Seija Ilmakunnas, the director of the Labour Institute for Economic Research, urges the Government to get its debt trend under control.Structural changes are needed to reverse Finland's debt trajectory, economists view.

PASI Holm, the managing director of Pellervo Economic Research Institute, and Seija Ilmakunnas, the director of the Labour Institute for Economic Research, concur that Finland cannot balance its budget deficit year after year by borrowing.

According to Holm, the budget deficit of seven billion euros is a problem particularly because it is now hovering at its current level already for the sixth consecutive year. While attempts to tackle the deficit have naturally been made, thus far they have yielded no results, Holm adds.

Prime Minister Jyrki Katainen's (NCP) Government has until 2015 to get the public debt under control.

Under EU conventions, the national debt of a member state shall not exceed 60 per cent of its gross domestic product. “Today, the figure stands at around 62 per cent,” highlights Holm, reminding that in comparison to several other eurozone economies, the figure is nonetheless relatively low.

Whereas Holm estimates that the public debt should be balanced by 2017, Ilmakunnas refrains from offering a specific timetable for the project. “Finland relies on the economic development of Europe,” she reminds.

The more successful the implementation of the Government's structural policy programme and the more plausible the programme is, the more leeway Finland will have, Ilmakunnas estimates.

“If a credible structural policy programme is finalised during the current Government term, the debt situation will not be as alarming as it would otherwise be,” she views.

Although it is vital to reverse the debt trajectory in the medium term, Ilmakunnas views that it is not necessary to achieve this during the reign of the current Government.

It is important to bear in mind, she stresses, that domestic demand has diminished and is projected to remain weak for the rest of the year. In this light, the high debt level is tolerable.

According to Holm, the structural policy programme includes measures needed to balance the budget. “The reform of social and health care and the raise of the retirement age will help, but in addition we must pursue extremely moderate wage hikes in the next labour market talks,” he adds.

The priority now, Holm says, is to expedite and specify the structural reforms. If the Government is to address its debt trajectory, annual adaptation measures of roughly a few billion euros are needed until 2017.

“It has been proposed that the budget be adjusted by 2—3 billion euros, half through tax hikes and half through spending cuts,” reveals Holm.

With the next parliamentary elections only a year away, Holm believes they will also prove significant.

“Maybe the adaptation measures will not be as extensive. In any case, measures to promote growth are required to support them,” Holm underlines.

With the employment situation only improving modestly, the Government must also introduce measures to encourage employment. “Support for the airport operator Finavia, for example, is a positive thing, but other projects are also needed,” says Holm.

Meanwhile, Ilmakunnas reminds that Finland's debt burden has many temporal dimensions. The sustainability deficit is a problem in the long term, whereby repairing the public economy in the long term is crucial.

In addition, policy-makers must consider how to safeguard public revenue streams.

“If you tighten the public belt notably in the short term, the risk is that you reduce economic growth and tax revenue,” Ilmakunnas reminds.

Ilmakunnas hopes that the Government demonstrates its ability to implement the structural policy programme in the spring's framework session. Holm, in turn, hopes that decision-makers announce further adjustment measures.

Kirsti Karttunen – HS
Aleksi Teivainen – HT
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Photo: Mikko Stig / Lehtikuva