Elderly care staff cuts lower tax and contribution revenue

Confidence: Low

On by default

Shape: Fading

When elderly care spending is cut and some employees become unemployed, they pay no income tax or social contributions on a wage, and no employer pension or other social contributions are paid for them, until they find new work. The effect is largest in the first year and then fades. Extra spending works the other way, but probably less strongly.

Of every 100 euros that a change to “Old age (elderly care services)” saves or brings in, 2 € is lost as revenue on the line “Personal income tax” in the first year, getting 55% smaller every year after that. (The other way round if the change adds spending or cuts taxes.)

E(t) = s × T(t) × (1 − fading)ⁿ

Derived: payroll share of spending 43% (Statistics Finland 2024) × share of the cut person-years where someone loses their job about 40% (23–59% in the wellbeing services county examples; the rest retirements and posts left unfilled) × on average 0.35 years of unemployment in the first year (OECD: nearly five in six are re-employed within a year) × lost income tax and employee and employer social contributions, less the tax paid on the allowance, about 34% of the wage cost (an estimate) ≈ 2.0%. For simplicity the whole loss shows on the income tax line, although about half of it is social contributions. Fades 55% a year. Only own payroll is counted, not purchased services. In a downturn unemployment lasts longer (Verho 2020) and the effect is bigger; in the long run a change in public employment hardly changes total employment according to research, so the effect fades. If growth effects are on, part of the same effect is counted twice.

Sources: Statistics Finland: general government expenditure by function 2024 (table 12a6): compensation of employees is 44% of health spending (excl. medicines), 51% of education (excl. student aid) and 43% of elderly care; OECD (2016): Back to Work: Finland – nearly five in six displaced workers are re-employed within a year; those over 55 and the less educated more slowly (Ministry summary); Yle 23 Sep 2026: Pohjois-Savo wellbeing services county cuts 280 person-years – 50 dismissed, 14 fixed-term contracts not renewed, 88 retire (in Finnish); Yle 1 Sep 2026: at Pohjois-Pohjanmaa wellbeing services county 511 employment relationships end, 302 of them dismissals; saving €25.4m (in Finnish); Verho (2020), Economica: workers displaced in the 1990s recession were almost 50% more often unemployed five years later than a comparison group (VATT summary); Algan, Cahuc & Zylberberg (2002): public jobs crowd out private ones – in the long run a change in public employment hardly changes total employment; Faggio & Overman (2014): public sector jobs have no identifiable effect on total local private employment (England)

How the effect builds up over time

Share of the change's own effect on the balance, year by year while the change continues: −15% means 15% of a saving comes back as cost (or 15% of extra revenue is lost). With the default values.

You can switch the effect on or off and adjust its assumptions in the simulator under Cause-and-effect chains.