Supplementary budget submitted to Parliament: Government borrowing to reach 8 billion euros in 2009
The stimulus package adopted by the Finnish Government on 30 January 2009 for inclusion in the 2009 supplementary budget will increase budget appropriations or reduce central government revenue by a net total of EUR 662 million. In addition, EUR 1.35 billion will be allocated to finance business and exports. Higher than projected unemployment rates will increase the need for appropriations to cover unemployment benefits, housing assistance and basic income support by around EUR 290 million. Today, on 3 February 2009, the Government has reached agreement on the 2009 supplementary budget that will be submitted to Parliament.
With the decrease in actual revenue amounting to EUR 2,867 million and the net increase in appropriations rising to EUR 2,738 million euros, the 2009 supplementary budget shows an overall deficit of EUR 5.6 billion. The Government?s net borrowing requirement for 2009 is put at EUR 8.0 billion. It is estimated that at the end of 2009, central government debt will stand at EUR 62.6 billion, or 34 per cent of GDP.
The Government proposes that the temporary financing made available for export credits be increased from the earlier figure of EUR 1,200 million to EUR 3,000 million. To this end, the amount of loan authority available from the state budget to Finnish Export Credit Ltd (FEC) is to be increased by EUR 2,500 million. Furthermore, the Government hopes to establish a new fund under Finnish Industry Investment Ltd, which will be charged with investing in viable businesses that have run into difficulty in the current downturn. A total of EUR 100 million will be invested in the capitalization of Finnish Industry Investment Ltd. It is proposed that loss compensation for Finnvera plc be increased by EUR 15 million.
The Government proposes that a loan of EUR 350 million be granted to the Government of Iceland to help stabilize the country?s economy. The interest on the loan would be no lower than the rate payable by the Finnish Government on a corresponding loan taken out for the same period. The more detailed terms of the loan shall be decided by the Ministry of Finance.
Estimated revenue from income tax is down EUR 1,620 million. EUR 100 million of this decrease is attributable to lowered revenue from earned income and capital income tax and EUR 1,520 million to lowered corporate tax revenue. The decrease in earned income and capital income tax is due primarily to the expected rise in unemployment, while estimates for corporate tax revenue have been revised downwards based on 2008 accrual data and declining corporate financial performance.
Estimates of VAT revenue are revised downwards by EUR 603 million to reflect 2008 accrual and the bleaker economic outlook. Estimates of revenue from energy taxes are down by EUR 47 million based on lower accrual rates and lowered estimates of energy consumption.
Estimated revenue from car tax is down EUR 250 million because of weaker than projected economic development. Figures for capital transfer tax are lowered by EUR 100 million on the basis of accrual data and weaker than projected economic development.
Liquidation of asset management company Arsenal Ltd is expected to bring central government EUR 23.7 million in revenue. In addition, EUR 20 million will be entered as revenue from the Government Guarantee Fund.
Estimates for interest received on deposits are down EUR 73 million because of lowered deposit interest rates. Estimates of dividend revenue are revised downwards by EUR 250 million in response to declining corporate financial performance, particularly in late 2008.
Economic situation deteriorating rapidly
Output is set to shrink by more than 2 per cent in 2009, even though the stimulus package included in the supplementary budget will help to mitigate the economic downturn and slow the rise in unemployment. Given the country?s heavy dependence on exports, the recovery of the Finnish economy is dependent on demand rebounding in the export market. If the global economy recovers as expected in the latter half of 2009, then it is thought that the ongoing downturn will bottom out by the end of the year.
The slowdown of construction, other investment and exports will cause unemployment to rise: during 2009 the average unemployment rate will climb to over 8 per cent of the labour force. This will make households increasingly cautious and encourage saving. Inflation will slow sharply, particularly as a result of declining energy costs and lower interest rates. Consumer prices will rise on average by around one per cent this year.
General government surplus to melt away
In Finland the impacts of the economic downturn are most acutely felt in central government finances. In 2009 the National Accounts deficit will stand at -2.3 per cent of GDP.
Local government finances will also slip into deficit this year. The first to be hit by the deteriorating economic situation are local municipalities that are most heavily dependent on corporate tax revenue. Unless expenditure can be reined in, the problems in the local government sector threaten to spread further in 2010.
The financial surplus in general government will melt away during the current year. In 2009 the National Accounts general government deficit will be -0.4 per cent of GDP.
Public debt, which in 2008 stood at the internationally comparatively low level of 33% of GDP, will also rise sharply in 2009. Both central government and local government debt burdens will increase, and it is projected that the public debt to GDP ratio will climb by at least 5 percentage points to 38 per cent.
Further information: Hannu Mäkinen, Budget Director, tel. 358 9 160 33036, Markus Sovala, Deputy Budget Director, tel. 358 09 160 33105 and Taina Eckstein, Economist, tel. 358 160 32598