Finland Times

 

Ministry of Finance Permanent Secretary Martti Hetemäki presented the expert group report on austerity measures at a programme along with other members of the committee. Photo Lehtikuva

The Central government finances would remain permanently and substantially in deficit and the debt-to-GDP ratio would continue to rise unless new measures were taken to reduce government spending and increase revenue, said a report from a group of fiscal policy experts.

 

The report submitted to the authority on Wednesday also said an adjustment, strengthening the central government’s finances by around €3bn, would be sufficient to slow down the rise debt ratio, according to an official press release.

 

The adjustment would reduce deficit to around 1% of GDP, assuming that annual economic growth averages around 1.5%. 

 

This – together with an adjustment according to the structural policy programme directed at local government finances – will give general government indebtedness a trickledown effect, said the experts led by Ministry of Finance Permanent Secretary Martti Hetemäki.

 

The report stated that strengthening government finances would mean an excessive tightening of fiscal policy at a time when the economy was only recovering from recession and underutilisation of resources was still high.

 

This supports the phasing of the adjustment over a number of years. Phasing requires, however, that the government specifies the adjustment measures precisely; implement the structural programme purposefully and in a front-loaded way.

 

The measures can be phased over the period 2015-2017 such that €1bn is implemented by the end of 2015 and €1bn each in the next two years.

 

In addition, the government should decide the adjustment measures in its discussion on spending limits in March 2014 and put through the relevant legislative proposals so that they can be decided on in the current term of parliament.

 

In terms of achieving the objectives of the structural policy programme, it is critical that organisations negotiate a solution on pension reform to credibly implement a jointly agreed objective by autumn 2014. 

 

Regarding achieving the objectives of the programme, it is also critical that the social welfare and health care reform results in a functionally and administratively efficient service structure, supported by the local government structural reform, and that the necessary legislation is decided on in the current term of parliament. 

 

Hetemäki presented the report to the government.Photo Lehtikuva

Balance should be restored in local government finances by reducing municipalities’ tasks and obligations according to an agreed level and through their own efforts. The balance should be maintained with the aid of a new local government financial framework.

 

The assessment emphasises that adjustment measures to reduce spending and increase revenue must be permanent in nature. Measures to reduce structural employment will permanently reduce unemployment security, housing allowance and social assistance expenditure, for example, and they will permanently increase tax revenue. 

 

In calculating the €3bn adjustment requirement, measures to reduce structural unemployment comprise policy programmes not taken into account. As far as the impacts of the measures can be reliably estimated and unemployment fell, impacts can be included in the adjustment.

 

Together with the adjustment directed at local government finances, the additional adjustment, directed at government finances, will be sufficient to correct the deviation that has risen in the target set for the general government medium-term structural budgetary position.

 

In 2018, the structural budgetary position would already be a surplus of 1% of GDP. Bridging the sustainability gap in general government finances requires a clearly surplus budgetary position in Finland before the unfavourable effects of ageing population on public finances becomes stronger in the 2020s.

 

Reducing central government borrowing and bridging the sustainability gap are more demanding objectives that the obligations relating to the management of public finances set by EU agreements. The measures presented here will, therefore, also fulfil these objectives, state the experts in their assessment.

 

In December 2013, Prime Minister Jyrki Katainen appointed the policy expert group to make an assessment of the economic policy.

 

Apart from Martti Hetemäki, the other members of the group are Jukka Pekkarinen from the Ministry of Finance, Pasi Holm from the Pellervo Institute of Economic Research,

 

Seija Ilmakunnas from the Labour Institute for Economic Research, Juhana Vartiainen from the Government Institute for Economic Research and Vesa Vihriälä from the

Research Institute of the Finnish Economy. Lauri Kajanoja from the Bank of Finland was the only external expert. 

 

The Economic Council will discuss the results of the work in a meeting on February 25.

 

The Ministry of Finance will utilise the report of the working group and the decision of the Economic Council in preparing the fiscal policy for the Government spending limits.

 

Prime Minister Jyrki Katainen said the expert group’s assessment provided a sound basis for economic decisions this spring, according to a press release.

 

“The expert group assessment provides a good foundation for creating a national consensus on the ways to stop the rise in the central government debt ratio,” said the prime minister, adding that the central message was that it would be impossible to moderate the growth of central government debt without new spending cuts and tax increases.

He assured that as the expert group in its report stated, the adjustment measures must be specified precisely so that adverse effects on employment and growth were minimised.

“The Government will make decisions on the adjustment measures in line with the timetable announced earlier. The Economic Council will discuss the results of the expert group’s work in a meeting on February 25,” said Katainen, adding that taking into account the recent economic forecast issued by the Ministry of Finance, the Government would then make decisions on the adjustment measures and possible phasing at the end of March.

 

In all cases, the effects of the government decisions would extend beyond the current term of parliament. 

 

Should the adjustment measures be implemented in full in 2015, the next Government would take office in a context of extremely weak economic growth. If the adjustment measures are phased over a certain period of time, then a part of the decisions would come into force during the time of the next electoral, Katainen said.