the high level of domestic costs and poor purchasing power as major challenges in the sector,” Kurjenoja says.[3]

Consumers can avoid the high prices caused by multiple tax wedges by purchasing products digitally from abroad, such as China, but commerce can attempt to do the same by reducing the share of domestic labour in prices.

“The best solution, however, would to be to reduce the tax wedge by cutting labour taxation. This would improve purchasing power without increasing salary costs,” Kurjenoja emphasises.

Growth in the commerce sector creates jobs and income in other sectors

Other industries and Finnish decision-makers should also feel the need to cut domestic salary costs. In recent years, added value in the commerce sector has grown more rapidly than elsewhere, and its procurements and investments have created growth in other industries. The immediate effect of the retail and wholesale trade sector (excluding car sales) on GDP is about 8%, but the overall impact is nearly twice as large when considering indirect effects on other industries.[4]

“The more products and services the commerce sector acquires domestically, the more other industries and the entire national economy benefit from its growth,” Kurjenoja says.

As a result of its orders and investments, the commerce sector creates growth and jobs especially in other service industries, for which it has an increasing need to support its operations. At the same time, the share of the domestic logistics and industry sector of the growth and employment created by the commerce sector have shrunk in a few years.

“If it is possible to acquire ERP and warehouse management systems more reliably and cheaply from Germany, logistics services from Estonia and the components for warehouse robots from Korea, the growth created by the commerce sector will not remain in Finland,” Kurjenoja says.

The multiple tax wedge of the service sector must be taken seriously

According to the Managing Director of the Finnish Commerce Federation, Mari Kiviniemi, the significance of consumer services to economic growth is still not understood in Finland. The service sector is once again looked to to drive economic growth, which is why one of its biggest challenges, the multiple tax wedge, should be solved.

“Domestic commerce should be profitable in the middle of international competition in order to create extensive growth. For this reason, labour taxation should be cut over a long period of time,” Kiviniemi says.

Kiviniemi also says that the commerce sector is not typically a major beneficiary of business subsidies and does not generally demand such subsidies; however, in order to digitalise and internationalise specialty goods trade, support is needed. A successful commerce sector creates new business opportunities around it, which is why establishing headquarter activities and various clusters in Finland is important.

“For example, the programmes arranged by Business Finland, which last several years, have been necessary in order to make companies in the commerce sector more international, but they are not enough,” Kiviniemi says.

Kiviniemi also has a third wish for the remainder of the current government term: the urgency of making labour immigration easier. This is essential not only for the dependency ratio of the entire national economy, but for the commerce sector and the industries that serve it as well.

Appendix: Commerce sector outlook II 21 (only in Finnish)

For more information, please contact:

Jaana Kurjenoja, Chief Economist, Finnish Commerce Federation, tel. +358 (0)40 820 5378, jaana.kurjenoja@kauppa.fi

Mari Kiviniemi, Managing Director, Finnish Commerce Federation, tel. +358 (0)50 511 3189, mari.kiviniemi@kauppa.fi

[1] The amount of turnover corresponds with turnover adjusted for price fluctuations.

[2] The result is based on the input-output tables of Statistics Finland and the calculations of the Finnish Commerce Federation (summary included as an appendix).

[3] Part of the Muotikauppa koronan jälkeen (Fashion trade after the pandemic) study (summary included as an appendix).

[4] The result is based on impact calculations made by KPMG on behalf of the Finnish Commerce Federation (summary included as an appendix).