Council opinion of 12 February 2008 on the updated stability programme of Finland, 2007-2011
Date: 2008-02-12
Institutions: Council of the European Union
Subjects: Finland, budget estimate, economic forecasting, public finance, stability programme

22.2.2008

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Official Journal of the European Union

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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 surveil-
lance of budgetary positions and the surveillance and coordination of economic policies (1), and in particular
Article 5(3) thereof,

Having regard to the recommendation of the Commission,

After consulting the Economic and Financial Committee,

HAS DELIVERED THIS OPINION:

(1)

(2)

(3)

(4)

(5)

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

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.

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.

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 govern-
ment revenue, while expenditure has been largely contained in line with earlier plans. The implemen-
tation 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.

The programme's central objective is to ensure sustainability of public finances in the face of popula-
tion 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 cycli-
cally-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

(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:
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.

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

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(6)

(7)

(8)

(9)

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 govern-
ment term.

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.

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 implau-
sible 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.

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, contri-
butes significantly to offsetting the long-term budgetary impact of ageing and the large assets accu-
mulated 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.

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.
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.

is foreseen to maintain a strong commitment

It

(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 (1).

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.

(1) 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).

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Comparison of key macroeconomic and budgetary projections

2006

2007

2008

2009

2010

2011

Real GDP
(% change)

HICP inflation (4)
(%)

Output gap (1)
(% of potential GDP)

Net lending/borrowing
vis-à-vis the rest of the
world
(% of GDP)

General government
balance
(% of GDP)

Primary balance
(% of GDP)

Cyclically-adjusted
balance (1)
(% of GDP)

Structural balance (3)
(% of GDP)

Government gross debt
(% of GDP)

SP Nov 2007

COM Nov 2007

SP Dec 2006

SP Nov 2007

COM Nov 2007

SP Dec 2006

SP Nov 2007

COM Nov 2007 (2)

SP Dec 2006

SP Nov 2007

COM Nov 2007

SP Dec 2006

SP Nov 2007

COM Nov 2007

SP Dec 2006

SP Nov 2007

COM Nov 2007

SP Dec 2006

SP Nov 2007

COM Nov 2007

SP Dec 2006

SP Nov 2007

COM Nov 2007

SP Dec 2006

SP Nov 2007

COM Nov 2007

SP Dec 2006

5,0

5,0

4,5

1,6

1,3

1,5

– 0,3

– 0,4

0,1

4,8

5,9

5,4

3,8

3,8

2,9

5,3

5,3

4,5

4,0

4,1

2,9

4,0

4,1

2,9

4,4

4,3

3,0

2,4

1,5

1,3

0,6

0,4

0,2

4,9

5,3

4,8

4,5

4,6

2,8

6,0

6,0

4,3

4,2

4,4

2,7

4,2

4,4

2,7

3,3

3,4

2,9

2,4

2,4

1,7

0,7

0,5

0,1

4,6

5,2

4,6

3,7

4,2

2,7

5,2

5,6

4,2

3,3

3,9

2,7

3,3

3,9

2,7

3,0

2,8

2,6

2,2

2,1

1,7

0,5

0,1

2,5

n.a.

2,1

2,0

n.a.

1,7

0,1

n.a.

– 0,2

– 0,8

5,0

5,1

4,4

3,6

4,0

2,7

5,0

5,3

4,1

3,3

4,0

2,8

3,3

4,0

2,8

5,0

n.a.

4,1

2,8

n.a.

2,4

4,1

n.a.

3,7

2,8

n.a.

2,8

2,8

n.a.

2,8

2,1

n.a.

n.a.

2,0

n.a.

n.a.

– 0,7

n.a.

n.a.

4,8

n.a.

n.a.

2,4

n.a.

n.a.

3,6

n.a.

n.a.

2,8

n.a.

n.a.

2,8

n.a.

n.a.

39,2

39,2

39,1

35,3

35,7

37,7

32,8

32,4

36,2

30,4

29,8

35,0

29,0

n.a.

33,7

27,9

n.a.

n.a.

Notes:
(1) Output gaps and cyclically-adjusted balances from the programmes as recalculated by Commission services on the basis of the informa-

tion in the programmes.

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

(4) 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.

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