The Finnish government last night (25 March) announced additional fiscal austerity of EUR2.3bn in expenditure cuts and tax changes. The budget framework covers 2015-18, which extends beyond the next parliamentary elections. The expenditure cuts are frontloaded: EUR1.6bn in austerity is targeted in 2015.
The Left Alliance left Finland’s ‘six pack’ coalition government after refusing to accept the package, which Prime Minister Katainen described as being ‘painful for everyone’. The government now has five parties and 112 members in the 200-seat parliament.
The announced revenue measures include a lot of small items: cuts to tax deductions, freeze in inflation adjustments to income tax brackets, increased tax burden both in high labour and capital income brackets and higher healthcare fees. Expenditure cuts include items from development aid to child allowance and industrial subsidies. The government also aims to raise almost EUR2bn by increasing dividend targets for government-owned entities and selling holdings in companies and real estate.
Together with structural changes announced earlier, the cuts are expected to bring the budget deficit down to EUR2.7bn by 2017. We expect the measures to stabilise public debt per GDP slightly above 60%, if GDP grows modestly.
Finland’s economic outlook remains weak. Despite recovery in the euro area, Finnish GDP fell in Q4. Exports to Russia will be dented by the Crimean crisis and domestic demand is flat. We expect GDP to grow only 0.5% in 2014. The government tries to strike a balance between the long-run fiscal sustainability gap and short-term need to support domestic demand. This budget addresses mostly the sustainability gap and includes only some new items for financing growth companies.
The structural reforms announced last year also aim at reducing the sustainability gap but the implementation is proceeding slowly. As a positive sign, a long-running dispute over health and social care reform moved forward last Sunday. The government and opposition parties announced that responsibility for the services will transfer from municipalities to five new regional authorities based around university hospitals. The reform, after issues relating to transfer of staff have been worked out successfully, should improve efficiency and cut costs of providing health care.
The debt to GDP ratio could rise above 60% before the end of 2015, which makes Finnish debt still relatively low and manageable. It could be argued that Finland has room for expansive fiscal policy. The sustainability gap relating to aging, the will to maintain buffers also against future shocks and the goal to keep its Aaa rating imply, however, that Finland will refrain from stimuli and targets a balanced budget sooner rather than later.
The measures go a long way towards meeting rating agency wishes, which should help to keep Aaa ratings, assuming the economy heads towards growth in 2014.
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