Stability Programme Update for Finland
The global economic crisis plunged the Finnish economy into an exceptionally deep recession in late 2008. Owing to the recession, public finances, which at the time were in a strong position, plummeted into a deficit in the course of one year. The deficit in general government finances will slide to 3.6% of GDP by 2010. In the next few years a great challenge of economic policy is to implement a post-recession exit strategy in which measures supporting growth will be combined with general government adjustment measures, it was estimated in Finland?s Stability Programme update endorsed by Government today and to be delivered to the EU Commission.
The Stability Programme update presents Finland's economic policy objectives and premises, in particular in terms of fiscal policy, and projects their implementation up to 2013. This update draws on the Government's decision on the 2010-2013 spending limits for central government finances, the 2010 Budget approved by Parliament on 18 December 2009 and the short-term forecast published in the Ministry of Finance Economic Bulletin of December 2009.
Recession leaves enduring repercussions on public finances
At the onset of the economic crisis, the Finnish economy was in a goodposition relative to many other countries, thanks to general government finances being in surplus. The financial sector has also withstood the upheaval caused by the global financial crisis well. Nonetheless, as an economy dependent on exports, Finland sank into an exceptionally steep recession. In 2009 the economy is expected to have contracted by 7.6%, which is significantly more than the average for EU countries.
The decline in the economy seems to have levelled off and a gradual growth in GDP is expected in 2010. After the recession, a similar rapid economic recovery to that experienced in Finland after the 1990s' recession is not expected, however. In the next few years, rapid expansion based on information and communications technology is not on the horizon and new fields of strong growth have not appeared either.
The recession will leave a deep and enduring mark on the balance of general government finances and the debt ratio. The general government deficit will deepen in 2010 to 3.6% of GDP. This exceeds the 3% deficit-to-GDP ratio specified in the Stability and Growth Pact. Public finances are expected to strengthen again from 2011 onwards but to remain in a clear deficit over the whole of the projection period. The debt-to-GDP ratio will rise to over 56% by 2013.
In the wake of the recession, the task in economic policy is to implement a post-recession exit strategy in which measures supporting growth will be combined with general government adjustment measures. The impact of the recession on public finances is so considerable that it will take a number of years to recover. Structures facilitating long-term management of public finances such as medium-term budget planning and, based on this, spending limits extending beyond the parliamentary term are therefore an important tool in implementing the strategy. Structural reforms in support of more sustainable general government finances are also an essential part of the exit strategy.
Based on the Stability and Growth Pact, each Member State must specify in their Stability Programmes a differentiated medium-term objective for budgetary balance in general government finances. Finland?s medium-term target for general government is set at a structural surplus of 0.5% of GDP. In the light of the Stability Programme, the medium-term objective will not be achieved in the projection period without new and significant additional measures. Public finances are projected to still show a structural deficit of 1.3% of GDP in 2013.
Achieving the medium-term surplus target will not be sufficient alone to safeguard the long-term sustainability of general government finances, because the surplus required to safeguard sustainability is expected to be around 4% of GDP. Owing to the large sustainability gap, general government finances must be supported by measures to strengthen the budget balance in the projection period and by structural reforms to boost growth and mitigate the spending pressures resulting from the ageing of the population.
Inquiries: Mr Jukka Pekkarinen, Director General, Economics Department, Ministry of Finance, tel. 358 9 160 33191 and Mr Sami Yläoutinen, Director, Economics Department, Ministry of Finance, tel. 358 9 160 34706
Stability Programme Update for Finland 2009
Background: Stability and Convergence Programmes
Under the provisions of the Stability and Growth Pact, euro area Member States prepare annual stability programmes and other EU Member States draw up convergence programmes. The aim is to ensure more rigorous budgetary discipline through surveillance and coordination of fiscal policies within the euro area and EU.
The stability and convergence programmes provide information on a medium-term objective representing a budgetary position that safeguards against the risk of breaching the 3% of GDP threshold of the Treaty and ensures the long-term sustainability of public finances. The information provided must cover the preceding, the present and at least three years ahead. Guidelines on the content and format of the stability programmes specify that the Member States should use common background assumptions based on EU Commission forecasts. This facilitates comparison of the programmes across Member States.
The Council examines the programmes at the beginning of each year and delivers an opinion on each Member State's programme, based on assessments by the Commission and the Economic and Financial Committee. The opinion focuses on issues such as whether the policy measures are sufficient to achieve the medium-term budgetary objective and what risks the ageing of the population might pose to the long-term sustainability of public finances.