EN    EN EN 
 
EN    EN  EUROPEAN COMMISSION 
Brussels, 12.5.2010 
SEC(2010) 589 final 
  
REPORT FROM THE COMMISSION 
Finland 
 
Report prepared in accordance with  Article 126(3) of the Treaty 
 
 
EN 2   EN REPORT FROM THE COMMISSION 
Finland 
 
Report prepared in accordance with  Article 126(3) of the Treaty 
 
1. T HE APPLICATION OF THE STABILITY AND GROWTH PACT IN THE CURRENT CRISIS 
SITUATION  
Many EU countries are presently facing genera l government deficits above the 3% of GDP 
reference value set in the Treaty. The often strong deterioration in the deficit as well as the debt positions must be seen in the context of the unprecedented global financial crisis and 
economic downturn. Several factors are at play . First, the economic downturn brings about 
declining tax revenue and rising social bene fit expenditure (e.g. unemployment benefits). 
Second, recognising that budgetary policies have an important ro le to play in the current 
extraordinary economic situation, the Commissi on called for a fiscal  stimulus in its 
November 2008 European Economic Recovery Plan (EERP), endorsed by the European Council in December. The Plan explicated that  the stimulus should be differentiated across 
Member States to reflect their different positions  in terms of public finance sustainability and 
competitiveness and should be reversed when economic conditions improve. Finally, several countries have taken measures to stabilise the fi nancial sector, some of which impact on the 
debt position or constitute a risk of higher deficits and debt in the future, although some of the costs of the government support co uld be recouped in the future. 
The Stability and Growth Pact requires the Commission to prepare a report such as the 
present one whenever an actual or planned defi cit of a Member State exceeds the 3% of GDP 
reference value. This report, which represen ts the first step in the “excessive deficit 
procedure” (EDP), analyses the reasons for the breach of the reference value with due regard 
to the economic background and all other relevant  factors. The amendments to the Stability 
and Growth Pact in 2005 aimed specifically at ensuring that in particular the economic and 
budgetary background was fully take n into account in all steps in the EDP. This means for 
instance that, if an “excessive deficit” is deemed to exist, adequate attention needs to be paid 
to the economic background and outlook when making recommendations on the pace of the 
correction. In this way, the Stability and Gr owth Pact provides the framework supporting 
government policies for a prompt return to sound budgetary positions taking account of the economic situation. 
2. L
EGAL BACKGROUND  
This report, which assesses recent and curre nt budgetary developments in Finland and 
reviews the short- and medium-t erm prospects in the light of overall economic conditions and 
policy action taken by the government, is prepar ed according to Article 126(3) of the Treaty 
on the Functioning of the European Union (TFEU). 
 
EN 3   EN Article 126 TFEU lays down an excessive deficit procedure (EDP). This procedure is further 
specified in Council Regulation (EC) No 1467/97 “on speeding up and clarifying the 
implementation of the excessive deficit procedure”1, which is part of th e Stability and Growth 
Pact. According to Article 126(2) of the Treaty, the Commission has to monitor compliance with budgetary discipline on the ba sis of two criteria, namely: (a) whether the ratio of the 
planned or actual government deficit to gro ss domestic product (GDP) exceeds the reference 
value of 3% (unless eith er the ratio has declined substant ially and continuously and reached a 
level that comes close to the reference value; or, alternatively, the excess over the reference value is only exceptional and temporary and the ratio remains close to the reference value); and (b) whether the ratio of government debt  to GDP exceeds the re ference value of 60% 
(unless the ratio is sufficiently diminishi ng and approaching the reference value at a 
satisfactory pace). 
Article 126(3) stipulates that, if a Member St ate does not fulfil the requirements under one or 
both of these criteria, the Commi ssion has to prepare a report. Th is report also has to “take 
into account whether the government deficit exceeds government investment expenditure and take into account all other relevant factors, including the medium-term economic and 
budgetary position of the Member State”. 
According to data notified by the authoritie s in April 2010
2”, the general government deficit 
in Finland is planned to reach 4.1% of GDP in  2010, thus exceeding the 3% of GDP reference 
value, while general government gross debt w ould be 49.9% of GDP, below the 60% of GDP 
reference but on a rising trend. 
Table 1 : General government deficit and debt a 
 2004 2005 2006 2007 2008 2009 2010 2011 
       COM FI COM 
General 
government 
balance 2.3 2.7 4.0 5.2 4.2 -2.2 -3.8 -4.1 -2.9 
General 
government 
gross debt 44.4 41.7 39.7 35.2 34.2 44.0 50.5 49.9 54.9 
Note : 
a In percent of GDP.  
Source : Eurostat and Commission serv ices’ spring 2010 forecast. 
                                                 
1 OJ L 209, 2.8.1997, p. 6. The report also takes into account the “Specifications on the implementation 
of the Stability and Growth Pact and guidelines on the format and content of stability and convergence 
programmes”, endorsed by the ECOFIN Counc il of 10 November 2009, available at  
http://ec.europa.eu/economy_finance/sgp/legal_texts/index_en.htm. 
2 According to Council Regulation (EC) No 479/2009, Member States have to report to the Commission, 
twice a year, their planned and actua l government deficit and debt le vels. The most recent notification 
of Finland can be found at:  
http://epp.eurostat.ec.europa.eu/portal/page/porta l/government_finance_statistics/excessive_deficit/edp
_notification_tables. 
 
EN 4   EN The planned figure for the 2010 deficit provides prima facie  evidence on the existence of an 
excessive deficit in Finland in the sense of th e Treaty and the Stability and Growth Pact. The 
Commission has therefore decided to initiate th e excessive deficit procedure for Finland with 
the adoption of this report. Section 3 of the report examines the deficit criterion. Section 4 
deals with public investment and other relevant  factors. The report takes into account the 
Commission services’ spring 2010 forecast, released on 5 May.  
3. D EFICIT CRITERION   
In 2010, the general government deficit is plan ned to reach 4.1% of GDP. Well in excess of 
3% of GDP, the planned deficit is not close  to the Treaty reference value. The planned excess 
over the 3% of GDP reference value is exceptional . In particular, it does result from a severe 
economic downturn in the sense of the Treaty an d the Stability and Growth Pact. Even though 
Finland entered the global crisis in 2008 fr om a relatively strong position, having built up a 
substantial surplus in the current account and in  the government finances, the global crisis had 
a strong impact on the export-dominated Finnish  industry as well as on the domestic sectors 
through negative confidence effects. According to preliminary GDP data published by the national statistics office on 1 March 2010, GD P contracted sharply, by 7.8% in 2009. The 
steep fall has led to an exceptionally large out put gap, estimated at 4½ % of GDP in 2010. 
Although much of the observed decline in actual GDP in the context of the crisis is cyclical, 
the level of potential output has also been negativ ely affected. In addition, the crisis may also 
affect potential growth in the medium term through lower investment, constraints in credit 
availability and increasing structural unemployment.  
Table 2
: Macroeconomic and budgetary developments a 
 2004 2005 2006 2007 2008 2009 2010 2011 
Real GDP (% change) 4.1 2.9 4.4 4.9 1.2 -7.8 1.4 2.1 
Potential GDP (% change)  2.7 2.5 2.2 2.2 2.1 1.1 1.0 1.3 
Output gap (% of potential GDP) -0.2 0.2 2.4 5.1 4.1 -5.0 -4.6 -3.8 
General government balance 2.3 2.7 4.0 5.2 4.2 -2.2 -3.8 -2.9 
Primary balance 3.9 4.2 5.5 6.7 5.6 -1.0 -2.6 -1.7 
One-off and other temporary measures 0.0 0.0 0.0 0.0 0.0 -0.1 -0.1 0.0 
Government gross fixed capital formation 2.8 2.5 2.3 2.4 2.5 2.8 2.8 2.6 
Cyclically-adjusted balance 2.4 2.6 2.8 2.6 2.1 0.3 -1.4 -1.0 
Cyclically-adjusted primary balance 3.9 4.1 4.3 4.1 3.5 1.5 -0.3 0.2 
Structural balance b 2.4 2.6 2.8 2.6 2.1 0.4 -1.3 -1.0 
Structural primary balance 3.9 4.1 4.3 4.1 3.5 1.6 -0.2 0.2 
Notes : 
a In percent of GDP unless specified otherwise. 
b Cyclically-adjusted balance excluding on e-off and other temporary measures. 
 
EN 5   EN Source : Eurostat and Commission serv ices’ spring 2010 forecast. 
The planned excess over the 3% of GDP reference value is temporary  in the sense of the 
Treaty and the Stability and Growth Pact. The budgetary forecasts as provided by the 
Commission indicate that the deficit will fall below the refe rence value in 2011, supported by 
the forecast economic recovery taking hold. Thes e budgetary projections are based on current 
policies, including the rise in VAT and some product taxes worth 0.2% of GDP in 2011. The 
projection does not rely on any major one-off measures.  
In sum, the planned deficit is not close to the 3% of GDP reference value but the planned 
excess over the reference value is exceptional a nd temporary in the sense of the Treaty and 
the Stability and Growth Pact. This analysis suggests that the deficit criterion in the Treaty is not fulfilled. 
4. R
ELEVANT FACTORS  
Article 126(3) of the Treaty pr ovides that the Commission report “shall also take into account 
whether the government deficit exceeds governme nt investment expenditure and take into 
account other relevant factors including the me dium-term economic and budgetary position of 
the Member State”. These factors are further cl arified in Article 2(3)  of Council Regulation 
(EC) No 1467/97, which also specifies that “any  other factors which, in the opinion of the 
Member State concerned, are relevant in order to comprehensively assess in qualitative terms 
the excess over the reference value and which the Member State has put forward to the 
Commission and to the Council” need to be given due consideration.  
In view of the above provisions, the following four subsections consider in turn (1) the 
medium-term economic position; (2) the medium-term budgetary position (including public investment); (3) other factors put forward by the Member State; and (4) other factors 
considered relevant by the Commission. 
4.1. Medium-term economic position 
Cyclical conditions and potential growth.  Prior to the current global crisis, Finland had 
benefited from an extended period of rapid export-driven growth, building up a substantial 
surplus in the current account and in the government finances. This has allowed Finland to 
provide for a relatively large discretionary fiscal stimulus amounting to about 3% of GDP 
over 2009-2010 and to allow a full operation of automatic stabilisers, which has cushioned 
the effect of the crisis on the domestic market to  some extent. In spite of the dramatic fall in 
GDP in 2009, the repercussions of the crisis on  the Finnish financial system, labour market 
and on the household and enterpri se sectors has remained relatively contained. Since the main 
Finnish export markets are also set to recover from the global crisis, GDP growth in Finland 
is forecast to slightly exceed the EU average in 2010-2011. The medium term GDP growth outlook is nevertheless forecast to be weaker than what was recorded over the previous 
decade, given the adverse effects of the presen t crisis and the ageing of the population on the 
growth potential.  
Recent structural reforms.  The principal Finnish structural reform efforts in the framework 
of the Lisbon strategy were concentrated on  preparing for the ch allenges of population 
ageing, particularly focusing on ensuring long te rm sustainability of public finances and 
increasing labour supply in the face of the immi nent decline in working age population. These 
reform initiatives are ongoing and are expected to carry some fiscal benefits in the medium 
 
EN 6   EN and long term, while only partly offsetting the ageing related expenditure pressures. Boosting 
labour supply and employment would have a significant impact on the economic growth 
potential and tax bases, therefor e being an important element of  the strategy to improve long 
term sustainability. On the expenditure side , the government hopes to bring about savings on 
both the central and local government level. Th e government has over the past years designed 
some notable productivity-enhancing reforms for both the central and loca l level. The central 
government has set ambitious targets to reduce its personnel by over 10% over 2007-2015 
through natural attrition, with  the double aim of increasing productivity and adjusting to a 
shrinking workforce. A framework law promoting the reform of local governments' structure 
and their service provision was passed by the parliament in the beginning of 2007. It is 
designed to similarly result in productivity ga ins and thus reduce expenditure pressures. 
However, given that the reform of local gov ernments will be implemented only gradually, 
they would likely bring any subs tantial net benefits for public  finances only in the longer 
term. 
4.2. Medium-term budgetary position 
Structural deficit and fiscal  consolidation in good times.  Finland appropriately ran 
substantial budgetary surpluses both in nominal and structural (net of  cyclical factors and 
one-off measures) terms over the previously prevailing good economic times when also a sizeable positive output gap emerged. As the curre nt global crisis has had a strong impact on 
the Finnish economy, the estimated output gap ha s also turned sharpl y negative. Finland 
responded to the global crisis with a relatively large discretionary fiscal stimulus and allowed 
the full operation of automatic stabilisers. The fiscal stance, measured by the change in the 
structural balance, indicates a countercyclical impact of public finances over the period of 
economic contraction. The Finnish Stability Pr ogramme update of February 2010 sets its 
medium-term objective (MTO) for the budgetary pos ition at a structural surplus of 0.5% of 
GDP. The current level of the estimated structur al position stands considerably lower at a 
deficit of 1.3% of GDP in 2010, estimated to impr ove slightly to a deficit of 1% of GDP in 
2011. The stability programmes' projections foresaw the structural deficit to stay broadly flat 
in the medium term, based on current policies. Ap art from some limited rises in tax rates in 
2010-2011, the government has not yet announ ced a comprehensive medium term 
consolidation strategy.  
Public investment.  Government investment (as a share of GDP) amounted to slightly above 
2½ % of GDP in 2008, increasing by a few tent hs of percentage points over 2009-2010 on 
account of the fiscal stimulus measures and forecas t to return to  previous leve ls thereafter. 
The general government nominal deficit in 2010 will therefore exceed to tal public investment 
in that year, but fall below investment again in  the medium term. In structural terms, the 
deficit estimated at above 1% of GDP in 2010 will be lower than public investment and 
broadly maintain the difference in the medium term.  
Quality of public finances.  The main tool in controlling central government expenditure are 
the multiannual spending limits, which exclude cy clically sensitive expenditure items and 
have therefore allowed the full operation of automatic stabilisers. While this setup has 
supported economic activity and social cohesion over the crisis period, it has also led to a 
relatively sharp negative swing in public fi nances. The budgetary framework will therefore 
mechanically result in a reduction of central government expenditure pressures, including 
social expenditure, only once the economic recovery is well underway. While local 
governments have large constitutionally grante d self-governance rights, they are responsible 
for the majority of education, health care, l ong-term care and social services and are not 
 
EN 7   EN bound by centrally-imposed expend iture limits. Growth in local  government expenditure has 
exceeded central government perfor mance in the past years. To compensate for the relatively 
high expenditure growth, local gove rnments have typically increased  local tax rates, adding to 
the overall national tax burden. The government  pursues reforming local governments' 
structures and service pr ovision with the aim of curbing e xpenditure growth, also triggered by 
additional ageing-related expenditure n eeds in the medium to long term.  
Long-term sustainability of public finances.  In its opinion of 26 April 2010 on the most 
recent stability programme update, the Council assessed the long-term sustainability of 
Finland’s public finances as follows: While the long-term budgetary impact of ageing is 
slightly higher than on average in the EU, enact ed pension reforms have helped to contain the 
projected increase in pensi on expenditure over the coming decades. Moreover, the large 
assets accumulated by the public pension funds will help finance part of the future increase in 
pension expenditure. The budgetary position in 2009, as estimated in the programme, 
compounds the budgetary impact of population ageing on the sustainability gap. Ensuring 
high primary surpluses over the medium term  and implementing appropriate structural 
reforms would contribute to limiting the risks to the sustainability of public finances which 
were assessed in the Commission 2009 Sustainabil ity Report as low. The Council invited the 
authorities to take timely action to define a comprehensive and concrete medium term fiscal 
strategy to consolidate from 2011 onwards, also with a view to achieve the MTO and to 
restore the long-term sustaina bility of public finances.  
4.3. Other factors put forwar d by the Member State  
The authorities of Finland have not presented an y relevant factors as they can do according to 
Article 2(3) of Council Re gulation (EC) No 1467/97.  
4.4. Other factors considered relevant by the Commission 
In its opinion on the most recent update of th e stability programme, the Council considered 
that the budgetary outcomes in the medium term  could turn out worse than projected in the 
programme. While the risks to the more immediate growth ou tlook are limited as the latest 
forward-looking indicators confirm a relativel y robust and continuous recovery of consumer 
confidence and, albeit less so, of business confidence, the budge tary outcome in the outer 
years may be worse than projected given th e markedly favourable growth assumptions 
underlying the budgetary projections.  
The Council invited Finland to implement the 2 010 fiscal policy as planned in line with the 
EERP, while ensuring that the planned breach of the 3%-of-GDP reference value would remain contained and temporary; and take ti mely action to define a comprehensive and 
concrete medium term fiscal strategy to cons olidate from 2011 onwards, also with a view to 
achieve the MTO and to restore the long-te rm sustainability of public finances. 
5. C
ONCLUSIONS  
The general government deficit in Finland is  planned to reach 4.1% of GDP in 2010, above 
and not close to the 3% of GDP reference valu e. The planned excess over the reference value 
can be qualified as exceptional within the mean ing of the Treaty and the Stability and Growth 
Pact. Furthermore, it can be considered tempor ary. This suggests that the deficit criterion in 
the Treaty is not fulfilled. 
 
EN 8   EN General government gross debt remains belo w the 60% of GDP reference value. This 
suggests that the debt criter ion in the Treaty is fulfilled. 
In line with the Treaty, this report has also ex amined “relevant factors”, which, according to 
the Stability and Growth Pact, can only be take n into account in the steps leading to the 
decision on the existence of an excessive defi cit if the double condition - that the deficit 
remains close to the reference value and that its excess over the reference value is temporary - is fully met. Considered on thei r own merit, the relevant factor s in the current case on balance 
seem to be relatively favourable, based on the good track record of fis cal policy in Finland.