Jenni Pääkkönen, a financial advisor at the Ministry of Finance, was photographed at the launch event of the ministry’s latest economic forecast in Helsinki on Thursday, 25 April 2024. The ministry expects the national economy to be stagnant this year before growing by around 1.5 per cent in 2025–2026. (Markku Ulander – Lehtikuva)

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ECONOMIC GROWTH in Finland will be held back by 0.5 percentage points in 2025–2026 by the spending cuts and tax increases to be implemented by the government of Prime Minister Petteri Orpo (NCP), estimates the Ministry of Finance.

The Ministry of Finance on Thursday announced it expects the economy to be stagnant this year, representing a 0.7-point downgrade from the forecast released in December.

The economy is forecast to expand by 1.6 per cent in 2025 and 1.5 per cent in 2026.

The Ministry of Finance said the economic recovery will be fuelled by slowing inflation, falling interest rates and rising household income. Also investments are forecast to start increasing next year as interest rates fall, the construction industry recovers and measures to beef up security are implemented.

“Finland is the subject of an enormous investment plan. Most of the investments naturally won’t be carried out, but the extent of plans is so large that investments will likely provide a boost [to growth] at the end of the decade,” Janne Huovari, a financial advisor at the Ministry of Finance, said at a press conference in Helsinki on Thursday.

“The spending cuts and value-added tax raise will in part weaken improvements in the [economic] situation. But their effects aren’t so large that we won’t see growth in private consumption and household purchasing power,” he added.

While the fiscal adjustment measures will undermine economic growth, they will significantly strengthen the public economy – albeit not to the extent that they would halt the growth of debt as a proportion of gross domestic product, according to the Ministry of Finance.

“Government measures will slow the growth of the debt ratio, which will settle at about 84 per cent at the end of the forecast period [in 2028],” it stated in a press release.

The Finnish economy had a total debt burden of 210.5 billion euros at the end of 2023, equalling 75.8 per cent of gross domestic product, according to recent data from Eurostat. The debt ratio grew by 2.3 points from the previous year, more than anywhere else in the EU.

Even though the recession will start loosening its grip toward the end of this year, stabilising the public economy has proven more difficult than anticipated, the ministry acknowledged.

“Problems in the public economy date further back, and the deficit isn’t about to magically disappear. The growth of the debt ratio will slow down and possibly even flatten over the forecasting period, but it looks like it’ll do so temporarily,” Jenni Pääkkönen, a financial advisor at the Ministry of Finance, commented at the presser.

The ministry stated that the budget deficit will widen this year, settling at over 3.5 per cent of gross domestic product. It is, though, expected to contract to under two per cent by 2028 – still well below the one-per-cent target set by the government by 2027.

“Without additional measures, the deficit in the public economy would be above three per cent of gross domestic product for several years and the debt ratio would be almost 90 per cent in 2028,” its press release reads.

EU rules that member states should not have a budget deficit exceeding three per cent of gross domestic product.

“What you can say about the figures it that the buffer for [complying with] the rules and reaching the government’s own goals is very thin. We can’t afford any kind of negative surprises in the real or public economy,” summarised Pääkkönen.

The forecast, she also highlighted, does not take into account all of the measures laid out but not yet implemented by the government.

“Especially the growth measures the government has decided on can have positive effects on the real economy and public economy if they get off the ground and have the desired impact,” she remarked.

Aleksi Teivainen – HT

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