HELSINKI (Reuters) -Finland's government announced tax breaks for companies and employees in an attempt to boost the country's ailing economy in a mid-term budget review it completed late on Wednesday.

In office since June 2023, the government had promised to stop public debt from growing despite the economy's slow recovery from a recession.

But at the mid-term budget talks, it chose to loosen its budget discipline and opt for tax breaks in the hope of boosting growth.

Corporate tax will be cut to 18% from 20%, the government said, while employee income taxation will be reduced by a total of 1.1 billion euros ($1.25 billion).

"We will make Finland one of Europe's most attractive countries for investments," Prime Minister Petteri Orpo told reporters after two days of budget talks.

Boosting growth is essential to fund increased spending on defence and other government expenses, Orpo said.

The Finnish economy shrank by 0.1% last year, according to preliminary data, while the Bank of Finland has warned 0.8% growth forecast for this year was under threat from tariffs and the global trade war.    

The tax breaks will be partially funded with a one-time withdrawal from the state pension fund, the government said.

Finance minister Riikka Purra said the government remained committed to stabilising public debt by the end of 2027 but acknowledged it would miss its initial target of reducing the fiscal deficit to 1% of gross domestic product by then.

According to finance ministry calculations, the deficit would shrink in 2026 and 2027 thanks to the pension fund withdrawal but then resume growth in 2028 and 2029 after the government's planned term.

While the right-wing government had estimated the 2024 deficit to be 3.7% of GDP, statistics office data on Tuesday showed it had reached 12.2 billion euros, or 4.4%, well above the European Union 3% limit. 

The government now expects a 12.3 billion euro deficit in 2025.

The government earlier this month announced plans to raise defence spending to 3% of GDP by 2029, from 2.4%, to meet growing NATO demands.

($1 = 0.8819 euros)

(Reporting by Anne Kauranen and Essi Lehto in Helsinki, editing by Terje Solsvik and Tomasz Janowski)