Stability Programme update - Government seeks new measures to boost economic ...
The balance in general government finances is estimated to become much weaker but to still stay in surplus in coming years. Both central and local government will slip into deficit next year, as computed in terms of the national accounts. Indeed, the Stability Programme update endorsed by government today and to be delivered to the EU Commission indicates that the general government surplus will hinge entirely on the employment pension funds from next year onwards.
The Stability Programme update draws on the central government spending limits for 2008-2011 and on the supplementary budget proposal for 2009 submitted on 20 November 2008 and on the related short-term economic forecast.
Government fiscal policy fosters aggregate demand and growth
During the upswing in recent years, the surplus in general government has remained strong and employment has increased. However, the economic cycle has now taken a sharp turn downwards and economic growth is rapidly decelerating.
Next year's tax cuts on labour that are aimed at fostering job creation, the increases in spending and other stimulatory measures included in the budget proposal fit in well with the weakening cyclical outlook. Overall, with the economic policy measures that are incorporated in the budget proposal, fiscal policy in 2009 is geared to supporting aggregate demand and growth.
The biggest threat to global economic development comes from the problems in the global financial markets, their failure to shrug of these problems, and the knock-on effects of these problems on other areas of the economy. Furthermore, the slowdown of domestic productivity growth coupled with higher price and cost pressures may significantly erode price competitiveness.
Medium-term growth projections will not create opportunities for employment to improve at the same rate over the next few years as they have done in the past few years. The number of employed people is expected to increase by over 10,000 during the Government's term in office. Beyond 2009-2010, it is expected that the numbers employed will begin to rise again, but because of the shrinking size of the labour force this increase will remain moderate.
The aim in the Government Programme is to create a one per cent structural surplus-to-GDP in central government finances in 2011. The estimates in the Stability Programme indicate that there will be a structural deficit in central government finances in 2011 of around one percentage point. In other words, in the absence of any new measures, the target announced in the Government Programme of a one per cent structural surplus ratio will not be reached.
The cyclical trough is making it more difficult for local government to make provision for the slowdown in economic growth generated by the impending demographic changes and by the increase in service demand. Unless activities are made more efficient and growth in spending is properly curbed, local government risks facing more permanent deficits and a cycle of debt.
With the structural surplus in general government contracting faster than previously anticipated, the long-term sustainability projections will also be affected. The baseline scenario of general government balance outlined in the Stability Programme update is insufficient to ensure the long-term sustainability of public finances. The sustainability gap, which is an indicator of the threat of a cycle of debt in future decades, has grown from an estimated 1.5% last year to around 3% of GDP.
The Government will actively monitor developments in the economy and will take decisions on new measures to perk economic growth and employment around late January and early February. Finance Minister Katainen has entrusted State Secretary Sailas with these preparations.
Inquiries: Mr. Jukka Pekkarinen, Director General, tel. 358 9 160 33191 and Mr. Sami Yläoutinen, Director, tel. 358 9 160 34706.
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.