COMMISSION STAFF WORKING PAPER Analysis by the Commission services 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
Date: 2011-01-27
Institutions: European Commission
Subjects: Bulgaria, budget deficit, budget policy, budgetary control, economic analysis, economic recession, public debt, public expenditure, reflation, stability programme

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EUROPEAN COMMISSION 

Brussels, 27.1.2011 
SEC(2011) 116 final 

COMMISSION STAFF WORKING PAPER 

Analysis by the Commission services 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 

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COMMISSION STAFF WORKING PAPER 

Analysis by the Commission services 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,  Finland  allowed  a  full  operation  of  automatic 
stabilisers and provided a discretionary fiscal stimulus, which turned the general government 
finances  from  earlier  surpluses  into  a  deficit  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 January 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  sustainable  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 breach of the 3%-of-GDP reference value would 
remain contained and temporary; (b) ensure a fiscal effort of at least 0.5% of GDP in 2011; 
and (c) specify measures to ensure that the planned correction of the excessive deficit in 2011 
is secured.  

The  present  paper  reviews  the  actions  taken  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  projected  budgetary  developments  in  2010 
according  to  the  Commission  services’  autumn  2010  forecast  with  the  economic  and 
budgetary scenario underpinning the Council recommendations. That scenario was based on 
the Commission services’ spring 2010 forecast and the budgetary projections underlying the 
central government’s 2010 budget2, 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 deficit is the Commission services’ autumn 2010 forecast, which 
incorporates the 2011 budgetary measures, as well as the Ministry of Finance forecast update 
from 20 December 2010. 

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2 

All EDP-related documents for Finland can be found at the following website: 
http://ec.europa.eu/economy_finance/sgp/deficit/countries/finland_en.htm 
The publication of the central government budgets for 2010 and 2011 can be found at: 
http://www.vm.fi/vm/en/04_publications_and_documents/01_publications/01_budgets/index.jsp 

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2. 

ECONOMIC DEVELOPMENTS 

The  global  crisis  strongly  affected  the  Finnish  economy  in  2009,  while  solid  fundamentals 
supported  a  fast  recovery  in  2010.  Economic  growth  picked  up  since  the  second  quarter  of 
2010,  following  a  severe  decline  of  8%  in  2009.  The  Commission  services’  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  for  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 historically 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  authorities  also  revised  their  economic  projections 
upwards in the second half of 2010. In December 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 Finnish stability programme in February 2010.     

Table 1: Comparison of macroeconomic developments and forecasts 

2009

2010

2011

outturn COM SF10 COM AF10 COM SF10 COM AF10

Real GDP (% change)
Contributions to real GDP growth:
Final domestic demand
Changes in inventories
Net exports
Employment (% change)
GDP deflator (% change)

-8.0

-3.9
-1.8
-1.7
-2.8
0.9

1.4

0.7
0.6
0.1
-2.1
1.4

2.9

1.5
0.7
0.7
-0.1
1.3

2.1

1.6
0.2
0.4
0.4
2.0

2.9

2.4
0.2
0.2
0.9
2.6

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  stabilisers  and  a  relatively  large  fiscal  stimulus,  the 
general government net lending fell to a deficit of 2.5% of GDP in 2009. 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  Ministry  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, reflecting the robust rebound 
in  economic  activity  recorded  since  the  second  quarter  of  2010,  the  fiscal  outlook  has  also 
improved. Subsequent forecast updates by both the Commission services' and the Ministry of 
Finance have revised the deficit projection for the better. The Commission services' autumn 
2010  forecast  projects  a  deficit  of  3.1%  of  GDP  in  2010,  which  will  in  turn  improve  the 
outlook for the following years. Similarly, the latest Ministry of Finance forecast update from 
December 2010 expects the deficit to reach only 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). 

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Table 2: Composition of the budgetary adjustment 

2009

SP Feb 2010

2010
MoF Sept 
2010

% ch  
yoy
0.8

% of 
GDP
52.6

% ch  
yoy
2.9

% of 
GDP
52.5

2011

COM AF 

2010        
% of 
GDP
52.3

% ch  
yoy
3.1

MoF Sept 
2010

% ch  
yoy
7.1

% of 
GDP
53.5

COM AF 

2010        
% of 
GDP
52.9

% ch  
yoy
6.6

SP Feb 
2010
% of 
GDP
53.1

13.4
16.2
12.8
10.6
55.3

0.4
-0.7
2.7
1.3
3.4

13.3
15.8
12.9
10.5
56.2

1.4
3.7
4.4
1.7
4.2

13.2
16.2
13.1
10.0
56.1

1.6
4.0
4.6
1.7
4.1

13.2
16.2
13.0
9.9
56.0

9.3
6.5
5.1
7.5
3.4

13.8
16.5
13.1
10.2
55.2

9.8
5.8
5.3
5.4
3.7

13.7
16.3
13.0
9.9
55.0

outturn

% of 
GDP
52.9

13.5
16.2
13.0
10.2
56.0

54.6

53.9

3.5

54.8

4.2

54.7

4.1

54.6

3.3

53.8

3.6

53.6

14.8
11.0
20.9
1.5
3.3
3.1
1.4

-2.5

-0.1
-8.0
0.9
-7.2

14.7
10.9
20.5
1.5
2.8
3.5
1.4

-2.2
-0.8
0.0
-7.6
1.1
-6.5

1.4
5.1
5.7
3.3
-1.9
-1.2
0.9

0.7
1.2
1.9

14.7
11.2
21.3
1.5
2.7
3.4
1.4

-3.6
-2.3
-0.2

1.4
5.1
5.0
6.3
-1.8
8.4
5.4

2.1
1.6
3.7

14.5
11.2
21.1
1.5
3.1
3.2
1.4

-3.3
-1.9
na

3.5
2.4
4.9
6.3
2.6
8.4
5.4

2.9
1.3
4.2

14.7
10.8
21.0
1.5
3.2
3.2
1.4

-3.1
-1.8
-0.1

2.1
4.0
3.9
5.9
0.9
3.9
5.4

2.9
2.2
5.1

14.1
11.1
20.9
1.5
3.0
3.2
1.4

-1.4
0.0
na

2.7
4.6
3.9
5.8
1.5
4.0
5.4

2.9
2.6
5.5

14.4
10.7
20.7
1.5
3.1
3.2
1.4

-1.6
-0.3
0.0

Revenue
of which:
- Taxes on production and imports
- Current taxes on imcome, wealth, etc.
- Social contributions
- Other (resedual)
Expenditure
of which:
- Primary expenditure
      of which:
     - Compensation of employees
     - Intermediate consumption
     - Social payments
     - Subsidies
     - Gross fixed capital formation
     - Other (residual)
- Interest expenditure

General government balance (GGB)
Primary balance
One-off and other temporary measures
Real GDP growth
GDP deflator
Nominal GDP

Source : SP Feb 2010 - Stability Programme February 2010; MoF Sept 2010 - Ministry of Finance Finland's September 2010 
forecast; COM AF10 - Commission services' autumn 2010 forecast.

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 February 2010 stability programme update. The 
full annualised impact of the VAT rise is estimated 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 tax 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. 

PROJECTED 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 forecast from 20 December 2010 projects a slightly 
lower deficit at 1.3% of GDP in 2011. Most revenue and expenditure categories are broadly in 
line  between  the  two  forecasts.  The  discrepancy  is  mainly  explained  by  the  Commission 
projecting  slightly  weaker  revenues  (lower  personal  income  tax  and  sales  receipts)  and 
slightly  higher  expenditures  (personnel  costs  and  intermediate  consumption).  The  deficit 
outlook has improved considerably since the February 2010 update of the stability programme 

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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  economic  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  cooperation  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  projects  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  financing  constraints  by  making  savings  in  their  budgets. 
Both the central and local governments are continuing 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 robustly 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 risks to the achievement of the 2011 deficit target 
are  mainly  dependent  on  underlying  economic  developments.  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 remain 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  improvement  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 worsening of around 1 pp. anticipated in 2010. These 
estimates  broadly  correspond  to  a  bottom-up  measurement  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 Commission services is in line with the lower GDP 
growth forecast for that year. 

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Table 3: Comparison of key macroeconomic and budgetary projections 

Real GDP 
(% change) 

Primary balance 
(% of GDP) 

Output gap 
(% of potential GDP) 

General government 
balance 
(% of GDP) 

2012 
2.3 
2.7 
3.5 
-3.5 
n.a. 
-2.5 
-1.2 
-0.6 
-2.3 
0.4 
n.a. 
-0.2 
0.6 
n.a. 
-1.0 
0.6 
n.a. 
n.a. 
53.0 
51.3 
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 

COM 
FI 
SP 
COM 
FI 
SP 
COM 
FI 
SP 
COM 
FI 
SP 
COM 
FI 
SP 
COM 
FI 
SP 
COM 
FI 
SP 

2009 
-8.0 
-8.0 
-7.6 
-6.0 
n.a. 
-5.0 
-2.5 
-2.7* 
-2.2 
-1.3 
n.a. 
-0.8 
0.6 
n.a. 
0.3 
0.6 
n.a. 
n.a. 
43.8 
43.8 
41.8 

2010 
2.9 
3.2 
0.7 
-5.0 
n.a. 
-5.2 
-3.1 
-3.2 
-3.6 
-1.8 
n.a. 
-2.3 
-0.6 
n.a. 
-1.1 
-0.5 
n.a. 
n.a. 
49.0 
47.9 
48.3 

2011 
2.9 
2.9 
2.4 
-4.0 
n.a. 
-4.3 
-1.6 
-1.3 
-3.0 
-0.3 
n.a. 
-1.2 
0.4 
n.a. 
-0.8 
0.4 
n.a. 
n.a. 
51.1 
50.0 
52.2 

2008 
0.9 
0.9 
1.0 
3.7 
n.a. 
3.6 
4.2 
4.2 
4.4 
5.6 
n.a. 
5.9 
2.4 
n.a. 
2.6 
2.4 
n.a. 
n.a. 
34.1 
34.1 
34.2 

Cyclically-adjusted 
balance 
(% of GDP) 

Government gross 
debt 
(% of GDP) 

Structural balance 
(% of GDP) 

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