Weak growth in the commerce sector is not enough to increase employment – the tax wedge of services should finally be reduced

The slump in the commerce sector will continue early this year. The uncertainty of consumers and negative employment news are undermining retail trade and particularly specialty goods trade. Technical wholesale trade is curbed by low residential construction and low orders from industry, which are expected to begin to grow during this year. The poor market situation in Germany is causing additional concerns. Foodservice wholesale trade, on the other hand, suffers from weak demand for restaurants and lunch restaurants.

The decline in the retail trade’s sales volume continued last year for the third consecutive year. Department store and hypermarket sales and low-price commerce grew the most, but the sales volume of daily consumer goods trade also started to grow. However, the specialty goods trade and particularly its major sectors – hardware, household technology, interior decoration and sporting goods – have continued to shrink. Nevertheless, budding growth can already be seen in the hardware trade.

The downward trend in employment in the retail sector continues

For this year, the Finnish Commerce Federation predicts that the volume of sales in the retail trade will begin to grow after the weak early part of the year. At the annual level, however, the increase in the volume of sales will remain at approximately half a per cent.

“Next year, growth in the retail trade will accelerate slightly, but growth rates such as those from before the financial crisis are not expected,” says Jaana Kurjenoja, Chief Economist of the Finnish Commerce Federation.

The slowing inflation and lower interest rates support purchasing power, but declining employment and slow economic growth increase the uncertainty of consumers.

“Consecutive events that have lowered people’s confidence, from the pandemic to the security policy, will remain in the memory for some time and reduce households’ desire to consume. The caution is directly reflected in the domestic specialty goods trade, whose operating conditions were further weakened by the increase in the general VAT rate in September,” says Kurjenoja.

The forecast slow growth is not enough to change the downward trend in employment in commerce, the largest employer in the private sector. The Finnish Commerce Federation predicts that employment in the retail sector will decline by approximately 4,000 people, or slightly less than three per cent, by 2026.

The multiple tax wedge is burdensome to services

The price of services and products and service chains often include a multiple tax wedge, which reduces the purchasing power of Finns and keeps the cost level high. However, the consumer can bypass the domestic tax wedge by buying the product from an international online store. For example, the price of a women’s shirt made in Asia that is bought from an Asian online store may be only 12–35 per cent of the price of the same shirt bought from a Finnish specialty goods store.

“Only 9 per cent of the total price subject to tax of a shirt made in Asia and sold by a domestic specialty goods store consists of foreign costs. The largest cost item is work done in Finland, which is now punished even harder with the tightening of VAT,” says Kurjenoja about the cost structure of the specialty goods trade.

The current tax policy does not support growth and well-being

The tax and industrial policy over the past 10 years has not supported the improvement of the operating environment of companies and the well-being of Finns. In industrial policy, the major problem with investment and business subsidies is that they are not allocated in a sector-neutral way and regardless of the size of the company. Instead, the winners are selected based on political decisions. On the other hand, economic growth is still expected to accelerate.

“Companies innovate and invest in order to develop their business and grow, not in order to receive subsidies. Subsidies do not create growth if business development in Finland does not seem attractive,” says Kari Luoto, Managing Director of the Finnish Commerce Federation.

According to the Finnish Commerce Federation, the government’s mid-term review should now curb the tailoring of various investment packages and business subsidies and create a visionary tax policy that creates growth, i.e. focus on the operating conditions of companies.

The taxation of labour and corporations must be reduced

Private spending and consumer services are significant sources of growth and employment. The taxation of labour should therefore be steadily reduced at all income levels in order to reduce the tax wedge of services and increase the purchasing power of Finns without increasing the cost level.

“If companies do not see consumer services as an attractive growth sector, we will lose competitive positions in foreign e-commerce and tourism exports as well as in the development of new services and related innovations,” says Luoto.

Corporate taxation should be reduced to 15 per cent. A reduction in corporation taxation is the most effective weapon in tax policy to attract investments and create growth in a sector-neutral way. According to the calculations, it can also finance itself in the long term, and in the short term, tax losses can be compensated by selling state property and pruning the business subsidy system.

“Tax reductions should not be financed by tightening VAT or with new excise duties. VAT increases the tax wedge, reduces purchasing power and increases costs while targeting work carried out in Finland,” says Luoto.

Appendix: Kaupan näkymät I 2025 eLiite

For further information, please contact:

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

Kari Luoto, Managing Director, Finnish Commerce Federation, tel. +358 (0) 400 688 708, kari.luoto(at)kauppa.fi