Minister of Finance Calls for Fiscal Consolidation
In November 2010, Standard & Poor’s Rating Services affirmed its AAA long term and A-1+ short term sovereign credit ratings for Finland and noted that the outlook for the Finnish economy is stable. In December 2010, the Finnish Ministry of Finance raised its 2010 growth projection for the economy from 2.1% to 3.2%, citing a faster than expected recovery in global trade. The ministry retained its original growth projection for 2011 (2.9%) and raised its 2012 projection to 2.7%.
Coping with aftermath of financial crisis
These factors demonstrate that the Finnish economy is recovering from the economic crisis. Many challenges remain, however. Jyrki Katainen, Minister of Finance, notes that inflation is expected to rise to 2.4% in 2011 from a little over 2% in 2010, mainly due to tax changes and higher commodity prices, and that the country’s budget deficit should rise to 6% of GDP this year and stay above the 3% EU limit into 2012.
The Minister of Finance favours a global approach to ensuring not only recovery from the crisis but also prevention of similar problems in the future. In a speech he delivered in April 2010 at the meeting of the IMF’s International Monetary and Financial Committee (IMFC) in Washington, DC, Jyrki Katainen commented, “While the economic and financial situation has improved, serious policy challenges remain, particularly in safeguarding public finances and rebalancing global demand. The global crisis has demonstrated the need for stronger IMF surveillance particularly on macrosystemic risks stemming from the financial sector and multilateral aspects of domestic policies. The IMF should take a leading role in analysing and giving guidance on macrosystemic issues related to financial regulation and supervision.”
Strengthening multilateral surveillance, risk assessment
Jyrki Katainen was speaking on behalf of Denmark, Estonia, Iceland, Latvia, Lithuania, Norway, and Sweden as well as Finland. He called for a “systemic bank or stability fee” to complement other measures planned to address systemic risk, and added, “A strengthened IMFC should be the key forum for global economic and financial discussions and decisions, being a truly multilateral and statutory based institution where all countries are represented. The Nordic-Baltic constituency strongly supports strengthening multilateral surveillance, assessments of macro systemic risks and spill over effects, and international policy coordination.”
While observing that “global recovery appears stronger than expected and global financial stability conditions have also improved,” the minister added in his speech, “Still, the recovery, which in the advanced economies has been driven mainly by policy support and the inventory cycle, is fragile as mostly downside risks remain and the global risk profile has been altered by the deterioration in fiscal balances and rapid accumulation of public debt. Countries should prepare and clearly communicate exit strategies from economic policy stimulus. A firm commitment to sound medium-term fiscal and monetary policy frameworks is essential in safeguarding public finances, anchoring inflation expectations, and underpinning confidence in the private sector.”
Jyrki Katainen also commented, “For most advanced countries, significant fiscal consolidation should be initiated in 2010 or 2011, depending on the fiscal challenges and taking into account sovereign risks to global stability.”
“Finland’s national Europe 2020 targets are more ambitious than those established by the European Council for the whole of the EU. These ambitious targets are essential to secure sustainable public finances in Finland.”
Strengthening public finances
The 2009 recession was one of the deepest ever in Finnish economic history; Finland’s GDP decreased by 8% and its previously strong public finances deteriorated by as much as €12 billion, or 7 percentage points of GDP. The Ministry of Finance notes that although the Finnish economy experienced moderate growth in 2010, “the general government deficit will continue to deepen because changes in the cyclical position are always slow to feed through. In 2010 and 2011 the first steps will be taken towards the stabilisation of public finances.”
Finland’s public debt is expected to top €100 billion in 2012, or 52% of GDP. Central government finances will still be in deficit in 2012 and borrowing will remain at approximately €8 billion. Overall, public debt will increase between 2008 and 2012 by nearly €40 billion, according to the ministry.
On the positive side, the euro area, which is particularly important to Finland, is expected to benefit from the strong rebound of the global economy and world trade in particular during the latter part of 2010 and in early 2011. The Ministry of Finance also predicts a 7% growth in private investment in 2011.
Europe 2020 Strategy
In November 2010, the Ministry of Finance and other government ministries announced the launch of the Europe 2020 draft national programme for Finland, part of the Europe 2020 Strategy for the EU adopted by the European Council in June 2010.
Finland’s Europe 2020 programme describes the main obstacles to economic growth, specifies five national targets, and builds on a strong European framework. As Jyrki Katainen points out, “Finland’s national Europe 2020 targets are more ambitious than those established by the European Council for the whole of the EU. These ambitious targets are essential to secure sustainable public finances in Finland.”