government spending limits and it shall be revised annually in connection with the spending limits
procedure.
An important part of the basic services programme is the reform of the system of local government
funding and central government transfers to local government, which will be implemented in two stages.
The first stage from the beginning of 2006 will involve the revision of certain criteria for central
government transfers and other changes to make the system clearer and increase its incentive effect.
Furthermore, the current system of cost-sharing adjustment between central and local government will be
replaced by a system where adjustments to the central government transfer percentage are enforced by
law. In making these adjustments it will be necessary to consider factors affecting the cost trends in basic
services, the current financial situation in central and local government, as well as the outlook and
challenges lying ahead. In order to secure operational precondition for all municipalities the Government
can grant discretionary financial assistance to municipalities that are in need of additional help mainly
due to economic problems of an exceptional or temporary nature. In the reform the conditions for
discretionary grants for municipalities facing special circumstances are to be reviewed with the aim of
setting stronger requirements for each municipality concerned to draw up a fiscal consolidation plan.
Following the changes in the environment in which local authorities operate, fiscal austerity, and
increasing migration, there has been more and more talk about municipal mergers. Considering the large
number of comparatively small municipalities, mergers should lead to economies of scale. For municipal
mergers to be instrumental in meeting the fiscal objectives, a more active approach to inducing
consolidation and co-operation among the many municipalities focused clearly on improvement in cost
efficiency is therefore needed. The Government is trying to speed up the process of mergers between
municipalities by granting special assistance to municipalities involved in them.
Productivity challenges are essential also in the municipal sector. As an example, the national health
programme and social sector development programme (2004 - 2007) launched on the strength of a
Government decision-in-principle in 2002 also includes the aim of increased productivity, primarily
through improved information management and more effective procedures. This will release an extra 200
million euros a year for reallocation to the development of health care. The first calculations and
estimates suggest that the targets will be met. Programme implementation is currently underway.
Furthermore, innovation and R&D related to the productivity, efficiency and quality of health services is
supported by programmes set up by the Finnish National Fund for Research and Development Sitra and
the National Technology Agency Tekes^1.
The municipal and service structure project set up by the Government has an important role in curbing
public expenditure. The objective of the project to restructure municipalities and services is a sound
structural and financial basis for the services that municipalities are currently responsible for in order to
secure the organisation and provision of such services in the future with due regard to the required
standard of quality, effectiveness, availability, efficiency, and technological advancement. Both
organisation and production of the services will be considered in the project. The project was set up by
the Government on 11 May 2005.
The basic principles set out by the government are that the size and population base of municipalities
must be sufficiently large to ensure professional service provision, and in particular specialised health
care should be provided by larger units. To improve cost effectiveness, it is also envisaged to involve a
wider variety of providers including incorporation of current public entities and more purchase of service
from private sector entities in order to benefit from economies of scale. These principles are to be
followed up by an action plan leading to a genuine reform of the municipal structure.
(^1) The Finnish National Fund for Research and Development Sitra is an independent public foundation under the
supervision of the Finnish Parliament. Its mission is to promote economic prosperity in the country. The fund is financed
from the yield of its own endowment capital and the return on its venture capital investments. The National Technology
Agency Tekes activates and provides funding for research and development projects undertaken by business companies,
universities and research institutes. Tekes comes under the Ministry of Trade and Industry.