Finland, the country that was the happiest in the world for nine years, is gripped by anxiety: a cold winter is coming, and the country is entering it with one of the most restrictive budgets it has ever had. Before the upcoming elections in April next year, the debate is no longer about how big the savings will be, but which services, social benefits and pensions will be cut the most.
Finland's debt and deficit figures are at their worst since the 1990s. Then the banking collapse and the collapse of the Soviet Union, which was a key export partner of Finland, plunged the northern country into a severe economic crisis.
Finland's debts have risen sharply
Last month, Statistics Finland confirmed that government debts in the second quarter reached 90.3 percent of GDP. Before the Covid pandemic, this indicator was only 65 percent.
And this time the reason must be sought in the east. Finland increased its defense spending after joining NATO. The Finns took this step a year after Russia invaded Ukraine. In addition, the country, which previously received a third of its energy from Moscow, faced significantly higher costs when it had to look for other suppliers.
But the Finnish government has been spending more than it receives since the global financial crisis in 2008/2009 - due, among other things, to an aging population and weak economic growth. Last month, the State Finance Administration forecast that the budget deficit in 2026 would reach 4.2 percent of GDP.
EU criticizes deficit
Brussels is putting pressure on Helsinki to reduce its new obligations, as EU rules require member states to run deficits below 3 percent of GDP. That's why the European Council launched a procedure in January and gave Finland until the end of 2028 to achieve the target.
The government of Prime Minister Petteri Orpo, which has been in power since June 2023, has set itself the goal of saving around nine billion euros. But whoever wins the next election will have to save much more, experts warn. Financial analyst Jarkko Kivisto told DW that it will most likely be between 8 and 11 billion euros.
At the beginning of the year - with one exception - all political parties agreed to support taking on new debt, and the government wants to limit the country's budget deficit to 2-2.5 percent of GDP by 2031.
The Prime Minister rejects tax increases
Orpo's conservative party “Kokoomus" is the only one so far that does not rule out further savings of nine billion euros if he wins a second term. Along with cuts in healthcare and social services, Orpo also plans measures to reduce company pensions.
While the Social Democrats are inclined to cut spending and raise taxes, Orpo is determined to implement the reforms without raising taxes. This would mean taking the brunt of the burden on public services. But as Kivisto says: “The deficit is so large that a package of measures will be needed that includes both tax increases and spending cuts”.
Currently, the share of people at risk of poverty in Finland is lower than the EU average, but unemployment (10.3 percent) is higher than in any other EU member state. Youth unemployment has reached 23.3 percent - compared to an average of 15.4 percent for Europe.
In the context of already falling consumer spending, Laeri Olappa, director of the Finnish Center for New Economic Analysis, warns that a new package of austerity will mean a heavy blow to the economy. “More than a quarter of the population is employed in the public sector, and if these people are threatened with dismissal, they will save even more and household spending will fall again."
Against this background, the draft budget for 2027 foresees a deficit of 12.4 billion euros.
Finland is arming itself
Even before the war in Ukraine, Finland committed to purchasing 64 F-35A fighter jets from the United States for about 8.4 billion euros. And because of the war, it increased its military spending from nearly 4 billion to over 7 billion euros annually.
In April, the government announced that it would increase this spending further - to 3.2 percent of GDP, approaching the NATO target of 3.5 percent.
Despite the fallout from the Iran conflict, the Finnish government has so far resisted pressure to increase fuel subsidies. A shift to renewable energy and the commissioning of a new nuclear reactor in 2023 averted a crisis, but the central bank warned in the summer that persistently high oil and gas prices would lead to weaker economic growth and higher inflation next year.
A light at the end of the tunnel is Finland's booming export sector, which benefits from a large order book in metallurgy and shipbuilding. "The export sector is likely to lead us out of the recession if demand from the rest of Europe remains strong," Olappa told DW.
Source: www.dw.com