The debt crisis in the euro area has demonstrated the perils of cutting public spending and raising taxes amid a volatile economic situation. The Finnish Government has, regardless, decided to continue its effort to address the country's debt-to-GDP ratio but will phase the so-called adjustment measures over a several-year period.
“It's clear that adjustment measures inhibit economic growth. The difficult question is to what extent the further adjustment measures to be introduced next year will inhibit economic growth,” says Martti Hetemäki, a permanent state secretary at the Ministry of Finance.
Finnish economic growth will in 2015 largely depend on the development of the world economy. Due to extremely moderate wage hikes, the purchasing power of Finnish consumers will deteriorate, essentially ensuring that domestic demand will not spur economic growth. Meanwhile, external threats to the economy include China's waning economic growth, the repercussions of the Ukrainian crisis and the economic sanctions on Russia, and the weaker-than-forecast economic development in the euro area.
The ultimate objective of the Government is nevertheless to reverse the Finnish debt-to-GDP ratio.
“The Government has postponed the adjustment measures that would have reversed the debt ratio next year. The adjustment measures were instead distributed over several years […] to guarantee economic growth,” Hetemäki explains.
Meanwhile, the Government will also sell its assets to fund measures to promote growth already this year.
Any estimates on the impact of the adjustment measures on the national output remain inevitably speculative.
In theory, a more rigorous fiscal policy could encourage private investments and demand. A key notion of the theory is that when public debt grows, households begin to save knowing that they will have to contribute to the repayment of the debt through future tax hikes.
There is little evidence of the accuracy of the theory, however.
Petri Sajari – HS
Aleksi Teivainen – HT
© HELSINGIN SANOMAT
Photo: Vesa Moilanen / Lehtikuva