The Government's budget proposal for 2011 and overview of the economic outlook
The Government's budget proposal for 2011 amounts to total spending of EUR 50.3 billion, with the budget deficit standing at EUR 8.3 billion.
On-budget expenditure will be roughly the same or around 4% below the figure in the ordinary budget for 2010. The reasons for this drop include the progressive unwinding of stimulus measures and the removal of certain state loans from expenditures. Administrative branch appropriations account for EUR 48.3 billion and interest expenses for EUR 1.9 billion of the proposed budget.
The level of appropriations contained in the budget proposal is consistent with the spending limits agreed for the parliamentary term. Spending limits expenditure is budgeted at EUR 37.7 billion, which is around 100 million below the ceiling. In addition, there is a supplementary budget provision of EUR 300 million for unexpected appropriation needs in 2011. Proposed expenditure outside the spending limits for 2011 is EUR 12.6 billion.
On-budget revenue in 2011 is expected to increase by around 7% from the figure budgeted for 2010. Tax revenue will account for 85% of all on-budget revenue and is forecast to rise by 9%. Tax revenue will increase by EUR 2.8 billion compared to the 2010 budget: EUR 1.0 billion of that increase will come from tax rate changes and the rest from expanding tax bases.
On-budget balance, EUR million
2010 budgeted 2011 proposal
Revenue* 39,144 41,948
Expenditure 52,482 50,270
Actual deficit 13,338 8,322
*Excluding use of cumulative surplus
Central government debt will climb to EUR 85 billion next year, which is about 45% of GDP. Central government debt has soared as a result of the economic crisis. By year-end 2011, the figure is expected to be around EUR 30 billion higher than in 2008.
Economic outlook improving
The global economy is emerging from recession and the financial crisis that triggered the slowdown. It is anticipated that over the next 18 months, both the global economy and world trade in particular will show quite robust growth. Driven by traditional export demand and private consumer demand, the Finnish economy is returning to a growth track after the winter slowdown. This is a direct reflection of the fact that employment did not drop as steeply as in previous recessions. The projected unemployment rate for 2010 is 8.6%, edging down to 8.2% in 2011.
GDP growth for 2010 is projected at around 2%. The prospects for economic growth remain positive for 2011, and investment is expected to pick up. GDP is expected to grow at a rate of close to 3% in 2011. With capacity utilization at depressed levels, pressure on domestic consumer prices will remain modest this year. Prices will be affected most by a rise in import prices resulting from increases in world market prices of raw materials. The inflation forecast for this year is around 1.5% and for next year around 2.5%. Next year, upward pressure on prices will intensify due to risingimport prices and through more buoyant economic activity both domestically and internationally.
The forecast involves risks and uncertainties in both directions. With respect to the global economy, negative risks are associated with the fragility of economic growth, public sector indebtedness and financial imbalances and the slow pace of employment growth.
Finland's strong public finances deteriorated sharply during the economic crisis, declining by as much as EUR 12 billion or 7 percentage points relative to GDP in 2009. Automatic stabilizers have been allowed full operation, in addition to which discretionary stimulus measures have adversely affected the financial position of general government.
During 2010 and 2011 the first steps will be taken towards the stabilization of public finances. With the increases in VAT rates and energy taxes and higher taxes on sweets and soft drinks, fiscal policy is moving away from a stimulatory strategy towards a tighter stance.
Although the economy will return to moderate growth in 2010, the general government deficit will continue to widen because the impacts of the turnaround will take some time to filter through. The general government deficit for 2010 will come in at 3.3% of GDP. General government finances will improve next year but continue to show a substantial deficit at 1.4% of GDP. The central government deficit will also deepen in 2010, but next year it will begin to shrink in response to accelerating economic growth and tax hikes. The public debt to GDP ratio is continuing to rise as a result of central and local government borrowing, and in 2011 the ratio will exceed 50%. Even though the public debt ratio in Finland is still relatively low by EU standards, the rate at which debt is growing does give cause for concern.
It appears that the economic crisis has caused less damage than feared to the local government sector. Government interventions including the increased apportionment of corporate tax revenue to local government and the discontinuation of the national pension contribution have significantly improved the financial position of the municipal sector during the crisis. However municipal finances will continue to remain more strained than usual, with revenue from municipal taxes remaining flat because of the weak employment situation. On the other hand the prospects for an increased level of tax revenue over the next few years are brighter than indicated by earlier forecasts. Improving local government balance and mobilizing the necessary investments without constantly creating new debt demand considerable caution to keep operating expenses in check. Furthermore, the cost pressure of population ageing on municipal finances highlights the need for productivity-enhancing reforms.
Social security funds are firmly in surplus. It is expected that in 2011, the financial surplus of social security funds will increase somewhat from the current year. Surplus will only accumulate in employment pension funds, which are preparing for the growth of pension expenditure due to population ageing.
Inquiries: Director General of the Budget Department Hannu Mäkinen, tel. 358 9 160 33036, Director General of the Department of Economics Tuomas Sukselainen, tel. 358 9 160 33191, and Deputy Director General of the Budget Department Markus Sovala, tel. 358 9 160 33105