Stability programme update for Finland 2007

Stability programme update for Finland 2007
29.11.2007 | pdf, 626 Kt

Summary

This Stability Programme update draws on the central government spending limits for 2008 - 2011 and on the budget proposal for 2008 submitted in September, as well as related economic policy guidelines and assessments on economic developments.

The main medium-term constraint to economic growth is the ageing of the population, which in Finland will be faster and more pronounced than in the rest of the EU. The combination of shrinking labour supply and high structural unemployment together with mounting household indebtedness, changing regional demography as well as globalisation and adjustments to rapid technological advances is a demanding mix in terms of economic growth.

An ageing population coupled with high structural unemployment is a major challenge to sustainable public finances in particular. Expenditure pressure in pensions and welfare services will soon start mounting while labour supply will drop and growth in GDP and the tax base will slow down.

The surplus in general government will average at 3.1% of GDP over the next four years. The social security funds account for the bulk of the surplus in general government finances. The funds are being accumulated in response to the mounting expenditure pressure caused by the ageing population. The debt ratio in public finances (EMU debt) is anticipated to edge down below 28%.

Finland will meet the objectives of the Stability and Growth Pact both in terms of the balance in public finances and with regard to the debt ratio in the medium term. However, a sustainability analysis that includes the forthcoming demographic changes indicates that overall general government finances are not sustainable in the long term. Based on Eurostat's 2004 population projection, a surplus of 4% of GDP would be required to secure sustainability in general government finances. Under the current Stability Programme, the surplus would amount to 2½ of GDP by the end of the government term, which means there would be a sustainability gap of about 1½% of GDP. If the latest national population forecast were to be used for the computations, the sustainability figure would be even bleaker than this.