EN    EN EN 
 
EN    EN  EUROPEAN COMMISSION 
Brussels, 27.1.2011 
SEC(2011) 116 final 
 
COMMISSION STAFF WORKING PAPER 
Analysis by the Commission s ervices of the action taken 
 
by Finland 
 
in response to the Council Recommendation of  13 July 2010 with a view to bringing an 
end to the situation of excessive government deficit 
   
COM(2011) 22 final 
SEC(2011) 113 final SEC(2011) 114 final SEC(2011) 115 final 
 
EN 2   EN COMMISSION STAFF WORKING PAPER 
Analysis by the Commission s ervices of the action taken 
 
by Finland 
 
in response to the Council Recommendation of  13 July 2010 with a view to bringing an 
end to the situation of excessive government deficit  
1. INTRODUCTION  
In response to the economic downturn, Finl and allowed a full operation of automatic 
stabilisers and provided a discre tionary fiscal stimulus, which turned the general government 
finances from earlier surpluses into a defi cit of 2.5% of GDP in 2009. The deficit was 
projected to widen further to 4.1% of GDP in 2010 according to the April 2010 EDP 
notification presented by the Ministry of  Finance. The Commission services’ spring 2010 
forecast projected a slightly smaller deficit of 3.8% of GDP in 2010. Against this background, 
on 13 July 2010, the Council decided that an excessive deficit existed and addressed 
recommendations to Finland in accordance with Article 126(7) TFEU with  a view to bringing 
an end to the situation of an excessive government deficit by 2011.1 In its recommendations, 
the Council established a deadline of 13 Janua ry 2011 for effective action to be taken.  
The Council recommended to Finland to bring the general government deficit below 3 % of 
GDP in a credible and sustai nable manner. Specifically, to this end, Finland should (a) 
implement the fiscal measures in 2010 as envisaged in  the latest update  of the stability 
programme, while ensuring that the planned bre ach of the 3%-of-GDP reference value would 
remain contained and temporary; (b) ensure a fi scal effort of at leas t 0.5% of GDP in 2011; 
and (c) specify measures to ensu re that the planned correction of the exce ssive deficit in 2011 
is secured.  
The present paper reviews the actions ta ken by the Finland to meet the above 
recommendations, in light of the economic and budgetary developments since the Council 
recommendations were issued on 13 July  2010. In particular, it reviews budgetary 
implementation in 2010 by comparing the pr ojected budgetary developments in 2010 
according to the Commission services’ autumn 2010 forecast with the economic and budgetary scenario under pinning the Council recommendations . That scenario was based on 
the Commission services’ spring 2010 forecast and the budgetary projections underlying the 
central government’s 2010 budget
2, which was also incorporated in the stability programme 
update of 4 February 2010. For 2011, the basis for the assessment of action taken towards the 
correction of the excessive de ficit is the Commission servic es’ autumn 2010 forecast, which 
incorporates the 2011 budgetary measures, as well as the Ministry of Finance forecast update 
from 20 December 2010. 
                                                 
1 All EDP-related documents for Finland can be found at the following website: 
http://ec.europa.eu/econo my_finance/sgp/deficit/countries/finland_en.htm  
2 The publication of the central government budgets for 2010 and 2011 can be found at: 
http://www.vm.fi/vm/en/04_publications_and_do cuments/01_publications/01_budgets/index.jsp  
 
 
EN 3   EN 2. ECONOMIC DEVELOPMENTS  
The global crisis strongly affected the Fi nnish economy in 2009, while solid fundamentals 
supported a fast recovery in 2010. Economic grow th picked up since the second quarter of 
2010, following a severe decline of 8% in 2009. The Commission serv ices’ autumn 2010 
forecast projects real GDP to increase by 2.9% both in 2010 and 2011, mainly driven by 
domestic demand.   
Macro-economic conditions and the outlook fo r the Finnish economy have significantly 
improved since the Commission services’ spring 2010 forecast (Table 1). In the first quarter 
of 2010, economic growth was suppressed due to an exceptionally cold winter and several 
strikes, but picked up in the following quarters. Domestic demand has strengthened 
considerably, fuelled by historic ally high levels of consumer confidence on the back of global 
recovery. Net exports have also progressively gained from strengthening external, following a 
subdued growth in early 2010. National authoritie s also revised their economic projections 
upwards in the second half of 2010. In Decembe r 2010, the Ministry of Finance projected real 
GDP to increase by 3.2% in 2010 and 2.9 % in 2011, compared to 0.7% and 2.4%, 
respectively, in the most recent update of the Fi nnish stability programme in February 2010.     
Table 1: Comparison of macroeconomic developments and forecasts 
2009
outturn COM SF10 COM AF10 COM SF10 COM AF10
Real GDP (% change) -8.0 1.4 2.9 2.1 2.9
Contributions to real GDP growth:
Final domestic demand -3.9 0.7 1.5 1.6 2.4
Changes in inventories -1.8 0.6 0.7 0.2 0.2
Net exports -1.7 0.1 0.7 0.4 0.2
Employment (% change) -2.8 -2.1 -0.1 0.4 0.9
GDP deflator (% change) 0.9 1.4 1.3 2.0 2.62010 2011
Source : COM SF10 - Commission services' spring 2010 forecast; COM AF10 - Commission services' 
autumn 2010 forecast.
 
3. BUDGETARY IMPLEMENTATION IN 2010 
Reflecting the operation of automatic stabiliser s and a relatively large fiscal stimulus, the 
general government net lending fell to a deficit of 2.5% of GDP in 200 9. Since a substantial 
fiscal stimulus of about 1% of GDP was also given in 2010, in the February 2010 update of 
the stability programme the Mini stry of Finance projected the deficit to widen to 3.6% of 
GDP in 2010. In its economic forecast from 30 March 2010, the Ministry of Finance revised 
the 2010 deficit target further down to 4.1% of GDP. However, reflecti ng the robust rebound 
in economic activity recorded since the second quarter of 2010, the fis cal outlook has also 
improved. Subsequent forecast updates by both the Commission services' and the Ministry of 
Finance have revised the deficit projection fo r the better. The Commission services' autumn 
2010 forecast projects a deficit of 3.1% of GDP in 2010, whic h will in turn improve the 
outlook for the following years. Similarly, the late st Ministry of Finance forecast update from 
December 2010 expects the deficit to reach on ly 3.2 % of GDP in 2010. The revisions to the 
general government deficit forecast were mainly explained by the robust economic recovery boosting tax revenues. Expenditure growth was also somewhat higher in 2010 than projected 
in the February 2010 stability programme update on account of stimulus measures (Table 2). 
 
EN 4   EN Table 2: Composition of the budgetary adjustment 
outturnSP Feb 
2010
% of 
GDP% of 
GDP% ch  
yoy% of 
GDP% ch  
yoy% of 
GDP% ch  
yoy% of 
GDP% ch  
yoy% of 
GDP% ch  
yoy% of 
GDP
Revenue 52.9 53.1 0.8 52.6 2.9 52.5 3.1 52.3 7.1 53.5 6.6 52.9
of which:
- Taxes on production and imports 13.5 13.4 0.4 13.3 1.4 13.2 1.6 13.2 9.3 13.8 9.8 13.7
- Current taxes on imcome, wealth, etc. 16.2 16.2 -0.7 15.8 3.7 16.2 4.0 16.2 6.5 16.5 5.8 16.3
- Social contributions 13.0 12.8 2.7 12.9 4.4 13.1 4.6 13.0 5.1 13.1 5.3 13.0
- Other (resedual) 10.2 10.6 1.3 10.5 1.7 10.0 1.7 9.9 7.5 10.2 5.4 9.9
Expenditure 56.0 55.3 3.4 56.2 4.2 56.1 4.1 56.0 3.4 55.2 3.7 55.0
of which:
- Primar y expenditure 54.6 53.9 3.5 54.8 4.2 54.7 4.1 54.6 3.3 53.8 3.6 53.6
      of which:
     - Compensation of employees 14.8 14.7 1.4 14.7 1.4 14.5 3.5 14.7 2.1 14.1 2.7 14.4
     - Intermediate consumption 11.0 10.9 5.1 11.2 5.1 11.2 2.4 10.8 4.0 11.1 4.6 10.7
     - Social payments 20.9 20.5 5.7 21.3 5.0 21.1 4.9 21.0 3.9 20.9 3.9 20.7     - Subsidies 1.5 1.5 3.3 1.5 6.3 1.5 6.3 1.5 5.9 1.5 5.8 1.5
     - Gross fixed capital formation 3.3 2.8 -1.9 2.7 -1.8 3.1 2.6 3.2 0.9 3.0 1.5 3.1
     - Other (residual) 3.1 3.5 -1.2 3.4 8.4 3.2 8.4 3.2 3.9 3.2 4.0 3.2
- Interest expenditure 1.4 1.4 0.9 1.4 5.4 1.4 5.4 1.4 5.4 1.4 5.4 1.4
General government balance (GGB) -2.5 -2.2 -3.6 -3.3 -3.1 -1.4 -1.6
Primary balance -0.8 -2.3 -1.9 -1.8 0.0 -0.3
One-off and other temporary measures -0.1 0.0 -0.2 na -0.1 na 0.0
Real GDP growth -8.0 -7.6 0.7 2.1 2.9 2.9 2.9
GDP deflator 0.9 1.1 1.2 1.6 1.3 2.2 2.6
No minal GDP -7.2 -6.5 1.9 3.7 4.2 5.1 5.5
Source : SP Feb 2010 - Stability Programme February 2010; MoF Sept 2010 - Ministry of Finance Finland's September 2010 
foreca st; COM AF10 - Commission services' autu mn 20 10 foreca st.MoF Sept 
2010COM AF 
2010        2010 2011 2009
SP Feb 2010MoF Sept 
2010COM AF 
2010        
  
While fiscal policy was overall expansionary in 2010, reflecting the share of the fiscal 
stimulus programme implemented in that year (including several tax cuts), some significant 
tax rises were also implemented as planned. They will also have a positive carry over impact in 2011. The increase of VAT rate by 1 percentage  point as of 1 July 2010 was implemented 
as announced in the 2010 budget and in the Fe bruary 2010 stability pr ogramme update. The 
full annualised impact of the VAT rise is esti mated to amount to 0.4% of GDP, however, due 
to timing effects its impact in 2010 was limited to  just 0.1% of GDP. Additionally, in Finland 
local governments have almost full autonomy over  setting some local ta x rates (most notably 
municipal income tax and real-estate taxes). A large share of local governments increased 
their tax rates in 2010, estimated  by the Ministry of Finance to  yield 0.3% of GDP in 2010. It 
is expected that local governments will continue  to increase their tax rates in the coming years 
as well. 
4. P
ROJECTED BUDGETARY DEVELOPMENTS IN 2011  AND 2012 
The Commission services' autumn 2010 forecast projects a deficit of 1.6% of GDP in 2011. 
The Finnish Ministry of Finance's latest fo recast from 20 December 2010 projects a slightly 
lower deficit at 1.3% of GDP in 2011. Most reve nue and expenditure cate gories are broadly in 
line between the two forecasts. The discrepa ncy is mainly explained by the Commission 
projecting slightly weaker re venues (lower persona l income tax and sales receipts) and 
slightly higher expenditures (personnel cost s and intermediate consumption). The deficit 
outlook has improved considerably  since the February  2010 update of the stability programme 
 
EN 5   EN that projected a deficit of 3.0% of GDP for that  year. A major part of this improvement is 
explained by the better-than-expected econom ic and fiscal outcome in 2010, which carries 
over to 2011. However, also some discretionary tax increases have been settled over the 
course of 2010. The central government budget for 2011, adopted in December 2010, raises energy and some product taxes, amounting to  some 0.5% of GDP in 2011 and 0.1% of GDP 
in 2012. Additionally, the government, in coopera tion with social partners, has already 
decided on changes to pension, health, and unemployment insurance contribution rates, 
improving the general government balance by 0.1% of GDP in 2011 and 0.4% in 2012. While 
no exceptional budget cuts have been announced, expenditure growth is  also expected to 
moderate, as some of the investment projec ts coming from the earlier stimulus package 
gradually run out and local governments ( accounting for a third of general government 
expenditure) are likely to react to financi ng constraints by making sa vings in their budgets. 
Both the central and local governments are con tinuing to implement long term programmes to 
boost public sector productivity, which should also yield some savings in personnel costs. 
Since nominal GDP is projected to grow robus tly and exceed expenditure growth in 2011, the 
expenditure to GDP ratio is expected to fall by about 1 pp. 
The Commission services assesses that the risk s to the achievement of the 2011 deficit target 
are mainly dependent on underlying economic de velopments. Those risks related to the 
economic recovery in Finland are considered to  be broadly balanced. While a deteriorating 
external economic environment would have immediate repercussions for the highly open 
Finnish economy, economic fundamentals rema in sound and the domestic market is buoyed 
by strong consumer and corporate confidence. In a more stable external environment, 
economic recovery in Finland could also turn out stronger than forecast. 
The Commission services' forecast implies an im provement in the structural balance (the 
cyclically-adjusted balance net of one-off and other temporary measures) relative to GDP by 
slightly less than 1 pp. in 2011, after a worsen ing of around 1 pp. anticipated in 2010. These 
estimates broadly correspond to a bottom-up meas urement of the size of  the discretionary 
fiscal measures in 2010 and 2011.  
For 2012, the Commission services' autumn 2010 forecast projects the deficit to narrow 
further to 1.2% of GDP by 2012, thanks to the consolidation measures mentioned above. The 
authorities project the deficit to improve to 0.6% of GDP. Compared with the authorities, the 
somewhat higher deficit projected by the Commi ssion services is in line with the lower GDP 
growth forecast for that year. 
 
EN 6   EN Table 3: Comparison of key macro economic and budgetary projections 
  2008 2009 2010 2011 2012 
COM 0.9 -8.0 2.9 2.9 2.3 
FI 0.9 -8.0 3.2 2.9 2.7 Real GDP 
(% change) SP 1.0 -7.6 0.7 2.4 3.5 
COM 3.7 -6.0 -5.0 -4.0 -3.5 
FI n.a. n.a. n.a. n.a. n.a. Output gap 
(% of potential GDP) SP 3.6 -5.0 -5.2 -4.3 -2.5 
COM 4.2 -2.5 -3.1 -1.6 -1.2 
FI 4.2 -2.7* -3.2 -1.3 -0.6 General government 
balance 
(% of GDP) SP 4.4 -2.2 -3.6 -3.0 -2.3 
COM 5.6 -1.3 -1.8 -0.3 0.4 
FI n.a. n.a. n.a. n.a. n.a. Primary balance 
(% of GDP) SP 5.9 -0.8 -2.3 -1.2 -0.2 
COM 2.4 0.6 -0.6 0.4 0.6 
FI n.a. n.a. n.a. n.a. n.a. Cyclically-adjusted 
balance 
(% of GDP) SP 2.6 0.3 -1.1 -0.8 -1.0 
COM 2.4 0.6 -0.5 0.4 0.6 
FI n.a. n.a. n.a. n.a. n.a. Structural balance 
(% of GDP) SP n.a. n.a. n.a. n.a. n.a. 
COM 34.1 43.8 49.0 51.1 53.0 
FI 34.1 43.8 47.9 50.0 51.3 Government gross 
debt 
(% of GDP) SP 34.2 41.8 48.3 52.2 54.4 
Source : COM - Commission services’ 2010 autumn forecast; FI  –Ministry of Finance forecast update of 20 
December 2010; SP - Stability  Programme February 2010. 
Note:*  The general government deficit according to EDP reporting was 2.5% of GDP in 2009