GDP to fall in 2009 - Central and local government in deficit
Finland's GDP growth slowed sharply towards the end of 2008. The higher cost of finance and the subdued state of the housing market led to a slackening in construction output. The export markets declined rapidly, and the fall in exports was followed by cuts in industrial output.
The decline in construction, in other investment activities and in exports will lead to higher unemployment. Households have therefore become more cautious. Sharply rising earnings coupled with lower inflation and cuts in income tax are boosting purchasing power. However, the present caution means the increased purchasing power is not fully reflected in consumption. This leaves growth in public sector demand as the driving force in national output. As this forms just a limited share of the overall economy, Finland's GDP will decrease by over 2% in 2009.
Lower tax revenues
The general government budgetary position was still rather strong last year. However, the sharp downturn in the economy coupled with an expansionary Budget will rapidly erode the government surpluses. This year will already see an erosion of the general government surplus. The deterioration in general government finances will be reflected most clearly and most rapidly in central government finances, above all in the accruals of cyclically sensitive taxrevenues such as corporate income tax and taxes on capital gains. The tax revenue estimate in the supplementary budget proposal has been adjusted downwards by almost EUR 2.6 billion. Asset income will also decline considerably from the high level of recent years.
The central government budgetary position will slip into deficit this year for the first time in the present decade. There will be a dramatic increase in expenditure not included in the spending limits, such as expenditure related to unemployment. Local government finances will also slide into deficit this year, and the deteriorating state of the economy will impact first on those municipalities that are strongly dependent on corporate income tax. General government debt, which last year was relatively small internationally, at an estimated 33% of GDP, will this year increase substantially as a result of these deficits.
Finland's recovery depends on the world economy
As a small country dependent on exports, the recovery of the Finnish economy is intimately connected with the cyclical state of the international economy. If the world economy begins to recover during the second half of this year, as is generally expected, the downturn in the Finnish economy will probably bottom out before the end of the year. The strength of the expansion will depend on the recovery in export demand, and could be substantial.