Report from the Commission - Finland - Report prepared in accordance with Article 126(3) of the Treaty
Date: 2010-05-12
Institutions: European Commission
Subjects: Bulgaria, Economic and Monetary Union, Finland, budget deficit, economic recession, stability pact

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 

   EN 

 
 
 
  
 
 
REPORT FROM THE COMMISSION 

Finland 

Report prepared in accordance with Article 126(3) of the Treaty 

1. 

THE APPLICATION OF THE STABILITY AND GROWTH PACT IN THE CURRENT CRISIS 
SITUATION 

Many  EU countries are presently facing general  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  benefit  expenditure  (e.g.  unemployment  benefits). 
Second,  recognising  that  budgetary  policies  have  an  important  role  to  play  in  the  current 
extraordinary  economic  situation,  the  Commission  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 financial 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 could 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 deficit of a Member State exceeds the 3% of GDP 
reference  value.  This  report,  which  represents  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  taken  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  Growth  Pact  provides  the  framework  supporting 
government policies for a prompt return to sound budgetary positions taking account of the 
economic situation. 

2. 

LEGAL BACKGROUND  

This  report,  which  assesses  recent  and  current  budgetary  developments  in  Finland  and 
reviews the short- and medium-term prospects in the light of overall economic conditions and 
policy action taken by the government, is prepared according to Article 126(3) of the Treaty 
on the Functioning of the European Union (TFEU). 

EN 

2 

   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 the Stability and Growth 
Pact. According to Article 126(2) of the Treaty, the Commission has to monitor compliance 
with  budgetary  discipline  on  the  basis  of  two  criteria,  namely:  (a)  whether  the  ratio  of  the 
planned or actual government deficit to gross domestic product (GDP) exceeds the reference 
value of 3% (unless either the ratio has declined substantially 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  reference  value  of  60% 
(unless  the  ratio  is  sufficiently  diminishing  and  approaching  the  reference  value  at  a 
satisfactory pace). 

Article 126(3) stipulates that, if a Member State does not fulfil the requirements under one or 
both of these criteria, the Commission has to prepare a report. This 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 authorities in April 20102”, 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 would 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 

2.3 

2.7 

4.0 

5.2 

4.2 

-2.2 

-3.8 

-4.1 

-2.9 

44.4 

41.7 

39.7 

35.2 

34.2 

44.0 

50.5 

49.9 

54.9 

General 
government 
balance 
General 
government 
gross debt 

Note: 
a In percent of GDP. 
Source: Eurostat and Commission services’ spring 2010 forecast. 

1 

2 

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 Council of 10 November 2009, available at 
http://ec.europa.eu/economy_finance/sgp/legal_texts/index_en.htm. 
According to Council Regulation (EC) No 479/2009, Member States have to report to the Commission, 
twice a year, their planned and actual government deficit and debt levels. The most recent notification 
of Finland can be found at: 
http://epp.eurostat.ec.europa.eu/portal/page/portal/government_finance_statistics/excessive_deficit/edp
_notification_tables. 

EN 

3 

   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 the Treaty and the Stability and Growth Pact. The 
Commission has therefore decided to initiate the 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. 

DEFICIT CRITERION  

In 2010, the general government deficit is planned 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 and the Stability and Growth Pact. Even though 
Finland entered the global crisis in 2008 from 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,  GDP  contracted  sharply,  by  7.8%  in  2009.  The 
steep fall has led to an exceptionally large output 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 negatively 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) 

Potential GDP (% change)  

Output gap (% of potential GDP) 

General government balance 

Primary balance 

One-off and other temporary measures 

4.1 

2.7 

2.9 

2.5 

-0.2 

0.2 

2.3 

3.9 

0.0 

2.7 

4.2 

0.0 

4.4 

2.2 

2.4 

4.0 

5.5 

0.0 

4.9 

2.2 

5.1 

5.2 

6.7 

0.0 

Government gross fixed capital formation  2.8 

2.5 

2.3 

2.4 

Cyclically-adjusted balance 

Cyclically-adjusted primary balance 

2.4 

3.9 

2.6 

4.1 

2.8 

4.3 

2.6 

4.1 

Structural balance b 

2.4 

2.6 

2.8 

2.6 

Structural primary balance 

3.9 

4.1 

4.3 

4.1 

Notes: 
a In percent of GDP unless specified otherwise. 
b Cyclically-adjusted balance excluding one-off and other temporary measures. 

1.2 

2.1 

4.1 

4.2 

5.6 

0.0 

2.5 

2.1 

3.5 

2.1 

3.5 

-7.8 

1.4 

1.1 

1.0 

2.1 

1.3 

-5.0 

-4.6 

-3.8 

-2.2 

-3.8 

-2.9 

-1.0 

-2.6 

-1.7 

-0.1 

-0.1 

0.0 

2.8 

2.8 

2.6 

0.3 

1.5 

0.4 

1.6 

-1.4 

-1.0 

-0.3 

0.2 

-1.3 

-1.0 

-0.2 

0.2 

EN 

4 

   EN 

 
Source: Eurostat and Commission services’ 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 reference value in 2011, supported by 
the forecast economic recovery taking hold. These 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 and 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. 

RELEVANT FACTORS 

Article 126(3) of the Treaty provides that the Commission report “shall also take into account 
whether  the  government  deficit  exceeds  government  investment  expenditure  and  take  into 
account other relevant factors including the medium-term economic and budgetary position of 
the Member State”. These factors are further clarified 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 enterprise 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 present 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  challenges  of  population 
ageing,  particularly  focusing  on  ensuring  long  term  sustainability  of  public  finances  and 
increasing labour supply in the face of the imminent decline in working age population. These 
reform initiatives are ongoing and are expected to carry some fiscal benefits in the medium 

EN 

5 

   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, therefore 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. The government has over the past years designed 
some notable productivity-enhancing reforms for both the central and local 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  gains  and  thus  reduce  expenditure  pressures. 
However,  given  that  the  reform  of  local  governments  will  be  implemented  only  gradually, 
they  would  likely  bring  any  substantial  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 current global crisis has had a strong impact on 
the  Finnish  economy,  the  estimated  output  gap  has  also  turned  sharply  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  Programme  update  of  February  2010  sets  its 
medium-term objective (MTO) for the budgetary position at a structural surplus of 0.5% of 
GDP.  The  current  level  of  the  estimated  structural  position  stands  considerably  lower  at  a 
deficit of 1.3% of GDP in 2010, estimated to improve 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. Apart from some limited rises in tax rates in 
2010-2011,  the  government  has  not  yet  announced  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 tenths of  percentage points  over 2009-2010  on 
account  of  the  fiscal  stimulus  measures  and  forecast  to  return  to  previous  levels  thereafter. 
The general government nominal deficit in 2010 will therefore exceed total 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  cyclically  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  finances.  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 granted self-governance rights, they are responsible 
for  the  majority  of  education,  health  care,  long-term  care  and  social  services  and  are  not 

EN 

6 

   EN 

 
bound by centrally-imposed expenditure limits. Growth in local government expenditure has 
exceeded central government performance in the past years. To compensate for the relatively 
high expenditure growth, local governments have typically increased local tax rates, adding to 
the  overall  national  tax  burden.  The  government  pursues  reforming  local  governments' 
structures and service provision with the aim of curbing expenditure growth, also triggered by 
additional ageing-related expenditure needs 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, enacted pension reforms have helped to contain the 
projected  increase  in  pension  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 Sustainability 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 sustainability of public finances.  

4.3. 

Other factors put forward by the Member State  

The authorities of Finland have not presented any relevant factors as they can do according to 
Article 2(3) of Council Regulation (EC) No 1467/97.  

4.4. 

Other factors considered relevant by the Commission 

In its opinion on the most recent update of the 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 outlook  are  limited as the latest 
forward-looking indicators confirm a relatively robust and continuous recovery of consumer 
confidence  and,  albeit  less  so,  of  business  confidence,  the  budgetary  outcome  in  the  outer 
years  may  be  worse  than  projected  given  the  markedly  favourable  growth  assumptions 
underlying the budgetary projections.  

The Council invited Finland to implement the 2010 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  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 sustainability of public finances. 

5. 

CONCLUSIONS 

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 value. The planned excess over the reference value 
can be qualified as exceptional within the meaning of the Treaty and the Stability and Growth 
Pact. Furthermore, it can be considered temporary. This suggests that the deficit criterion in 
the Treaty is not fulfilled. 

EN 

7 

   EN 

 
General  government  gross  debt  remains  below  the  60%  of  GDP  reference  value.  This 
suggests that the debt criterion in the Treaty is fulfilled. 

In line with the Treaty, this report has also examined “relevant factors”, which, according to 
the  Stability  and  Growth  Pact,  can  only  be  taken  into  account  in  the  steps  leading  to  the 
decision  on  the  existence  of  an  excessive  deficit  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 their own merit, the relevant factors in the current case on balance 
seem to be relatively favourable, based on the good track record of fiscal policy in Finland.  

EN 

8 

   EN