REPORT FROM THE COMMISSION FINLAND Report prepared in accordance with Article 126(3) of the Treaty
Date: 2014-06-02
Institutions: European Commission
Subjects: Finland, budget deficit, budgetary equilibrium, public debt, public expenditure, short-term economic prospects













EUR-Lex - 52014DC0432 - EN











|



52014DC0432

REPORT FROM THE COMMISSION FINLAND Report prepared in accordance with Article 126(3) of the Treaty /* COM/2014/0432 final */










1.                      
LEGAL BACKGROUND

Article
126 of the Treaty on the Functioning of the European Union (TFEU) lays down the
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. Specific provisions for euro
area Member States under EDP are laid down in Regulation (EU) No 473/2013[2].
According
to Article 126(2) TFEU, 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) TFEU stipulates that, if a Member State does not fulfil the requirements
under one or both of the above criteria, the Commission has to prepare a
report. The Commission may also prepare a report if, notwithstanding the
fulfilment of the requirements under the criteria, it is of the opinion that
there is a risk of an excessive deficit, the latter understood as the situation
defined in Article 126(2) TFEU. 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”.
This
report, which represents the first step in the EDP, analyses the reasons for
Finland being non-compliant with the debt criterion of the Treaty, with due
regard to the economic background and other relevant factors. 
Following
the amendments to the Stability and Growth Pact in 2011, the debt requirement
has been put on an equal footing with the deficit requirement in order to
ensure that, for countries with a debt-to-GDP ratio above the 60% reference
value, the ratio is brought below (or sufficiently declining towards) that
value. 
According
to the Stability Programme, communicated to the Commission on 17 April 2014,
the general government deficit for 2015 is expected to reach 1.1% of GDP while
the gross debt ratio would reach 61.0% by the end of 2015, above the 60% of GDP
reference value. According to the Commission 2014 Spring Forecast, the debt
ratio would reach 61.2% of GDP. 
The
planned figure, both in the Commission forecast and in the 2014 Stability
Programme debt provides prima facie evidence on the risk of the
existence of an excessive deficit based on the debt criterion in Finland in the sense of the Treaty and the Stability and Growth Pact. The
Commission has therefore prepared the following report in order to
comprehensively assess the excess over the reference value, in order to
conclude whether the breach of the debt criterion merits the launch of an EDP.
This report is an update of the report issued on 15 November 2013[3].
Section 2 examines the debt criterion and section 3 the relevant factors
influencing the debt developments. The report takes into account the Commission
2014 Spring Forecast, released on 5 May 2014.

2.                      
Debt criterion 

The
general government gross debt ratio has increased rapidly over the last years,
growing from 48.8% of GDP in 2010 to 57.0% in 2013. According to the Commission
2014 Spring Forecast, the debt will reach 59.9% of GDP in 2014 and 61.2% of GDP
in 2015. Finland's Stability Programme forecasts the debt to increase to 59.8%
of GDP in 2014 and to 61.0% of GDP in 2015. The difference is due to the fact
that for 2015, the Commission forecasts a lower primary balance and a smaller
positive effect from GDP growth. It is forecast that the debt ratio would increase
also in 2016, reaching 61.4% according to the national forecast.
Table
1: Debt dynamics

3.                      
Relevant factors

Article
126(3) of the TFEU 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 in order to
decide whether the breach of the criterion merits the launch of an EDP for the
Member State in question." 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 subsections consider in turn (1)
the medium-term economic position; (2) the medium-term budgetary position
(including public investment); (3) the developments in the medium-term
government debt position, its dynamics and sustainability; (4) other factors
put forward by the Member State; and (5) other factors considered relevant by
the Commission. 

3.1.                
Medium-term economic position

Cyclical
conditions and potential growth. After Finland's GDP decreased by
8.5% in 2009, the country recovered at satisfactory pace over 2010 and 2011,
but has experienced a new recession over 2012 and 2013. The crisis has
negatively affected Finland's potential growth. Before the crisis, in 2007,
potential growth was estimated at 2.2% but has decreased to 0% in 2013. Capital
accumulation remains the only positively contributing element for potential
output growth. Potential growth is forecast to remain at 0% in 2014 and to
improve only slightly, to 0.4% in 2015.
Real GDP
declined in 2012 and 2013, opening up an output gap of -2.7% of GDP in 2013.
Growth is forecast to exceed potential growth over 2014-15, but this will not
be sufficient to close the output gap which is expected to narrow to -1.9% by
2015. 
Table 2:
Macroeconomic and budgetary developments a
 
When taking into
account the influence of the cycle, it seems that the negative cyclical
developments over the recent years have had a significant impact on the debt
ratio. Indeed, if corrected for the cycle over the last three years, the debt
ratio in 2015 would remain below the Treaty reference value. 
Table 3. General government deficit and debt (% of GDP)[4]
Recent
structural reforms. Assessment of the reforms undertaken by
the Finnish authorities in response to the recommendations issued by the
Council in July 2013 in the context of the EU semester is generally positive. Comprehensive
reforms of the municipal structure, healthcare and social services are being
prepared, the youth guarantee has been extended, early exit pathways from the
labour market are being reduced and the national competition authority has been
strenghtened. Finland reformed the corporate income tax system effective as
from 2014, reducing the corporate income tax rate and increasing dividend
taxation. The aim is to increase the growth-friendliness of the tax system.
In 2013, Finland adopted a
broad structural policy programme for improving growth conditions and reducing
the sustainability gap[5].
The government is foreseeing measures to balance local government finances, to
increase the efficiency of the public sector, to extend working careers by 2 years
and to improve competition and competitiveness. More specific steps have been
announced in the context of the latest expenditure ceilings decision in March
2014[6] and in
the National Reform Programme 2014[7].
Political
parties have reached a consensus regarding the direction of the healthcare and
social care reforms. All social welfare and healthcare services are to be
delivered by five regional providers, based on current, specific catchment
areas. This is confirmed in the  the National Reform Programme. Municipalities
would continue to participate in the provision of services, but a significant
share of their obligations is transferred to these five regions. Local
services, such as healthcare services, home help services for the elderly and
social welfare services, should still be provided close to home. The
legislative proposal is due to be submitted to the parliament in autumn 2014
and it is expected that the new structures will be effective by 2017.
The municipal reform is built on
voluntary mergers of the municipalities, which are currently preparing detailed
studies on the benefits of the mergers. Municipalities that will take merger
decisions within the deadline will be entitled to grants and compensation.
According to the National Reform Programme, the government has decided to
appoint special rapporteurs for the 12 larger metropolitan regions to study the
potential mergers. The outcome of the voluntary mergers appears uncertain at
this stage. However, the government has set in the structural policy programme
targets to reduce the duties and obligations and to cut the overlapping
activities in order to increase the efficiency. At the same time, the
municipalities are expected to improve productivity and to increase tax
revenues, thus closing the deficit (1% of GDP) currently persistent in the
local government sector.
A pension reform
is part of the reform agenda social partners are expected to arrive at the
agreement in autumn 2014. The target is to implement it from 2017. 
Depending on the
implementation details still to be decided, these measures could have a strong
positive impact on public finances in the medium term through increased growth
and expenditure reduction.

3.2.                
Medium-term budgetary position

Structural
deficit and fiscal consolidation. During the recovery of 2010-11, Finland improved the structural balance significantly, reaching -0.6% by end 2011. With the
economic decline over 2012-13 the structural balance started to deteriorate,
falling to -1.0% in 2012. Finland had a MTO of +0.5% of GDP until 2013, when it
was adjusted to -0.5%. According to the Commission 2014 Spring Forecast, Finland reached the MTO in 2013. In all years, Finland's headline deficit has been below 3%
of GDP and is forecast to remain so over the forecast horizon.
With growth
expected to return in 2014, Finland's Stability Programme aims to stay
sufficiently close to the MTO. However, according to the Commission 2014 Spring
Forecast the structural balance deteriorates to -0.9% in 2014. Still, the risk
of significant deviation highlighted in the assessment of the 2013 Draft
Budgetary Plan appears to be reduced. For 2015, Finland plans to improve the
structural balance to -0.1%, above the MTO, due to the consolidation measures
decided in March 2014. The Commission 2014 Spring Forecast confirms that the
structural balance is likely to exceed the MTO in 2015, albeit with a lower
margin. 
The Commission
forecast shows that debt will remain on the upward trend over 2014-15. National
authorities also forecast that the debt level will increase over 2014-16, but
assuming no change in policies, the stability programme expects that the debt
ratio will start to decline in 2017. 

3.3.                
Medium-term government debt position

Long-term
sustainability of public finances. Finland is assessed to be at low
risk of fiscal stress in the short term but is at medium sustainability risk in
the medium term and at high risk in the long term due to the budgetary impact
of the cost of ageing. The focus, therefore, should be on containing
age-related expenditure growth further so as to contribute to the
sustainability of public finances in the medium and long term.
According to the
2012 Ageing Report reference scenario, Finland’s public healthcare expenditure
is set to increase significantly from 6.0% of GDP to 7.0% of GDP by 2060. Among the many measures being proposed is
the consolidation of reform efforts already being made by, for example,
increasing hospital efficiency, enhancing the supply of follow-up care for
long-term care patients so as to reduce the unnecessary use of acute care
settings for these patients, improving the organisation and management of
health care or introducing medical best practices systematically.
Stock-flow
adjustment. The stock-flow adjustment has a large effect on the
changes in the general government debt in Finland. This is driven by the fact
that the earnings-related pension system included in the general government
sector is partially pre-funded and is showing surpluses. The surplus was at
2.1% of GDP in 2013 and is forecast at 2.0% for 2014. It is included in the
general government balance but is not used to pay off gross general government
debt. These funds show up as net accumulation of financial assets in the
stock-flow adjustment. Therefore, Finland's general government net financial
assets position is forecast to amount to 47.1% of GDP in 2014[8]. Among
the OECD countries, it is one of the highest positive net financial asset
positions.
Sale of
assets. The
government has decided to sell properties belonging to government-owned Senate
Properties and Metsähallitus. Balance sheet management of the central
government’s company ownerships will be enhanced by expanding the ownership
base of state-owned unlisted companies and, if necessary, withdrawal from
company ownership. In addition, sales of shares of state-owned listed companies
as well as other measures will be implemented to increase proceeds transferred
to central government. The total amount of dividends of unlisted companies will
be increased. The additional recognition of revenue arising from the measures
compared with that outlined earlier will be around EUR 1.9 billion in
2014–2015. Most of the proceeds will be directed to the repayment of central
government debt, but EUR 0.6 billion will be dedicated to investments for 2014
and 2015. 
Total
stock of debt guaranteed by government. Finland had
central government guarantees amounting to 17.1% of GDP in 2013. Guarantees
linked to the financial sector amounted to 0.6% of GDP in 2013. Therefore,
risks related to contingent liabilities, guarantees, financial
rescue operations and debt assumptions are limited.

3.4.                
Other factors considered relevant by the
Commission

Financial
stabilisation operations. Among the other factors considered
relevant by the Commission, particular consideration is given to financial
contributions to fostering international solidarity and achieving the policy
goals of the Union, the debt incurred in the form of bilateral and multilateral
support between Member States in the context of safeguarding financial stability,
and the debt related to financial stabilisation operations during major
financial disturbances (Article 2(3), Regulation (EC) No 1467/97). 
In
assessing compliance with the debt criteria, financial assistance to euro-area
Member States with a debt-increasing impact has been taken into account. At the
end of 2013, the cumulative impact of participation in the financial
stabilisation operations amounted to 2.9% of GDP. According to the Commission
2014 Spring Forecast, the cumulative impact would amount to 2.3% of GDP in
2015. Thus, Finland's general government gross debt would be 58.9% of GDP in
2015, if the debt related to financial stabilisation operations was removed
from the total. 

3.5.                
Other factors put forward by the Member State

In the letter
received by the Commission on 14 May 2014, Finland emphasised the role of
solidarity operations in the debt buildup, deviations in the growth forecast
between Finland and the Commission, the governemnt Structural Policy programme
agreed in August 2013 (further specified in November 2013 and March 2014),
consolidation measures decided for 2015 and beyond and the sale of government
assets (2014 and 2015) in order to reduce debt and to stimulate the economy as
the factors to be considered. According to Ministry of Finance calculations,
the debt level corrected for business cycle effects  would be 56.7% of GDP in
2015. 
The implications
of solidarity operations are discussed in section 3.4 of the current report.
Section 3.1 addresses the recent structural reforms including the Structural
policy programme. Consolidation measures are covered in section 3.2 and asset
sales in section 3.3. While the Commission 2014 Spring Forecast expects
growth in 2014 and 2015 to be lower than the national forecasts, the debt to
GDP ratio exceeds the reference value also in the national forecast for 2015
despite the slightly more positive growth scenario. Thus the finding on the
planned breach is not based exclusively on the Commission's more negative
growth forecast. 

4.                      
Conclusions

General
government gross debt is planned to reach 61.0% of GDP in 2015, above the 60%
of GDP reference value. The risk of breaching the reference value is confirmed
by the Commission forecast, which projects gross debt at 61.2% of GDP. However,
as explained above, the planned breach is fully explained by Finland's financial support in the context of the safeguarding financial stability in the
euro area. Finally, the debt level has been influenced by large purchases of
financial assets by the social security funds, resulting in the build-up of
assets in parallel to the increase of debt.
Overall, the
analysis presented in the report suggests that the debt criterion of the Treaty
is fulfilled.
[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 Council of 3 September
2012, available at:
http://ec.europa.eu/economy_finance/economic_governance/sgp/legal_texts/index_en.htm
.
[2]               OJ L 140, 27.5.2013, p. 11:
Regulation (EU) No 473/2013 of the European Parliament and of the Council on
"common provisions for monitoring and assessing draft budgetary plans and
ensuring the correction of excessive deficit of the Member States in the euro
area".
[3]               COM(2013) 912 final.
[4]               The cyclically-adjusted debt is computed as:                
 
where Bt stands for debt, Yt for GDP
at current price, ypot for potential growth, pt for the price
deflator of GDP, Ct for the cyclical part of the budget balance. The
cyclical components and potential growth are calculated according to commonly
agreed methodologies.
[5]               A structural policy programme to
strengthen conditions for economic growth and bridge the sustainability gap in
general government finances is available at:               
http://valtioneuvosto.fi/etusivu/rakenneuudistus395285/tiedostot/rakennepoliittinen-ohjelma-29082013/fi.pdf
[6]               Hallituksen päätös rakennepoliittisen ohjelman
toimeenpanosta osana julkisen talouden suunnitelmaa http://valtioneuvosto.fi/tiedostot/julkinen/kehysneuvottelut-2014/paatos/fi.pdf

[7]http://www.vm.fi/vm/en/04_publications_and_documents/01_publications/02_economic_surveys/20140415Europe/Europa_2020_Spring_2014_NETTI.pdf
[8]               OECD Economic Outlook no 93, Annex Table 33.