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The economic crisis and weak employment together with the ageing of the population have exacerbated the sustainability gap in public finances. Estimates published today, 1 February2010, by the Ministry of Finance indicate that, without adjustment measures, public finances will slip into an untenable situation. The longer the delay in adopting corrective measures, the worse the problems will become both from the economic and social point of view.
The report indicates that the sustainability problem is of such magnitude that to resolve it we will need not only structural reforms but also a critical assessment of all expenditure items, including spending cuts and reallocations. Moderate tightening of taxation will also be required.
To meet the sustainability challenge caused by the ageing of the population and weaker economic growth potential, general government finances (central and local government and the social security funds) will need to reach a surplus equivalent to 4% of GDP (around EUR 8 billion). This would allow the ratio of public debt to GDP to stabilize at a level of 60% under the current total tax rate, where age-related public expenditure is estimated to grow by an equivalent of 6 percentage points of GDP over the next two decades.
This surplus estimate, one that would ensure sustainability, is similar to the ones presented in earlier evaluation reports. As a result of the economic and financial crisis, the fundamentals of public finances, however, are essentially weaker than previously projected.
The report examines ways to introduce gradual adjustments to strengthen central government finances during the next government term at an average annual pace of EUR 1½ billion. The requirement for stabilization would ease if structural reforms in public finances were to be adopted, first and foremost in the form of reforms to boost productivity in public sector service systems which are mainly organized by local government, and solutions to lengthen the duration of years in working life.
To respond to the sustainability challenge, public finances will need to be further strengthened over the next government term, which starts in 2015. At this point, the introduction of structural reforms might have a greater impact than the first stages of an adjustment programme.
To resolve the sustainability problem, it will be necessary to enhance central government steering in the system of spending limits. Likewise, steering in local government calls for greater efficiency to stabilize local government finances and to curb spending.
This report and the estimates in it were drawn up in tandem with Finland?s Stability Programme update for consideration in Government on 4 February 2010. This publication includes updated information on previously published estimates as well as supplementary data. The purpose of the report is to serve as a discussion paper for fiscal policy decisions during the next parliament and beyond.
Inquiries: Mr Jukka Pekkarinen, Director General, Economics Department, Ministry of Finance, tel. 358 9 160 33191
Finland's Public Finances at a Crossroads (in finnish)
Ministry of Finance P.O BOX 28 FIN-00023 GOVERNMENT Tel. +358 295 16001 E-mail: valtiovarainministerio@vm.fi
