Government approves technical spending limits
The Government has approved the technical spending limits for the 2012-2015 planning period. The spending limits provide a framework for negotiations on the new Government Programme as well as for the spending limits that will be adopted in the 2012 Budget process by the new Government that emerges from the April parliamentary elections. The technical spending limits are not submitted to Parliament.
The expenditure levels set out for the 2012-2015 period are based on current legislation and its implications for spending over the next few years ahead. The technical spending limits incorporate no policy directions. The spending limits decision is designed to provide a solid and reliable platform for the assessment of expenditures over the next parliamentary term, for instance in connection with negotiations on the new Government Programme.
Compared to the spending limits decision in spring 2010, spending in 2012 will increase by around EUR 1.6 billion, roughly half of which is accounted for by changes in cost and price levels. In addition the revised distribution of costs between central and local government will drive up spending by some EUR 0.4 billion and the renewable energy package by some EUR 0.2 billion. Central government pension expenditure and other age-related spending will increase sharply in 2012-2015. Other factors driving expenditure growth include rising interest rates and higher interest payments on a growing state debt burden. On the other hand unemployment security and other cyclical expenditure will decrease over the planning period as the economy continues to recover.
Estimates for on-budget revenue are based on medium-term projections for the national economy, which are used to extract forecasts for the development of tax bases. Over the budget planning period on-budget revenue is expected to increase on average by 4% per annum. Revenue estimates are based on earlier tax base and other decisions. No assumptions are made about new changes to tax bases.
It is expected that on-budget accounts will remain in deficit throughout the planning period. Central government debt is projected to increase by around EUR 8 billion a year, climbing to an estimated EUR 117 billion in 2015, or some 51% of GDP.
Economy remains on growth track
The global economy is continuing to grow apace. World GDP adjusted for purchasing power is expected to increase at a rate of over 4%, with most of this growth driven by developing countries.
This year's projected growth rate for the Finnish economy is 3½%. Strong external demand is accelerating the growth of exports, which in turn is pushing up capacity utilization rates. As a result it is expected that investment will gather pace and that economic growth will continue to expand. It is forecast that all demand items will contribute positively to growth, with exports emerging as the most significant driver. The projected unemployment rate is 7.6%, which in annual average terms is almost one percentage point lower than in 2010.Rising raw materials prices coupled with higher market interest rates will push inflation to over three per cent in 2011.
Output growth in 2012 is expected to come in at over 2½%. The unemployment rate will edge down to 7.2%, and the greatest inflationary pressures will begin to ease in 2012.
Despite the current buoyancy, the Finnish economy is exposed to a number of risks. The financial markets have settled down, but they are still highly sensitive to bad news. Policy choices that are construed as misplaced can reinforce adverse trends precisely through market reactions. The acceleration of global inflation may pose another risk to future economic growth.Both economic research and practical experience indicate that excessive inflation has an adverse impact on economic growth.It is crucial that no such domestic measures are taken in Finland that might escalate the spiralling of costs, which would undermine our external competitiveness. The Ministry's forecast is based on fairly optimistic assumptions about the development of the global economy and world trade. Weaker than expected trends in the global economy would quickly be reflected in our exports and by the same token adversely affect our economic outlook.
Finland's strong public finances deteriorated sharply with the economic crisis, but the deficit in 2009 and 2010 did not exceed the 3% threshold under the Stability and Growth Pact. Public finances are set to improve in 2011 in the wake of economic recovery, tax hikes and the withdrawal of temporary stimulus measures.The general government deficit in 2011 is 0.9% of GDP. Although public finances will improve on the back of economic recovery, it is projected that without consolidation, they will continue to remain in deficit in 2015.
As a result of the economic crisis central government finances in particular deteriorated sharply, and recovery over the next few years is expected to be a rather slow process. Baseline economic growth will not in itself be enough to restore balance in central government. Current prospects are that in the medium term, local government finances will remain close to balance. Employment pension institutions are firmly in surplus, but it is predicted that the surplus will begin to contract with the sharp rise in pension expenditure in the new decade. The other social security funds, i.e. the Social Insurance Institution and the Unemployment Insurance Fund, are close to balance.
Over the past two years Finland's public debt has increased by some EUR 25 billion, or around 15 percentage points in relation to GDP. In the medium term this debt will continue to rise year on year, but since the debt level before the recession was no more than 30% of GDP, Finland is in a better position than most other EU countries. Nonetheless it is a matter of great concern that unless new measures are brought in, the debt ratio will continue to rise over the budget planning period.
Inquiries: Hannu Mäkinen, Director General of the Budget Department, tel. 358 9 160 33036; and Tuomas Sukselainen, Director General of the Department of Economics, tel. 358 9 160 33191