Left party to exit Finland's government over budget cuts

HELSINKI (Reuters) - Finland's Left Alliance will quit the government after opposing cuts to welfare spending in the budget, the party's leader said on Tuesday, but the ruling coalition will retain a parliamentary majority.

The five other parties in the coalition government agreed on a budget framework, which steps up the Nordic country's austerity measures. They still hold 112 seats in the 200-strong parliament. The Left Alliance has 12 seats.

"The prime minister told us we cannot continue in the government if we don't accept cuts to unemployment benefits, to child welfare, to the sick, to pensioners," Left Alliance chief and Culture Minister Paavo Arhinmaki told reporters.

"We will hand in our resignation letters from the government later this week," Arhinmaki said, adding that his party would have imposed higher taxes on the wealthy.

The five remaining parties will move to reduce the deficit by 2018, with a mix in spending cuts and tax increases.

Cuts slightly outweigh tax hikes, with about 55 percent of the total coming from decreased spending. It will shave child and unemployment benefits, raise the maximum capital gains tax rate to 33 percent from the current 32 percent, and increase the income tax for high earners.

The measures should bring the government deficit down to 1 percent of gross domestic product by 2018.

Finland, whose debt is rated triple-A, has taken a hard line towards euro zone bailouts and has insisted that countries which require aid to post collateral in exchange for loans.

Conservative Prime Minister Jyrki Katainen accused the Left Alliance of shrinking in front of challenges.

"The time is inopportune to try and work only for one's own benefit," he said. "The Left Alliance has chosen not to be there when decisions are made and will leave the government."

The Left Alliance's decision to quit the government did not come as a complete surprise, Katainen said. There has been no decision on how the two vacant ministerial posts would be filled.

The Finnish economy shrank in 2012 and 2013 and there are fears that the Crimea crisis could dampen the expected recovery, increasing pressure on the government to cut spending in order to reduce the budget deficit which amounted to 2.0 percent of gross domestic product last year.

The government said it expected the economy to grow slightly this year, led by exports.

Europe's downturn has weighed on exports from Finland's machinery and paper industries, and Nokia's loss of dominance of the global mobile-phone market has exacerbated the economic decline.

Katainen said the plan would require sacrifices from all Finns. "Every Finn will feel these measures," he said. "These were not easy decisions, but they were necessary."

(Reporting by Sakari Suoninen; Editing by Janet Lawrence and Richard Chang)