# C_2008049EN.01000501.xml

| 22.2.2008 | EN | Official Journal of the European Union | C 49/5 |
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22.2.2008

EN

Official Journal of the European Union

C 49/5

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COUNCIL OPINION

COUNCIL OPINION

of 12 February 2008

on the updated stability programme of Finland, 2007-2011

(2008/C 49/02)

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European Community,

Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies (1), and in particular Article 5(3) thereof,

1

Having regard to the recommendation of the Commission,

After consulting the Economic and Financial Committee,

HAS DELIVERED THIS OPINION:

| (1) | On 12 February 2008, the Council examined the updated stability programme of Finland, which covers the period 2007 to 2011. |
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(1)

On 12 February 2008, the Council examined the updated stability programme of Finland, which covers the period 2007 to 2011.

| (2) | Finland's macroeconomic performance has been strong and balanced over the last years, with growth in the recent years significantly exceeding earlier expectations. The present cyclical upswing in economic activity has been appropriately used to build up budgetary surpluses and to prepare for the effects of population ageing, reducing considerably the risks to the sustainability of public finances. However, the imminent demographic shift is predicted to dampen economic growth already at the end of the programme period and lead to a smaller fiscal surplus, thereby calling for sustained control over public spending. |
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(2)

Finland's macroeconomic performance has been strong and balanced over the last years, with growth in the recent years significantly exceeding earlier expectations. The present cyclical upswing in economic activity has been appropriately used to build up budgetary surpluses and to prepare for the effects of population ageing, reducing considerably the risks to the sustainability of public finances. However, the imminent demographic shift is predicted to dampen economic growth already at the end of the programme period and lead to a smaller fiscal surplus, thereby calling for sustained control over public spending.

| (3) | The macroeconomic scenario underlying the programme envisages that real GDP growth will moderate over the programme period, while remaining above 3 % in 2008-2009 to drop to just above 2 % by 2011. Judging from currently available information (2), this scenario appears to be based on plausible growth assumptions, leaning towards the cautious side for 2010 and 2011. The programme's projections for inflation appear realistic. |
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(3)

The macroeconomic scenario underlying the programme envisages that real GDP growth will moderate over the programme period, while remaining above 3 % in 2008-2009 to drop to just above 2 % by 2011. Judging from currently available information (2), this scenario appears to be based on plausible growth assumptions, leaning towards the cautious side for 2010 and 2011. The programme's projections for inflation appear realistic.

2

| (4) | For 2007, the general government surplus is estimated at 4,5 % of GDP in the current programme update, broadly in line with the Commission services' autumn 2007 forecast, against a target of 2,8 % of GDP set in the previous update of the stability programme. This is due to the carry-over from the better-than-expected outcome in 2006 and the positive growth surprise in 2007, boosting government revenue, while expenditure has been largely contained in line with earlier plans. The implementation of the 2007 budget was broadly in line with the Council opinion on the previous programme (3). The Council also notes that the 2007 budget was broadly consistent with the April 2007 Eurogroup orientations for budgetary policies. |
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(4)

For 2007, the general government surplus is estimated at 4,5 % of GDP in the current programme update, broadly in line with the Commission services' autumn 2007 forecast, against a target of 2,8 % of GDP set in the previous update of the stability programme. This is due to the carry-over from the better-than-expected outcome in 2006 and the positive growth surprise in 2007, boosting government revenue, while expenditure has been largely contained in line with earlier plans. The implementation of the 2007 budget was broadly in line with the Council opinion on the previous programme (3). The Council also notes that the 2007 budget was broadly consistent with the April 2007 Eurogroup orientations for budgetary policies.

3

| (5) | The programme's central objective is to ensure sustainability of public finances in the face of population ageing. As in the previous programme, Finland's medium-term objective (MTO) for the budgetary position is defined as a general government surplus of 2 % of GDP in structural terms, i.e. in cyclically-adjusted terms net of one-off and other temporary measures. The headline and the primary balance are set to decline in each year, albeit from a high level in 2007. The programme plans to maintain structural surpluses above the MTO throughout the programme period. Compared with the previous programme, the new update projects the structural surplus (calculated according to the commonly agreed methodology) to be 1,5 percentage points higher in 2007, but by 2010 both updates project the same structural balance. The steeper fall in the surplus in the most recent update is explained by the expenditure ratio declining only marginally while the revenue ratio drops more substantially. The latter reflects the phasing in of announced tax cuts as well as cautiously projected revenues in response to GDP growth. The less marked decline in the expenditure ratio compared with the previous programme reflects a step increase in the multi-annual budgetary ceilings for central government, with expenditure increases being frontloaded to 2008, the first year of the new government term. |
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(5)

The programme's central objective is to ensure sustainability of public finances in the face of population ageing. As in the previous programme, Finland's medium-term objective (MTO) for the budgetary position is defined as a general government surplus of 2 % of GDP in structural terms, i.e. in cyclically-adjusted terms net of one-off and other temporary measures. The headline and the primary balance are set to decline in each year, albeit from a high level in 2007. The programme plans to maintain structural surpluses above the MTO throughout the programme period. Compared with the previous programme, the new update projects the structural surplus (calculated according to the commonly agreed methodology) to be 1,5 percentage points higher in 2007, but by 2010 both updates project the same structural balance. The steeper fall in the surplus in the most recent update is explained by the expenditure ratio declining only marginally while the revenue ratio drops more substantially. The latter reflects the phasing in of announced tax cuts as well as cautiously projected revenues in response to GDP growth. The less marked decline in the expenditure ratio compared with the previous programme reflects a step increase in the multi-annual budgetary ceilings for central government, with expenditure increases being frontloaded to 2008, the first year of the new government term.

ratio

ratio

ratio

| (6) | The risks to the budgetary projections in the programme appear broadly balanced. In 2008, the budgetary outcome could be better than projected in the programme given the markedly cautious tax revenue assumptions for that year. Some risks could arise from rapid wage growth in the public sector, putting upward pressure on expenditure. On the other hand, the cautious growth projections for the outer years, combined with conservative revenue assumptions, counterbalance the negative risks. |
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(6)

The risks to the budgetary projections in the programme appear broadly balanced. In 2008, the budgetary outcome could be better than projected in the programme given the markedly cautious tax revenue assumptions for that year. Some risks could arise from rapid wage growth in the public sector, putting upward pressure on expenditure. On the other hand, the cautious growth projections for the outer years, combined with conservative revenue assumptions, counterbalance the negative risks.

| (7) | In view of this risk assessment, the budgetary stance in the programme would allow to meet the MTO by a comfortable margin throughout the programme period, as envisaged in the programme. This is in line with the Stability and Growth Pact. However, a fiscal expansion is planned in 2008, indicated by a decline in the structural surplus of 0,5 percentage point of GDP according to the Commission services' autumn forecast and 1 percentage point according to the programme. While economic conditions are expected to shift from ‘good times’ to neutral during 2008, it is not implausible that the favourable economic conditions of the previous years extend into 2008. Therefore, there is a risk that the fiscal policy stance implied by the programme may turn out to be pro-cyclical in 2008. However, the potential pro-cyclical stimulus to the economy would likely be limited and fiscal policy would assume a broadly neutral stance already in the following year. A sizeable budgetary surplus would still be maintained. |
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(7)

In view of this risk assessment, the budgetary stance in the programme would allow to meet the MTO by a comfortable margin throughout the programme period, as envisaged in the programme. This is in line with the Stability and Growth Pact. However, a fiscal expansion is planned in 2008, indicated by a decline in the structural surplus of 0,5 percentage point of GDP according to the Commission services' autumn forecast and 1 percentage point according to the programme. While economic conditions are expected to shift from ‘good times’ to neutral during 2008, it is not implausible that the favourable economic conditions of the previous years extend into 2008. Therefore, there is a risk that the fiscal policy stance implied by the programme may turn out to be pro-cyclical in 2008. However, the potential pro-cyclical stimulus to the economy would likely be limited and fiscal policy would assume a broadly neutral stance already in the following year. A sizeable budgetary surplus would still be maintained.

| (8) | Finland appears to be at low risk with regard to the sustainability of public finances. While the long-term budgetary impact of ageing is higher than on average in the EU, enacted pension reforms have helped to contain the projected increase in pension expenditure over the coming decades. The budgetary position in 2007 as estimated in the programme, with a large structural surplus, contributes significantly to offsetting the long-term budgetary impact of ageing and the large assets accumulated by the public pension schemes will help finance part of the increase in pension expenditure. Maintaining high primary surpluses over the medium term would contribute to limiting risks to the sustainability of public finances. |
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(8)

Finland appears to be at low risk with regard to the sustainability of public finances. While the long-term budgetary impact of ageing is higher than on average in the EU, enacted pension reforms have helped to contain the projected increase in pension expenditure over the coming decades. The budgetary position in 2007 as estimated in the programme, with a large structural surplus, contributes significantly to offsetting the long-term budgetary impact of ageing and the large assets accumulated by the public pension schemes will help finance part of the increase in pension expenditure. Maintaining high primary surpluses over the medium term would contribute to limiting risks to the sustainability of public finances.

| (9) | The stability programme seems to be consistent with the October 2007 implementation report of the National Reform Programme. In particular, the measures identified in the implementation report of the National Reform Programme to contain the population ageing risks are an integral part of the stability programme strategy. It is foreseen to maintain a strong commitment to measures enhancing productivity in public services in order to contain expenditure pressures. At the same time, the multi-annual expenditure ceilings of the central government, which form the basis of the stability programme projections, will provide a firm limit to the costs of the National Reform Programme measures. |
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(9)

The stability programme seems to be consistent with the October 2007 implementation report of the National Reform Programme. In particular, the measures identified in the implementation report of the National Reform Programme to contain the population ageing risks are an integral part of the stability programme strategy. It is foreseen to maintain a strong commitment to measures enhancing productivity in public services in order to contain expenditure pressures. At the same time, the multi-annual expenditure ceilings of the central government, which form the basis of the stability programme projections, will provide a firm limit to the costs of the National Reform Programme measures.

| (10) | The budgetary strategy in the programme is broadly consistent with the broad economic policy guidelines included in the integrated guidelines for euro area Member States in the area of budgetary policies issued in the context of the Lisbon strategy. |
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(10)

The budgetary strategy in the programme is broadly consistent with the broad economic policy guidelines included in the integrated guidelines for euro area Member States in the area of budgetary policies issued in the context of the Lisbon strategy.

| (11) | As regards the data requirements specified in the code of conduct for stability and convergence programmes, the programme has some gaps in the required and optional data (4). |
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(11)

As regards the data requirements specified in the code of conduct for stability and convergence programmes, the programme has some gaps in the required and optional data (4).

4

The overall conclusion is that the programme envisages continued high surpluses, albeit declining over the programme period. While the risks attached to the budgetary targets are balanced overall, the programme's fiscal projections appear somewhat cautious for 2008. The medium-term budgetary position is sound and should limit the risks to long-term sustainability. Continuing with expenditure restraint will remain crucial to stem the risk of a pro-cyclical fiscal policy stance in 2008 and to adjust to the lower growth path and the implied slower growth of tax revenue over the programme period.

Comparison of key macroeconomic and budgetary projections

| | 2006 | 2007 | 2008 | 2009 | 2010 | 2011 |
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| Real GDP
  (% change) | SP Nov 2007 | 5,0 | 4,4 | 3,3 | 3,0 | 2,5 | 2,1 |
| COM Nov 2007 | 5,0 | 4,3 | 3,4 | 2,8 | n.a. | n.a. |
| SP Dec 2006 | 4,5 | 3,0 | 2,9 | 2,6 | 2,1 | n.a. |
| HICP inflation (8)

  (%) | SP Nov 2007 | 1,6 | 2,4 | 2,4 | 2,2 | 2,0 | 2,0 |
| COM Nov 2007 | 1,3 | 1,5 | 2,4 | 2,1 | n.a. | n.a. |
| SP Dec 2006 | 1,5 | 1,3 | 1,7 | 1,7 | 1,7 | n.a. |
| Output gap (5)

  (% of potential GDP) | SP Nov 2007 | – 0,3 | 0,6 | 0,7 | 0,5 | 0,1 | – 0,7 |
| COM Nov 2007 (6) | – 0,4 | 0,4 | 0,5 | 0,1 | n.a. | n.a. |
| SP Dec 2006 | 0,1 | 0,2 | 0,1 | – 0,2 | – 0,8 | n.a. |
| Net lending/borrowing vis-à-vis the rest of the world
  (% of GDP) | SP Nov 2007 | 4,8 | 4,9 | 4,6 | 5,0 | 5,0 | 4,8 |
| COM Nov 2007 | 5,9 | 5,3 | 5,2 | 5,1 | n.a. | n.a. |
| SP Dec 2006 | 5,4 | 4,8 | 4,6 | 4,4 | 4,1 | n.a. |
| General government balance
  (% of GDP) | SP Nov 2007 | 3,8 | 4,5 | 3,7 | 3,6 | 2,8 | 2,4 |
| COM Nov 2007 | 3,8 | 4,6 | 4,2 | 4,0 | n.a. | n.a. |
| SP Dec 2006 | 2,9 | 2,8 | 2,7 | 2,7 | 2,4 | n.a. |
| Primary balance
  (% of GDP) | SP Nov 2007 | 5,3 | 6,0 | 5,2 | 5,0 | 4,1 | 3,6 |
| COM Nov 2007 | 5,3 | 6,0 | 5,6 | 5,3 | n.a. | n.a. |
| SP Dec 2006 | 4,5 | 4,3 | 4,2 | 4,1 | 3,7 | n.a. |
| Cyclically-adjusted balance (5)

  (% of GDP) | SP Nov 2007 | 4,0 | 4,2 | 3,3 | 3,3 | 2,8 | 2,8 |
| COM Nov 2007 | 4,1 | 4,4 | 3,9 | 4,0 | n.a. | n.a. |
| SP Dec 2006 | 2,9 | 2,7 | 2,7 | 2,8 | 2,8 | n.a. |
| Structural balance (7)

  (% of GDP) | SP Nov 2007 | 4,0 | 4,2 | 3,3 | 3,3 | 2,8 | 2,8 |
| COM Nov 2007 | 4,1 | 4,4 | 3,9 | 4,0 | n.a. | n.a. |
| SP Dec 2006 | 2,9 | 2,7 | 2,7 | 2,8 | 2,8 | n.a. |
| Government gross debt
  (% of GDP) | SP Nov 2007 | 39,2 | 35,3 | 32,8 | 30,4 | 29,0 | 27,9 |
| COM Nov 2007 | 39,2 | 35,7 | 32,4 | 29,8 | n.a. | n.a. |
| SP Dec 2006 | 39,1 | 37,7 | 36,2 | 35,0 | 33,7 | n.a. |
| Stability programme (SP); Commission services' autumn 2007 economic forecasts (COM); Commission services' calculations. |

2006

2007

2008

2009

2010

2011

Real GDP

(% change)

SP Nov 2007

SP Nov 2007

5,0

5,0

4,4

4,4

3,3

3,3

3,0

3,0

2,5

2,5

2,1

2,1

COM Nov 2007

5,0

4,3

3,4

2,8

n.a.

n.a.

SP Dec 2006

SP Dec 2006

4,5

4,5

3,0

3,0

2,9

2,9

2,6

2,6

2,1

2,1

n.a.

n.a.

HICP inflation (8)

8

(%)

SP Nov 2007

SP Nov 2007

1,6

1,6

2,4

2,4

2,4

2,4

2,2

2,2

2,0

2,0

2,0

2,0

COM Nov 2007

1,3

1,5

2,4

2,1

n.a.

n.a.

SP Dec 2006

SP Dec 2006

1,5

1,5

1,3

1,3

1,7

1,7

1,7

1,7

1,7

1,7

n.a.

n.a.

Output gap (5)

5

(% of potential GDP)

SP Nov 2007

SP Nov 2007

– 0,3

– 0,3

0,6

0,6

0,7

0,7

0,5

0,5

0,1

0,1

– 0,7

– 0,7

COM Nov 2007 (6)

6

– 0,4

0,4

0,5

0,1

n.a.

n.a.

SP Dec 2006

SP Dec 2006

0,1

0,1

0,2

0,2

0,1

0,1

– 0,2

– 0,2

– 0,8

– 0,8

n.a.

n.a.

Net lending/borrowing vis-à-vis the rest of the world

vis-à-vis

(% of GDP)

SP Nov 2007

SP Nov 2007

4,8

4,8

4,9

4,9

4,6

4,6

5,0

5,0

5,0

5,0

4,8

4,8

COM Nov 2007

5,9

5,3

5,2

5,1

n.a.

n.a.

SP Dec 2006

SP Dec 2006

5,4

5,4

4,8

4,8

4,6

4,6

4,4

4,4

4,1

4,1

n.a.

n.a.

General government balance

(% of GDP)

SP Nov 2007

SP Nov 2007

3,8

3,8

4,5

4,5

3,7

3,7

3,6

3,6

2,8

2,8

2,4

2,4

COM Nov 2007

3,8

4,6

4,2

4,0

n.a.

n.a.

SP Dec 2006

SP Dec 2006

2,9

2,9

2,8

2,8

2,7

2,7

2,7

2,7

2,4

2,4

n.a.

n.a.

Primary balance

(% of GDP)

SP Nov 2007

SP Nov 2007

5,3

5,3

6,0

6,0

5,2

5,2

5,0

5,0

4,1

4,1

3,6

3,6

COM Nov 2007

5,3

6,0

5,6

5,3

n.a.

n.a.

SP Dec 2006

SP Dec 2006

4,5

4,5

4,3

4,3

4,2

4,2

4,1

4,1

3,7

3,7

n.a.

n.a.

Cyclically-adjusted balance (5)

5

(% of GDP)

SP Nov 2007

SP Nov 2007

4,0

4,0

4,2

4,2

3,3

3,3

3,3

3,3

2,8

2,8

2,8

2,8

COM Nov 2007

4,1

4,4

3,9

4,0

n.a.

n.a.

SP Dec 2006

SP Dec 2006

2,9

2,9

2,7

2,7

2,7

2,7

2,8

2,8

2,8

2,8

n.a.

n.a.

Structural balance (7)

7

(% of GDP)

SP Nov 2007

SP Nov 2007

4,0

4,0

4,2

4,2

3,3

3,3

3,3

3,3

2,8

2,8

2,8

2,8

COM Nov 2007

4,1

4,4

3,9

4,0

n.a.

n.a.

SP Dec 2006

SP Dec 2006

2,9

2,9

2,7

2,7

2,7

2,7

2,8

2,8

2,8

2,8

n.a.

n.a.

Government gross debt

(% of GDP)

SP Nov 2007

SP Nov 2007

39,2

39,2

35,3

35,3

32,8

32,8

30,4

30,4

29,0

29,0

27,9

27,9

COM Nov 2007

39,2

35,7

32,4

29,8

n.a.

n.a.

SP Dec 2006

SP Dec 2006

39,1

39,1

37,7

37,7

36,2

36,2

35,0

35,0

33,7

33,7

n.a.

n.a.

Stability programme (SP); Commission services' autumn 2007 economic forecasts (COM); Commission services' calculations.

Stability programme (SP); Commission services' autumn 2007 economic forecasts (COM); Commission services' calculations.

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(1)  OJ L 209, 2.8.1997, p. 1. Regulation as amended by Regulation (EC) No 1055/2005 (OJ L 174, 7.7.2005, p. 1). The documents referred to in this text can be found at the following website:

1

http://ec.europa.eu/economy_finance/about/activities/sgp/main_en.htm

(2)  The assessment takes notably into account the Commission services' autumn forecast and the Commission assessment of the October 2007 implementation report of the national reform programme.

2

(3)  OJ C 71, 28.3.2007, p. 1.

3

(4)  In particular, external assumptions for the outer years are not provided and inflation projections are provided on the CPI rather than HICP basis. Data on ‘one-off and other temporary measures’ are also not explicitly given in the tables (nor are they mentioned anywhere in the text).

4

(5)  Output gaps and cyclically-adjusted balances from the programmes as recalculated by Commission services on the basis of the information in the programmes.

5

(6)  Based on estimated potential growth of 3,4 %, 3,4 %, 3,2 % and 3,2 % respectively in the period 2006-2009.

6

(7)  Cyclically-adjusted balance excluding one-off and other temporary measures. No one-offs have been identified in the most recent programme or in the Commission services' autumn forecast.

7

(8)  The most recent programme provides inflation projections on the basis of the national CPI rather than the HICP. CPI inflation was markedly higher than HICP inflation in 2007. The Finnish authorities have indicated that the corresponding HICP inflation projections are 1,3 %, 1,6 %, and 2,3 % for 2006-2008 respectively and that there would be no difference between both series in the remaining years.

8

Sources:

Stability programme (SP); Commission services' autumn 2007 economic forecasts (COM); Commission services' calculations.

Stability programme (SP); Commission services' autumn 2007 economic forecasts (COM); Commission services' calculations.

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