German economics Professor Sebastian Gechert told Yle that he was “a little annoyed” the ministry did not use the main finding from his study.
Documents assessing the economic impact of the Finnish government’s major tax cuts reveal inconsistencies in the Ministry of Finance’s calculations.
Although the ministry claims the cuts will largely pay for themselves through increased economic activity, closer inspection shows this assessment lacks firm grounding.
The government plans to reduce corporate tax from 20 percent to 18 percent, with the Finance Ministry stating the cut would be 60 percent self-financing, or in other words pay for itself due to expected boosts in investment and growth.
However, the academic research used to support this estimate appears to have been misinterpreted.
German economics Professor Sebastian Gechert, whose meta-study of over 40 corporate tax cut cases underpins the Finance Ministry’s calculations, told Yle that the ministry had misunderstood a key figure.
“Usually when we look at the international evidence, then we see that corporate tax cuts can have some self-financing effects over time, but that’s more in the realm of 10 to 20 percent, after a long time. Not in the realm of 60 percent in five years — that would be a very optimistic calculation in my view,” Gechert said.
The 60 percent cited in the memorandum reflects GDP growth, not direct tax revenue effects. When properly recalculated, the self-financing rate drops to just 25 percent.
“I was actually a little annoyed that the ministry didn’t use the main finding of our study, but instead focused on a highly specific result. The main takeaway is that, on average, self-financing is close to zero,” Gechert said.
Finance Ministry admits no calculation behind headline figure
Despite the widespread assumption that the 60 percent figure was derived from the same example included in its public memo, the ministry now says otherwise.
“That 60 percent self-financing rate has nothing to do with the example calculation,” said Lauri Kajanoja, the ministry’s economic policy coordinator. He clarified that the example was merely meant to illustrate the type of research available.
Kajanoja admitted there is no actual calculation behind the official estimate. Rather, the ministry selected a high-end figure from academic literature, based on its expectation that other pro-growth reforms — like easing business regulations and boosting research and development — would amplify the tax cuts’ effect.
“The government has taken many measures expected to strengthen the positive growth effects of the tax changes. That’s why we chose an estimate closer to the upper end of the range,” Kajanoja explained.
The discrepancy raises fresh doubts about the credibility of the government’s economic modelling. Critics point out that the 60 percent figure lacks a solid analytical foundation, and that the only documented estimate — the example calculation — puts the self-financing effect at less than half that rate.
The difference could mean hundreds of millions of euros in annual public revenue. Yet Kajanoja rejected claims that the two figures are in contradiction.
“There’s no direct connection between them, so I don’t see it as inconsistent.”
Fiscal strategy depends on dynamic effects
The issue is politically significant. The government is offering over two billion euros in tax cuts, while only planning one billion euros in offsetting tax hikes and spending cuts. Officials claim the rest will be covered by “dynamic effects” — the idea that growth will drive up tax revenues.
Many economists are sceptical. Several experts have warned the government’s fiscal plan may increase Finland’s structural deficit, as they doubt the tax cuts will generate nearly as much new revenue as hoped.
Whether those dynamic effects materialise as forecast will play a critical role in determining whether Finland’s debt path can be stabilised.
