The difficulty in understanding Helsinki’s position Heikki Helin

The special nature of cities usually receives little at-

the Helsinki Region than in Finland at large. Housing

tention, and in national policy, major cities are often

in particular is expensive: rents are at least

seen in opposition to other areas. In Finland, for ex-

one-quarter higher than in Finland as a whole. With

ample, Helsinki’s position and development is ham-

an average income, a Helsinki citizen pays the equiv-

pered by a deeply rooted – although ungrounded –

alent of an additional 5 to 10 per cent extra tax for a

conception of rich metropolitan areas that grow at

rented flat than other Finns on average (Helin, ed.

the expense of other municipalities. This has given

Keskinen et al. 2002).

rise to the idea in Helsinki to study and compare more

The economy of the City of Helsinki has developed

closely the special features of major cities.

in a stable manner. Whilst the city has been able to

By international standards, Helsinki is Finland’s

predict and cope with fluctuations in tax revenue due

only major city. It has roughly ten per cent of the

to economic highs and lows, it has had no means to

country’s population, but its significance in many cru-

be prepared for sudden and surprising decisions

cial matters of the nation is often much greater. For

made by the state.

example, Helsinki has 16 per cent of the country’s jobs, and consequently any major upswing or reces-

High costs in big cities

sion in Helsinki will soon have effects nationwide. Helsinki has most of the state authorities’ central

The balance of the municipal economy depends on

offices and most company headquarters. This is

revenue and expenditure. In Finland, where the con-

probably why Helsinki is often seen as a rich city else-

stitution grants municipalities autonomy including

where in Finland. With its higher income level and

the right to levy municipal tax, the state has signifi-

great accumulation of corporate tax revenue, Hel-

cantly influenced the revenue of municipalities by

sinki has been envied by most, and there has been lit-

means of collecting corporate tax nationwide and al-

tle understanding for Helsinki’s problems.

locating it to municipalities according to certain crite-

Helsinki’s municipal tax rate has been lower than

ria. The state, i.e. the legislator, which has formu-

average among Finnish municipalities but, obviously,

lated these criteria itself, has also forced municipali-

municipal tax is just one of many different costs of

ties to produce certain kinds of services without allo-

living. The general level of costs is clearly higher in

cating sufficient funds for the purpose.

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State allocations for Helsinki’s operational economy 1991–2002, euros per inhabitant

Among the biggest cities in Finland, Helsinki has the most expensive municipal public services (Helin 2002). There are several reasons for this, among

Euros/inhabitant 1000

which the higher level of salaries and premise rents

800

are important. In Helsinki, advantages of scale (more

600

clients per service provider) have turned into additional costs within some services.

400

High public service costs in Helsinki are explained

200

by the same factors that, according to Ernst Jonsson

0

(1989), lie behind similar differences of costs be-

-200

tween major cities and other municipalities in Sweden: service production in big cities has certain fea-

-400 1991

1993

1995

1997

tures of mass production. Mass production, of course,

2001 2002

1999

may give certain advantages, but at a certain stage these advantages become additional costs. With electricity, water and other technological services, Operational costs for the social and health services of 16 Finnish cities in 2001, euros per inhabitant

costs per unit usually decrease with increasing volume. But in education, health care and other similar services the same rule will not apply, and administrative costs grow rapidly.

Helsinki

According to Jonsson, the high costs per capita for

Vaasa

public services in Stockholm, Gothenburg and Malmö

Kotka

compared with Swedish municipalities at large are related to the high level of salaries, rents and costs in

Turku

the big cities, the greater proportion of immigrants Vantaa

and the disadvantages of a big city. Major cities have

Espoo

a greater proportion of divorced people, singles and

Average

foreigners. This fact is usually linked with various so-

Jyväskylä

cial problems that we see in Helsinki, too, and that

Tampere

partly explain the high costs. Compared with the

Lahti

other Scandinavian metropolises, costs are not higher in Helsinki.

Hämeenlinna

There are many problems with comparisons of

Lappeenranta

public service costs in municipalities. An apparent Kuopio

paradox seems to be that the more developed a mu-

Mikkeli

nicipality’s cost accounting system, the higher the

Oulu

costs per unit. The costs say nothing about the qual-

Pori

ity of the service or the needs for service. In several

Joensuu

service fronts, Helsinki offers high-quality service – 0

500

1000

1500

2000

and the city provides services to neighbouring munic-

2500

ipalities, too.

Euros/inhabitant

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The state allocation system does not account for higher service costs

take higher salaries and real estate costs into account (Jonsson 2002, 2003).

Helsinki foots the bill

The Finnish state allocation system consists of 1) allocations for special purposes and 2) a division of na-

From the state’s point of view, the Finnish municipal

tionwide aggregate tax revenue. The division – also

sector’s economy has increasingly turned into a zero

called equalisation – of tax revenue efficiently cuts

sum game. By taking from some municipalities and

the tax revenue of those municipalities that exceed

giving to others, the state has been able to reduce its

the national average. Thus, in 2000, 2001 and 2002

own role in supporting the activities of municipalities.

Helsinki received no equalising tax revenue funds but

Through its various decisions, the state has weak-

paid to the others, instead. The uncertainty of the

ened the aggregate municipal economy by 4.3 billion

municipalities around Helsinki has been increased by

euros.

the fear of even greater tax equalisation rates.

In Finland, the tax revenue of municipalities is

The present state allocation system is based on a

equalised according to a procedure where each mu-

system introduced in 1997. The significance of tax

nicipality is guaranteed a tax revenue that equals 90

equalisation grew in 2002, when the 15% limit was

per cent of the average tax revenue of all municipali-

cancelled. Under this scheme, no more than 15% of a

ties. Municipalities whose tax revenue falls short of

municipality’s calculated tax revenue could be in-

the 90 per cent limit receive an equalisation that

cluded in the equalisation.

amounts to the difference between the limit and their

The rules for the state allocations for special pur-

tax revenue. If the tax revenue of a municipality ex-

poses contain no such criteria that recognise the spe-

ceeds the 90 per cent limit, the state allocations to

cial problems caused by Helsinki’s position as a big

this municipality are reduced by 40 per cent of the

city. And indeed, it would be difficult to find such cri-

amount of the excess.

teria. Also, increased criteria would probably lead to a

In 2002, 80 municipalities exceeded the 90 per

more complex system than today, and their effects

cent limit, and paid an aggregate equalisation of 875

would not be significant. Therefore, the emphasis has

million euros. Helsinki’s share was 410 million euros,

been on revenue equalisation.

i.e. 47 per cent. This corresponds to the yielding of 4

The problem for Helsinki with the Finnish state al-

tax per cent units in Helsinki. Together with its neigh-

location system is that it cuts Helsinki’s higher in-

bours Espoo and Vantaa, Helsinki accounted for 72

come without, however, taking into account that ser-

per cent of the equalisation.

vice costs are higher in Helsinki due to higher income levels. For example, salaries in health care and child

The state has taken over tax revenue from municipalities

day care are clearly higher in Helsinki than the national average for the simple reason that otherwise

In solemn speeches we are often reminded that the

people in Helsinki could not afford to take these jobs.

right of municipalities to levy municipal tax is a cor-

State allocations for special purposes do not ac-

nerstone of municipal autonomy. Yet, the independ-

count for these differences in cost level, either. Jonsson has pondered how tax revenue equalisa-

ence of taxation is crumbling bit by bit – and so is au-

tion between municipalities could be made fairer. He

tonomy. High tax revenues in the Helsinki Metropoli-

suggests a sort of net income equalisation that would

tan Area are due to its higher income level than the

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Helsinki’s difficult position

national average. Another reason why Helsinki has had high tax revenue is corporate taxes. Since 1993, of course, this revenue has consisted of what is left

In the 1990s, the stable operational environment of

after corporate tax equalisation. And the proportion

Finnish municipalities became a turmoil. Reforms

going to municipalities has been used for tax equali-

succeeded each other, and their consequences were

sation and partly therefore it has shrunk. In 1993,

not always evaluated properly. Often new reforms

municipalities received 44.8 per cent of corporate tax

were being planned before their predecessors had

revenue, but in 2003 only 19.75 per cent. This has

even been put into practice, let alone evaluated.

implied difficulties particularly for those municipali-

Municipalities would have preferred a stable and

ties who used to have large corporate tax revenues.

predictable operational environment – just like any

At a certain point, Helsinki accounted for as much as

organisation would. Due to the unexpected measures

a quarter of the share of Finnish corporate tax that

of the state, it has been impossible to plan further

went to municipalities.

ahead than one year or so. Nobody has been able to

Helsinki’s problem is its size. When the share of

predict what the state might decide on tax revenue

aggregate corporate tax that municipalities receive is

and obligations, because the state authorities have

reduced or when tax revenue equalisation is raised,

been busy preparing a comprehensive reform of the

Helsinki contributes with funds that can repair the

state’s funds allocation system.

economy of tens, even hundreds of smaller munici-

Not many are ready to protect Helsinki’s interests

palities.

when the issue is to decide about cuts in corporate

According to Ministry of Finance calculations, the

tax and changes in the tax revenue equalisation sys-

municipalities’ share of the aggregate corporate tax

tem. If we really were to cancel the municipalities’

revenue should be cancelled and replaced by state al-

share of aggregate corporate tax, it would not be

locations. Such a measure would hardly fail to influ-

possible to create a system that would account for

ence the policy and activities of municipalities. To

the level of corporate tax revenue that municipalities

date, municipalities have endeavoured to attract

are enjoying today. If the equalisation of tax revenue

business, too, but from then on they would most

were to be increased further and if the state did not

likely start competing for taxpayers. We can only

participate in the costs incurred, Helsinki and the rest

speculate what municipal decisions taken a few years

of the Metropolitan Area would have to foot the bill

ago would have been like if it had been known that

again.

the allocation of corporate tax revenue may be

Members of parliament elected from other parts of

changed.

the country sometimes pursue the interests of their

It has been customary to locate business enter-

region very perseveringly, and politicians – whether

prise, too, in the administrative, economic and cul-

elected in Helsinki or elsewhere – usually do not seem

tural centre of the municipality. Corporate tax may

to have the time or energy to take an interest in the

also be seen as a kind of compensation for the higher

City of Helsinki’s economic problems. And there are

level of cost due to the position that big cities have as

politicians in Helsinki that have a different view than

nodes.

the city’s authorities of what decisions should be made in order to promote the city’s interest. Helsinki’s position is difficult in the Association of Finnish Local and Regional Authorities, too. The state has partly managed to withdraw from its responsibili-

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ties by leaving the distribution and equalisation of tax

References:

revenue increasingly to the municipalities them-

Helin Heikki, Turhaan kadehdittu Helsingin rikkaus. Julkaisussa Helsinki – pohjoinen metropoli. Helsingin kaupungin tietokeskus (toim. Vesa Keskinen – Martti Tuovinen – Mari Vaattovaara) 2002.

selves. Differences of opinion between municipalities are settled within the Association of Finnish Local and Regional Authorities, and the state government does

Helin Heikki, Kallis Helsinki. Suurten kaupunkien palvelukustannukset vuonna 2000. Helsingin kaupungin tietokeskuksen tutkimuksia 2002:1.

not have to get involved in disagreements between municipalities. Helsinki and the Metropolitan Area are

Jonsson Ernst, Varför har storstäder särskilt höga kommunala kostnader? IKE, Institutet för kommunal ekonomi. December 1989.

a minority in the association, and in the zero sum game between municipalities it is easy to move resources to others.

Jonsson Ernst, Skatteutjämning mellan kommuner. Hur kan sen göras mer rättvis? IKE, Stockholms universitet. Företagsekonomiska institutionen. Stockholm, December 2002.

For Finland’s national economy as a whole, too, there is reason to study what happens if development of the country’s most efficient region is hampered by

Jonsson Ernst, Så blir det kommunala utjämningssystemet mer rättvist. Kommunal ekonomi. nr 1/2003, ss. 25–28.

draining its financial resources.

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