Even if the short-term expansionary effects of a fiscal devaluation fade away over time, results from the assesment of long-run effects of such a policy option point also to a permanent, although small expansion of employment and GDP. Effects on the trade balance are likely to remain small both in the short run and in the long run.

Fiscal devaluation refers to a budget-neutral reduction of payroll taxes matched by changes in other taxes or in government expenditures. For instance employers’ social security contributions might be reduced, with the reduction financed by raising the VAT rate.

When devaluation of a currency is excluded as a policy option (as it is in the Euro Area), and nominal wages are inflexible, competitiveness and employment can be improved by lowering indirect labour costs. On top of the favourable short-term effects come long-term efficiency gains, since the VAT is considered less distortive than social security contributions.

A fiscal devaluation may stimulate the economy by reducing labour costs as nominal wages are not immediately adjusted to the reduction in the social security contribution rate. Consequently, net exports would increase. Moreover, higher VAT rate would depress consumption and imports, while exports are not subject to VAT. As a consequence, output would expand and the trade balance would improve.

However, the results of the simulations reported in the study point at the increase in domestic demand as the cause of favourable short-term effects of a fiscal devaluation. Since the nominal wage is assumed rigid in the short run, a temporary reduction in real labour costs is achieved, resulting in a higher employment and a lower unemployment, and an increased domestic demand.  As the nominal wage is gradually increased, the expansionary effects fade away over time.

In the long run, fiscal devaluation may have favourable effects on the economy due to a shift from wage to consumption taxation. The consumption tax is considered less distortive than the wage tax, because the former is also imposed on existing wealth.

Indeed, according to the simulations much of the favourable long-term effects come from shifting from wage to consumption taxes, which implies redistribution from current to future generations. Existing generations have to pay unexpectedly higher VAT, while they benefit less from the lower social security contributions. Future generations benefit from a less distortive taxation system. As a consequence, long-run consumption increases while the trade balance slightly worsens.

The leader and co-leader of the research project were CBP Netherlands Bureau for Economic Analysis and the Center for the Analysis of Public Policies (CAPP), Universita di Modena. ETLA carried out short-term simulations using the econometric NiGEM model. From ETLA, Paavo Suni and Tarmo Valkonen participated in the writing of the report. The full report “Study on the impacts of fiscal devaluation” is available for downloading on the DG Taxation and Customs Union website.

ETLA’s managing director Vesa Vihriälä argues in the British magazine Government Gazette that a monetary union could function properly even short of a complete fiscal union, and presents five key elements of such an alternative.

Read more in the Government Gazette website.

World GDP growth will remain at about last year’s 3 per cent in 2013. Tightened fiscal policy due to market pressures and the crisis in the euro countries are dampening factors.

Growth is expected to pick up in mid-2013 if the confidence of the financial markets is sustained and the deficits of the crisis countries can be put on sustainable paths. Fiscal policy is still stringent in many countries, but the private sector could even afford to take on more debt.

The expansionary policies followed in the aftermath of the 2008-2007 financial crisis have most likely prevented the reoccurrence of a recession like that experienced in the 1930s. However, in many of the economies the leeway for stimulus measures has been used up almost completely in both fiscal and monetary policy.

In the United States and Germany aggregate output has already surpassed the level prevailing at the beginning of 2008. Throughout the rest of the euro area, including Finland that level has not yet been reached.

In the US, GDP is expected to grow by 1.7 per cent in 2013. The political infighting regarding the budget will curb growth. In Russia, GDP growth will subside to 3.5-4 per cent. Growth in China will accelerate slightly to around 8 per cent thanks to a lax fiscal policy and a pick-up in domestic demand. The weakness of western demand is slowing export growth.

To begin with, the euro area also staged a recovery. At the end of 2011, however, due to several member countries facing a deficit and debt crisis, the area was driven into recession.

In early 2012 an upturn was still expected to occur towards the end of last year. However, a new escalation of the euro crisis in the spring and summer led to a continuation and deepening of the recession. The euro zone crisis is also dampening economic growth in the rest of the world. A turnaround is expected no earlier than mid-2013. The total EU area’s GDP will fall by a further 0.2 per cent in 2013.

There is still a high risk of substantially less favourable development in the world economy. At the moment, the most pressing risk relates to the EU countries’ ability to stabilize the financing of the public sectors in problem countries. This affects the financial markets’ faith in problem solving, as well as mutual trust between market players. In the United States, the main challenges are restoring the confidence of the private sector and political decision-making related to government debt. The worst case scenario for the western world is an escalation of the financial market unrest into the type of panic experienced in 2008. This kind of crisis would also hit Russia and Asian countries, including China. A risk of crude oil price increasing due to e.g. Iran’s political situation still exists.

Eurozone upswing expected in second half of 2013

In 2012, the euro countries’ GDP fell 0.5 per cent. The euro area has in practice been in a recession since the last quarter of 2011. The recession was at its deepest in the fourth quarter of 2012. The recession has been exacerbated by the tight fiscal policy aimed at curbing over-indebtedness.

The European Central Bank (ECB) last lowered its key interest rate by 0.75 per cent in July 2012. The central bank has also intermittently carried out so-called non-standard monetary policy measures, by which it has sought to promote the functioning of financial markets and to ensure sufficient liquidity. When the financial market unrest was at its peak in the summer and autumn of 2012, the ECB announced that it would buy an unlimited amount of crisis countries’ short-term bonds in the secondary market, as long as the crisis countries sought European Stability Mechanism (ESM) financing. The mere announcement of this offer has reassured the market, because it means that the risk of disintegration of the euro is deemed to have been reduced significantly.

Crisis countries are now responsible themselves for taking action to consolidate their public finances and restore their competitiveness. Tight fiscal policy will dampen overall demand in the short term, but in the long term it is essential to restore the confidence of investors. A credible economic policy requires the parties belonging to these countries’ governments commit themselves to fiscal stabilization.

There will be differences in growth between euro area countries also in 2013. Production in the crisis countries Greece and Portugal is still declining the most. Italian and Spanish production will also decrease significantly. In Germany, GDP will grow by half a per cent. In France, there will be zero growth.
Euro area GDP is expected to contract by 0.5 per cent in 2013. The decline will continue in the first half of the year, but production will begin to increase in the second half. In 2014, the euro area GDP growth will be one per cent and in 2015 more than one and a half a per cent.

Finland’s volume of total output declined last year

According to Statistics Finland’s preliminary figures, Finnish GDP decreased 0.2 per cent in 2012. In the fourth quarter production fell 0.5 per cent from the previous quarter and 1.5 per cent from the same quarter a year ago. The volume of exports decreased by one and a half per cent in 2012, in particular due to weak European demand and Nokia’s production cutbacks. Private consumption increased by one and a half per cent. Purchasing power was cut by high inflation rates. Weakening consumer confidence due to the euro crisis has also hindered consumption. Investment fell due to weak demand by a scant 3 per cent. Machinery and equipment investment as well as residential investment declined significantly.

GDP will grow by 0.3 per cent in 2013 and 1.8 per cent in 2014

Last September’s forecast of one per cent GDP growth for 2013 has been revised downwards to 0.3 per cent. The key reasons for the revision are the starting level at the end of last year being lower than expected and the weakening growth prospects in the euro area. Exports and private consumption will grow less than expected last fall. The long-awaited economic turnaround is finally expected to occur during the mid-year. In 2014 Finland’s GDP will already grow nearly two per cent. This will require that the financial markets remain calm. Growth rate will accelerate to slightly less than three per cent in 2015. These growth rates cannot be considered to be good because of the low starting level. Employment and the fiscal deficit in particular will improve with a lag.

Euro crisis, Nokia and erosion of competitiveness still hamper exports

Last year the export of goods decreased by 1.2 per cent from the previous year. The export of telecommunications equipment and related services decreased because of Nokia’s problems with products and structural changes. Exports of cyclic products, such as metal refining, also fell substantially. Chemical industry products and transport equipment exports were some of the few bright spots. Service exports fell by two per cent.

The euro zone recession will still be widely felt in Finnish exports during the first half of 2013. Total exports are expected to grow this year by only half a per cent. Exports of goods will increase 0.3 per cent and exports of services one per cent. Telecommunications equipment exports will decline sharply as a result of the closing of Nokia’s Salo factory last autumn. The turnaround predicted for mid-2013 year will spawn a rise in exports.

In 2014, exports will grow 3.5 per cent. In 2015, growth will accelerate to about 4.5 per cent. The projected export growth will require an improvement in cost competitiveness, as well as significant investments in the development and marketing of new products. Finland’s cost competitiveness has deteriorated due to costs rising swiftly and productivity growth declining.

Corporate investments decline further due to weak demand

According to Statistics Finland in December 2012, some 74.7 per cent of industrial capacity was in use. This was 3.1 percentage points lower than a year earlier. There is thus still a significant amount of idle capacity. Furthermore, since the outlook for both exports and private consumption is uncertain, companies are reluctant to carry out investments. Total investment is forecast to decline by two per cent in the current year. Next year it will grow 3.3 per cent. Machinery and equipment investment will decrease this year by 3 per cent. Next year, it will grow by 3 per cent, as the demand outlook begins to improve and there begins to be a shortage in capacity supply. Housing investment will decline a couple of per cent in 2013, but it will witness a 3.5 per cent upswing in 2014.

In 2015, overall investment growth will strengthen to 4.5 per cent as the economic situation improves. Companies need to increase production capacity. Residential construction will also continue to expand, as there continues to be a need for sufficient housing in major growth centres. Investment growth will accelerate further as the construction of new nuclear power plants begins.

Shrinking working age population curbs rise in unemployment rate

In 2012, the unemployment rate fell by 0.1 percentage points to 7.7 per cent. Thus, unemployment did not begin to increase in spite of the stagnation of aggregate output. A major reason for this is the fact that the working-age population has started to decline due to aging. The employment rate rose by 0.4 percentage points to 69 per cent. In 2013, the unemployment rate will rise to 8.3 per cent due to this year’s weak economic growth and lagging effects carried over from last year. In 2014 the unemployment rate will decline to 8.1 per cent as production recovers slightly. In 2015, the unemployment rate is 7.8 per cent and the employment rate 69.9 per cent.

Slow growth of purchasing power curbs consumption

Private consumption is expected to grow only 0.3 per cent in 2013. Real earnings will increase slightly as a consequence of the framework agreement signed a couple of years ago and the slowdown in international inflation compared to last year. The increase in VAT rates by one percentage point at the beginning of 2013 will nevertheless cut purchasing power. Income taxation will also be tightened slightly since the tax scales were not adjusted at the beginning of the year for inflation and the rise in earnings. The number of employed persons will decrease compared to last year and labour input will decline. The household savings ratio will fall. In 2014, private consumption is expected to grow by 1.3 per cent. Labour input will rise slightly as the economy recovers. The forsaking of income tax scale adjustments will dampen the growth of the purchasing power also in 2014. Private consumption is estimated to grow by 2.2 per cent in 2015. Enhanced employment opportunities will have a positive impact on consumption.

VAT hike fuels inflation in 2013

In 2013, consumer prices are expected to rise by 2.4 per cent. The inflation forecast has been lowered from that made last autumn since international inflation has weakened. Average interest rates on loans are falling slightly in the wake of the ECB’s lowering of its key interest rate last year. Margins on new loans, however, are on the rise. Inflation is being boosted by about 0.7 percentage points due to the hike in VAT rates carried out at the beginning of this year. The level of earnings will increase by just under 3 per cent in line with the collective wage settlement. In 2014, consumer prices are expected to rise by about 2 per cent. However, the prognosis is very uncertain, as there is currently no information on incomes policy agreements or possible taxation changes. Also the international inflation outlook may change significantly. In 2015, inflation is anticipated to fluctuate around the two per cent level.

Sluggish growth erodes impact of fiscal belt-tightening

The ratio of central and local government’s net lending to GDP was 4.8 per cent in 2012, which was nearly one percentage point higher than in 2011. The central government’s deficit as a percentage of GDP was 3.8 per cent while that of the municipalities was one per cent. The slowdown in economic growth offsets the impact of savings and tax increases. In 2013, the ratio of central and local government’s deficit to GDP will decline only marginally to 4.7 per cent. The size of the employed labour force will be reduced. This will hamper the growth of income tax revenue. Owing to the government’s programme and last spring’s decision on spending limits as well as economic growth, the central government’s net lending as a percentage of GDP will be reduced to 3.5 per cent in 2014 and further to 3 per cent in 2015. The general government’s EMU deficit will be 1.3 per cent of GDP in 2015. The EMU debt-to-GDP ratio will continue to rise, reaching 59.3 per cent in 2015. In 2016, it will already exceed the 60 per cent ceiling.

The government’s goal of getting the central government’s debt-to-GDP ratio back on a declining path during its term in office will not be fulfilled without additional adjustments to expenditure and revenue. According to our forecast the debt-to-GDP ratio will still increase by almost one percentage point in 2015. The stabilization of the debt ratio at the previous year’s levels would require additional belt-tightening measures equivalent to some 1.8 billion euros. Achieving the goal of a maximum deficit of 1 per cent of GDP is even more difficult because it would require about 4 billion euros in additional austerity measures during the government’s term in office. The government is running out of time.

Further belt-tightening is not deemed prudent in the next few years in light of the weak financial position of the central government. Austerity measures equivalent to about one billion euros should be enough in this year’s budget framework negotiations. The government could be more flexible than expected in light of the clearly weaker economic situation. Agreement should nevertheless be reached in the budget framework negotiations on actions to reduce the long-term sustainability gap stemming from the aging of the population.

For additional information:

Research director Markku Kotilainen,
tel. +358 9 6099 0206,
markku.kotilainen@etla.fi

Download press release as a pdf file.

Finland’s balance of supply and demand

* Preliminary
¹⁾ Including statistical discrepancy
Source: Statistics Finland.

Key forecasts

* Preliminary
¹⁾ Harmonised index
Source: Statistics Finland

Among the findings contained in the report are the following:

• As a result of relatively weak external demand, continuing financial uncertainty and the contractionary stance of fiscal policy, output fell in the Euro Area in 2012 (-0.5 per cent). Over the course of 2012 there was a slowdown in some key economies, which were previously contributing much of the growth. This slowdown has carryover effects into 2013.
• Even though we anticipate a recovery in confidence in some major economies over the course of this year, the outcome for the Euro Area as a whole is still likely to be a further limited fall in GDP in 2013 of 0.3 per cent. Weak external demand will not be enough to compensate for the fall in domestic demand.
• For 2014, a recovery in domestic demand should see a return to significant growth in GDP of around 1.3 per cent. However, this forecast must be considered in the light of the continuing vulnerability to financial shocks of a number of the Euro Area member states.
• This vulnerability of countries in financial distress is being addressed through a continuing major fiscal adjustment. However, the fiscal adjustment under way across other members of the Area is also having a substantial negative effect on growth, particularly in the crisis countries. Without this fiscal adjustment the Euro Area would be looking to growth this year at around 1½ per cent and next year at approximately 2 per cent.

The EUROFRAME Group comprises ten of the most respected economic forecasting and research institutes in Europe: CASE (Poland), CPB (Netherlands), DIW Berlin (Germany), ESRI (Ireland), ETLA (Finland), The Kiel Institute for the World Economy (Germany), NIESR (United Kingdom), OFCE (France), PROMETEIA (Italy) and WIFO (Austria).

For further information please contact:

Paavo Suni, ETLA, tel. +358 9 609 90205, mob. +358 50 524 5616, paavo.suni@etla.fi

Web site: www.euroframe.org

The project is carried out by the Research Institute of the Finnish Economy (ETLA) and the Finnish Institute of International Affairs (FIIA) and researchers from both organisations will take part in the project. The study will be finished by the summer of 2014. The project is led by Research Director Markku Kotilainen (ETLA) and Director Teija Tiilikainen (FIIA).

Further information:

Markku Kotilainen (ETLA)
+358 50 35111 92
markku.kotilainen@etla.fi

Teija Tiilikainen (FIIA)
+358 9 432 7701
teija.tiilikainen@fiia.fi

The growth of the world economy will slow down, as the euro area recession curbs economic activity also in the rest of the world. Early in the year, an upswing was still expected for the end of the year, but the new escalation of the euro crisis in the spring and summer has triggered a new decline in leading indicators. An upswing is expected no earlier than mid-2013.

The entire EU area’s GDP will contract by 0.3 per cent this year. U.S. gross domestic product is expected to increase by about 2 per cent in 2012. Russia’s GDP growth rate will fall to 3.5-4 per cent. China is still expanding by some 7.5 to 8 per cent. Weakening western world demand and domestic inflationary pressures are retarding growth there, too.

In 2012 the entire world’s GDP growth will slow from last year’s 3.5 per cent to 2.8 per cent. Tightened fiscal policy due to market pressures and the crisis in the euro countries are dampening factors. Growth may accelerate in mid-2013 if the crisis countries’ deficits can be steered toward sustainable paths and market confidence can be restored. Fiscal policy is still stringent in many countries, but the private sector could even afford to increase its borrowing.

There is still a high risk of substantially less favourable development in the world economy. At the moment the most critical risk is related to the EU countries’ ability to stabilize the financing of the public sector of the problem countries. In the United States, the main challenges are restoring the confidence of the private sector and political decision-making during the presidential election.

The worst case scenario for the western world is still the financial market turbulence escalating into a panic like the one experienced in 2008. This kind of crisis would also affect Russia and Asian countries, including China. Recently, a possible increase in the price of crude oil from the present level has become a new risk due to e.g. Iran’s political situation

Eurozone crisis escalated again in the summer

In practice, the euro area has been in recession since the end of last year. In 2011 the real GDP of euro countries grew by 1.5 per cent. However, in the fourth quarter it decreased from the previous quarter. In the first quarter of 2012 GDP was at the level of the previous quarter but fell again in the second.

The actions of the European Central Bank late last year and early this year, as well as restructuring of Greek public debt in connection with the aid package negotiated in February contributed to calming the financial markets and boosted confidence.

Turbulence increased again in the spring and summer, however, as the crisis spread to the government bond markets of Italy and Spain. At the same time euro area business and consumer confidence plummeted. The economic turnaround expected for the latter half of this year will be clearly delayed into next year.

Crisis countries must now perform all actions necessary to consolidate their public finances and restore competitiveness. Tight fiscal policy weakens overall demand in the short term, but in the long term it is crucial in restoring the confidence of investors. The European Central Bank and the European Financial Stability Facility (EFSF) as well as the permanent European Stability Mechanism (ESM) beginning to operate next year can act as some sort of bridge financiers to restore confidence. In September the ECB agreed to buy the crisis countries’ short bonds from the secondary market on the condition that they apply for long-term financing from the afore-mentioned mechanisms. This has increased market confidence in the normalization of the interest rates of problem countries, which is a necessary, though not sufficient, condition for them to achieve renewed growth. The ECB may also further lower its repo rate from the current 0.75 per cent to 0.5 per cent.

There are significant differences in growth between euro area countries in 2012. The output of crisis countries Greece and Portugal will decline the most. Italian, Spanish and Dutch output will also decrease significantly. In Germany, GDP will grow by half a per cent, and in France growth is close to zero. Exports in these countries will also be affected as demand in the crisis countries falls.

Real GDP in the euro area is expected to contract by 0.6 per cent in 2012. Output will start to expand again towards the middle of next year. In 2013 euro area GDP growth will be half a per cent, and in 2014 about one and a half per cent.

GDP growing by half a per cent in 2012 and one per cent in 2013

According to Statistics Finland’s revised preliminary data, Finnish GDP grew by 2.7 per cent in 2011. In last year’s first quarter output increased slightly less than 5 per cent, but the rate of growth slowed down after this. In the first quarter of the current year, real GDP rose by 2.2 per cent on a year-on-year basis and 0.9 per cent over the previous quarter. During the second quarter, real GDP contracted by 1.1 per cent from the previous quarter. Weak export development has slowed growth from the second quarter of last year onwards. Private consumption still continued to grow rapidly during the first quarter of this year, but in the second quarter growth began to decelerate.

The 0.9 per cent GDP growth projected for 2012 in March has been revised to 0.5 per cent. The development of exports and private consumption will be worse than expected before. The global economic upswing expected for the second half of this year is being postponed by almost a year. In 2013 Finland’s GDP growth will remain at one per cent due to the simultaneous weakness of both exports and consumption. Again, this requires that the acute phase of the euro crisis is resolved in the coming months. Growth will become more rapid at 2.2 per cent as exports pick up in 2014.

Euro crisis, Nokia and erosion of competitiveness still curbing exports

Exports of goods decreased during the first half of this year by 0.7 per cent compared to last year. The significantly steeper decline of service exports led to a reduction in total exports by a couple of per cent. The exports of communication equipment and related services decreased due to Nokia’s product problems and structural changes. Exports also fell significantly in cyclical products such as paper. Petroleum products, motor vehicles and food exports were among the few highlights of exports.

The euro zone recession is reflected clearly in Finnish exports in 2012 and still in the first half of 2013. Export as a whole is expected to decline by 1.1 per cent in the current year. Exports of goods will fall by one per cent and services by one and a half. Communication equipment exports will decline sharply towards the end of this year as Nokia’s Salo factory closes.

The turnaround predicted to take place towards the middle of next year will spawn growth in exports. In 2013, exports will grow 2.7 per cent. In 2014, growth will accelerate to about 4 per cent. Finland’s cost competitiveness has deteriorated due to rapidly rising costs and weakened productivity growth. The projected export growth requires an improvement in cost competitiveness as well as significant investments in the development and marketing of new products.

Business investment falling due to weak demand

According to Statistics Finland 74.5 per cent of industrial capacity was in use in July 2012.Thus, there is still a significant amount of idle capacity. Moreover, since the outlook for both exports and private consumption are uncertain, businesses are curbing investment. Investments as a whole are forecast to decline by 1.5 per cent this year and 1.3 per cent next year. Machinery and equipment investment will decrease by 5 per cent this year and 2.5 per cent next year. Housing investment will fall by about one and a half per cent in both 2012 and 2013.

In 2014 overall investments will start to grow at a rate of 4 per cent as export demand picks up. Companies will begin to add more production capacity. Housing construction will also recover. Housing demand remains high in growth centres. Investment will be boosted from 2014 onwards by the start of construction of two new nuclear power plants.

Shrinking working age population dampens rise in unemployment rate

In 2011 the unemployment rate fell nearly half a percentage point to 7.8 per cent. The decrease was driven by moderate real GDP growth. The size of the working-age population has started to decline due to aging. The unemployment rate will not, therefore, start to rise in 2012, despite the clear slowdown in GDP growth, but rather it will even decline to 7.7 per cent. In 2013 it will rise to 8.0 per cent. In 2014 the unemployment rate will dip back to 7.7 per cent as output recovers. The supply of labour will remain roughly unchanged due to the increase in the labour force participation rate. The employment rate will rise from last year’s 69.8 per cent to 71 per cent by 2014.

Slow growth of purchasing power curbing consumption

Private consumption is expected to increase by 1.1 per cent in 2012. Real wages will rise slightly as a consequence of inflation slowing from last year and the comprehensive wage settlement made last year. The number of the employed persons will increase slightly from last year. The household savings rate is still falling. In 2013 private consumption is expected to grow by only 0.6 per cent, which is attributable largely to the savings rate turning negative. The number of employed persons will decrease slightly due to weak economic development. Increasing the VAT by one percentage point from the beginning of 2013 onwards as well as rising food prices will cut purchasing power. Leaving income tax rates unadjusted for inflation and the rise in earnings also has the same effect. It will furthermore curb the growth of private consumption in 2014, when growth in consumption is also slowed down by households trying to restore their savings rate to normal levels. The rate of growth is thus estimated at 1.3 per cent.

Vat hike spurring inflation in 2013

In 2012, consumer prices are expected to rise by 2.9 per cent. The weakening of the euro will in part spur inflation. Inflation will be fuelled by excise taxes being raised in the beginning of this year by slightly over half a percentage point. On the other hand slight decline of interest rates on loans due to the already realized lowering of interest rates of the ECB will restrain the rise on consumer prices a little. The level of earnings will increase by about 3 per cent both this year and next year due to the contract wage increases agreed last year.  In 2013 consumer prices will also rise by 2.9 per cent. The one percentage point increase of the VAT going into effect in the beginning of next year will increase consumer prices by about 0.7 percentage points. Due to this year’s poor harvests food prices will also contribute to inflation. In 2014, the inflation rate is expected to be at about two per cent, although very reliable forecasts cannot be made due to numerous elements of uncertainty.

Slowdown in growth erodes impact of fiscal belt-tightening

The central and local government’s ratio of net lending to GDP declined in 2011 by almost two percentage points to -3.7 per cent. This year the reduction will come to a halt due to the slowdown in aggregate growth. The number of employed persons will increase only slightly. This will hamper the growth of income tax revenue. Next the central and local government’s joint deficit is 3.4 per cent of GDP. The debt of the central government will rise by 5 billion euros while that of the local government will increase by 1.5 billion euros. Due to the government’s programme and decisions made in the long-term budget framework last spring as well as economic growth, the central and local government’s net lending will shrink to -3.0 per cent of overall output in 2014 and further to -2.6 per cent in 2015. The so-called EMU debt ratio to GDP will continue to grow, reaching 53.7 per cent in 2015.

The goal of bring about a decline in the debt-to-GDP ratio included in the government’s programme during its term in office can only be achieved if the burden for adjustment is shifted significantly to the municipalities. Central and local government’s joint debt per GDP is still climbing. It seems the deficit target of no more than 1 per cent will not be achieved. Due to the poor economic situation further tightening is not even appropriate in the coming years.

For additional information:

Research director Markku Kotilainen,
tel. +358 9 6099 0206,
markku.kotilainen@etla.fi
Download press release as a pdf-file.

Finland’s balance of supply and demand

* Advance information
¹⁾ Including statistical discrepancy
Source: Statistics Finland.

Key forecasts

* Advance information
¹⁾ Harmonised index
Source: Statistics Finland

Read the article One-firm economies: The Nokia effect on The Economist website.

Read the article Finland and the euro crisis: Northern gripes on The Economist website.