The general government debt in Finland has more than doubled since the financial crisis. The Government's fiscal policy aims to strengthen general government finances and to curb the growth of public debt. According to forecasts, it seems unlikely that the Government's fiscal position target will be achieved, but the growth of the debt ratio will slow by the end of the parliamentary term. It is necessary to continue to strengthen public finances beyond parliamentary terms. The EU's reformed fiscal rules, the kernel of which is the debt sustainability analysis, were applied for the first time in the autumn of 2024. In the case of Finland, where debt is growing rapidly, the fiscal framework requires a rapid reduction of the debt ratio.
The fiscal policy monitoring report includes an assessment of the status of fiscal rules and objectives, compliance with the central government’s spending limits, the business cycle, and the fiscal stance. The report also deals with the factors affecting the growth of public debt, the realism of economic forecasts, and the new EU fiscal framework, which was applied for the first time in the autumn of 2024.
The general government debt ratio in Finland has more than doubled since the financial crisis particularly due to the sustained central government deficit. The surplus of earnings-related pension funds cannot be used to reduce general government debt. Therefore, earnings-related pension funds should be excluded from the examination of debt growth. It is important to ensure that the debt ratio provides sufficient fiscal space so that fiscal policy can stimulate the economy in crisis situations. In spring 2024, the Government set the target for the general government deficit to be no more than 1.3% in relation to GDP in 2027 and for the debt ratio to stabilise by the end of the parliamentary term. The target is justified.
In order to achieve its targets, the Government has prepared an adjustment package of EUR 9 billion. However, the adjustment package does not cover all fiscal measures, and the measures that are outside the package partly offset the impacts of the savings and tax increases. According to forecasts, it seems unlikely that the Government’s fiscal position target will be achieved, but the growth of the debt ratio will slow by the end of the parliamentary term. The general government deficit is expected to remain above the 3% level in 2025, and the government debt ratio is expected to rise to more than 80%. It seems that the Government’s target of a EUR 1.5 billion reduction in spending limits expenditure by 2027 will be achieved. However, the lack of expenditure decisions on the investment programme and assistance to Ukraine will still raise the spending limits and may have an impact on the achievement of the savings target. It is necessary to continue to strengthen public finances beyond the parliamentary term, assessing the spending and revenue categories and structural measures comprehensively.
The kernel of the EU’s reformed fiscal rules is the debt sustainability analysis, which is used to calculate a reference trajectory for each Member State. The reference trajectory guides the Member States’ maximum permitted growth rate for net expenditure, i.e. the net expenditure path. In the case of Finland, which is rapidly becoming more debt-laden, the safeguard that requires a rapid reduction in the debt-to-GDP ratio is a binding criterion in the debt sustainability analysis. This leads to a tight reference trajectory for net expenditure. The tight reference trajectory is also affected by the updated stock-flow adjustment, which is now better aligned with the projected development of debt.
In its first fiscal-structural plan, Finland makes wide use of the flexibilities contained in the fiscal framework. The Commission estimates that the consolidation presented by Finland meets the requirements set by the fiscal framework. Compliance with the net expenditure path will be subject to ex-post surveillance. In the coming government terms, it would be useful to draw up the plan as an integral part of the Government’s fiscal planning. According to the forecast of the Ministry of Finance, Finland will approximately follow the net expenditure path it has presented to the EU in the coming years. In 2024, however, Finland will breach the 3% deficit limit, which remained unchanged in the reform of the EU fiscal rules.
The business cycle continued to be weak in 2024, and the recovery of the economy has been delayed. The economic outlook was still uncertain and weak in autumn 2024, but the slowdown of inflation, the decrease in the key interest rates, the projected decreases in interest rates, and the slow improvement in purchasing power give hope for a turn for the better. The forecast of the Ministry on Finance on which the budget proposal is based is realistic. In the light of forecasts, the fiscal stance will be counter-cyclical, i.e. expansive in a negative business cycle, and the fiscal impulse will be neutral in 2024 and 2025.