Recommendation for a Council Recommendation with a view to bringing an end to the situation of an excessive government deficit in Finland
Date: 2010-06-15
Institutions: European Commission
Subjects: Finland, budget deficit, economic recession, public debt, public finance, stability pact

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EUROPEAN COMMISSION 

Brussels, 15.6.2010 
SEC(2010) 747 final 

Recommendation for a 

COUNCIL RECOMMENDATION 

with a view to bringing an end to the situation of an excessive government deficit in 
Finland 

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Recommendation for a 

COUNCIL RECOMMENDATION 

with a view to bringing an end to the situation of an excessive government deficit in 
Finland 

THE COUNCIL OF THE EUROPEAN UNION, 

Having  regard  to  the  Treaty  on  the  Functioning  of  the  European  Union,  and  in  particular 
Article 126(7) thereof; 

Having regard to the recommendation from the European Commission; 

Whereas: 

(1) 

(2) 

(3) 

(4) 

(5) 

According  to  Article  126  of  the  Treaty  Member  States  shall  avoid  excessive 
government deficits. 

The Stability and Growth Pact is based on the objective of sound government finances 
as a means of strengthening the conditions for price stability and for strong sustainable 
growth conducive to employment creation. 

The  2005  reform  of  the  Stability  and  Growth  Pact  sought  to  strengthen  its 
effectiveness and economic underpinnings as well as to safeguard the sustainability of 
the public finances in the long run. It aimed at ensuring that in particular the economic 
and budgetary background was taken into account fully in all steps in the EDP. 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. 

The Council has decided on [13 July 2010], in accordance with Article 126(6) of the 
treaty, that an excessive deficit exists in Finland. 

In accordance with Article  126(7)  of the Treaty and Article 3 of Council  Regulation 
(EC) No 1467/97 on speeding up and clarifying the implementation of the excessive 
deficit procedure1 (which is part of the Stability and Growth Pact), the Council is also 
required  to  make  recommendations  to  the  Member  State  concerned  with  a  view  to 
bringing  the  situation  of  excessive  deficit  to  an  end  within  a  given  period.  The 
recommendation  has  to  establish  a  deadline  of  six  months  at  the  most  for  effective 
action to be taken by the Member State concerned to correct the excessive deficit as 
well  as  a  deadline  for  the  correction  of  the  excessive  deficit,  which  should  be 
there  are  special 
completed 
circumstances.  In  deciding  whether  special  circumstances  exist,  “relevant  factors”  as 
clarified in Article 2(3) of Regulation (EC) No 1467/97 should be taken into account. 

identification  unless 

the  year  following 

its 

in 

1 

OJ L 209, 2.8.1997, p. 6.  

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(6) 

(7) 

(8) 

Furthermore, in a recommendation to correct an excessive deficit the Council should 
request the achievement of a minimum annual improvement in the structural balance, 
i.e. the cyclically-adjusted balance excluding one-off and other temporary measures, of 
0.5% of GDP as a benchmark. 

In the case of Finland, the relevant factors, as clarified in Article 2(3) of Regulation 
(EC)  No  1467/97  and  examined  in  the  Commission’s  report  under  Article  124(3), 
were  considered  favourable.  However,  they  do  not  suggest  the  existence  of  special 
circumstances  warranting  a  departure  from  the  standard  deadline  for  correcting  the 
deficit. In particular, according to the Commission services' spring 2010 forecast, the 
general  government  deficit  would  fall  by  a  narrow  margin  below  the  3%  reference 
value under a no-policy-change assumption already in 2011. 

Prior to the global crisis, Finland built up a substantial surplus in public finances. This 
has  allowed  Finland  provide  for  a  relatively  large  discretionary  fiscal  stimulus 
amounting to 1.8% of GDP in 2009 and 1.1% in 2010 and to allow a full operation of 
automatic stabilisers. This has turned the general government finances into a deficit of 
2.2%  of  GDP  in  2009.  The  deficit  is  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 service's spring forecast projected a slightly smaller deficit 
of 3.8% of GDP in 2010. The third supplementary budget presented by the Ministry of 
Finance  to  the  Parliament  on  14  May  2010  suggests  that  tax  revenue  in  2010  could 
turn  out  by  0.5%  of  GDP  higher-than-planned,  principally  on  account  of  stronger 
corporate income tax accrual. This indicates upside risks to the current public finance 
projections, but given that no full-fledged update of these projections has been made, 
the deficit target for 2010 has not been officially changed and the current assessment 
remains  valid.  In  2011,  both  the  Ministry  of  Finance  and  the  Commission  services’ 
forecast  the  general  government  deficit  to  fall  narrowly  below  3%  of  GDP  on  a  no 
policy  change  assumption.  On  the  basis  of  the  Commission  services’  forecast,  the 
correction  of  the  excessive  deficit  in  2011  implies  a  fiscal  effort  of  around  0.3 
percentage points of GDP in 2011. 

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,  in 
particular the free operation of automatic stabilisers, has supported economic activity 
and social cohesion over the crisis period, it has also led to a relatively sharp negative 
swing in public finances. This budgetary framework will therefore effectively support 
including  social 
the  reduction  of  central  government  expenditure  pressures, 
expenditure,  only  once  the  economic  recovery  is  well  underway.  Local  governments 
are  responsible  for  a  large  part  of  age-related  public  expenditure  such  as  education, 
health  and  long-term  care  and  they  are  not  bound  by  centrally-imposed  expenditure 
limits.  To  compensate  for  increasing  expenditure,  local  tax  rates  have  typically  been 
increased,  avoiding  building  up  debt  at  the  municipal  level  but  adding  to  the  overall 
national tax burden. The government pursues reforming local governments' structures 
and service provision in the medium term with the aim of curbing expenditure growth 
related to population ageing.  

(9) 

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 and invited 
the authorities to take timely action to define a comprehensive and concrete medium 

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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.  

(10)  The general government gross debt amounted to 44% of GDP in 2009. The April EDP 
notification expects the debt ratio to rise to 49.9% of GDP in 2010. The Commission 
spring forecast projected the debt ratio to grow slightly faster, reaching 50.5% of GDP 
in 2010 and 54.9% of GDP in 2011, still remaining below the 60% of GDP reference 
value.  

(11)  Enhanced  surveillance  under  the  EDP  will  require  regular  and  timely  monitoring  of 
the  progress  made  in  the  implementation  of  the  fiscal  consolidation  strategy.  In  this 
context,  a  separate  chapter  in  the  forthcoming  updates  of  the  Finnish  stability 
programme could usefully be devoted to this issue. 

(12) 

In general, in the view of the Council, budgetary consolidation measures should secure 
a lasting improvement in the general government balance, while being geared towards 
enhancing the quality of the public finances and reinforcing the growth potential of the 
economy. 

HAS ADOPTED THIS RECOMMENDATION: 

(1) 

(2) 

Recognising  that  Finland’s  budgetary  position  in  2010  resulted  from  measures 
amounting to 1.8% of GDP in 2009 and 1.1% in 2010, which is an adequate response 
to  the  downturn  and  were  in  line  with  the  European  Economic  Recovery  Plan 
principles, as well as from the free play of automatic stabilisers, the Finnish authorities 
should put an end to the present excessive deficit situation at the latest by 2011.  

The Finnish authorities should bring the general government deficit below 3% of GDP 
in a credible and sustainable manner. Specifically, to this end, the Finnish authorities 
should:  

(a) 

(b) 

(c) 

implement the fiscal measures in 2010 as envisaged in the latest update of the 
stability programme, while ensuring that the planned breach of the 3%-of-GDP 
reference value would remain contained and temporary; 

ensure a fiscal effort of at least ½% of GDP in 2011; 

specify measures to ensure that the planned correction of the excessive deficit 
in 2011 is secured. 

(3) 

The Council establishes the deadline of [13 January 2011] for the Finnish government 
to  take  effective  action  to  specify  the  measures  that  will  be  necessary  to  progress 
towards the correction of the excessive deficit. The assessment of effective action will 
take into account economic developments compared with the economic outlook in the 
Commission services' spring 2010 forecast.  

The  Finnish  authorities  should  report  on  progress  made  in  the  implementation  of  these 
recommendations in a separate chapter in the forthcoming updates of the stability programme 
until the abrogation of the excessive deficit procedure. 

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In  addition,  the  Council  highlights  the  importance  of  achieving  the  medium-term  objective 
(MTO) for appropriate budgetary management of economic downturns and also with a view 
of  restoring  the  long-term  sustainability  of  public  finances.  It  therefore  invites  the  Finnish 
authorities to ensure that budgetary consolidation towards the medium-term objective for the 
budgetary  position  –a  structural  surplus  of  0.5%  of  GDP  –  is  sustained  after  the  excessive 
deficit will have been corrected.  

This recommendation is addressed to the Republic of Finland. 

Done at Brussels,  

For the Council 
The President 

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