REPORT FROM THE COMMISSION Finland Report prepared in accordance with Article 126(3) of the Treaty
Date: 2015-02-27
Institutions: European Commission
Subjects: Finland, anti-crisis plan, budget deficit, budgetary control, economic stabilisation, gross domestic product, public debt, structural adjustment













EUR-Lex - 52015DC0114 - EN











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52015DC0114

REPORT FROM THE COMMISSION Finland Report prepared in accordance with Article 126(3) of the Treaty /* COM/2015/0114 final */









REPORT
FROM THE COMMISSION
Finland
Report prepared in accordance with Article 126(3) of the Treaty

1.                      
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 (SGP). 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 question of Finland's
compliance with the debt criterion of the Treaty, with due regard to the
economic background and other relevant factors before drawing a final
conclusion on compliance
Following
the amendments to the SGP 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. 
On
13 January 2015 the Commission presented a Communication on Flexibility,
providing new guidance on how to apply the existing rules of the Stability and
Growth Pact, in order to strengthen the link between effective implementation
of structural reforms, investment, and fiscal responsibility in support of jobs
and growth. The Communication does not amend any provision of the Pact, but
aims to further reinforce the effectiveness and understanding of its rules and
to develop a more growth-friendly fiscal stance in the euro area by ensuring the
best use of the flexibility enshrined within the Pact while preserving its
credibility and effectiveness in upholding fiscal responsibility. In
particular, the Communication clarified that – in line with the provisions of
Article 2(3) of Council Regulation (EC) No 1467/97 - the Commission, when
examining whether an EDP needs to be opened (in the context of a report
according to Article 126(3) TFEU), will analyse carefully all relevant
medium-term developments regarding the economic, budgetary and debt positions.
It has also clarified that the implementation of structural reforms in the
context of the European Semester is to be considered among these relevant
factors[3].

According
to the 2015 Draft Budgetary Plan of Finland, communicated to the Commission on
2 October 2014 the general government deficit for 2015 was expected to reach
2.4% of GDP while the gross debt ratio would reach 61.2% by the end of 2015,
which is above the 60% reference value. According to the Commission 2015 winter
forecast, the general government deficit will be at 2.5% of GDP in 2015, while
the projection for the debt ratio is in line with that of the authorities in
the Draft Budgetary Plan. 
The
projected figure, both in the Commission forecast and in the Draft Budgetary
Plan provides evidence that there appears to be prima facie a risk of
the existence of an excessive deficit based on the debt criterion in the sense
of the SGP before however considering all relevant factors as set out below. 
This
report therefore updates the previous Commission assessment of the excess of
the debt ratio over the reference value of 2 June 2014[4], in
order to examine whether the launch of an EDP is warranted after all relevant
factors have been considered. 
Section
2 examines the deficit criterion, Section 3 the debt criterion and section 4
the relevant factors influencing the debt developments. The report takes into
account the Commission 2015 winter forecast, released on 5 February 2015.
Compared to the report of 2 June 2014, the deficits are forecast to be higher
for 2014 as well as for 2015 due to the weaker growth outlook. Expenditure on
interest is forecast to be lower. The current report is based on ESA 2010 data.
The switch to ESA 2010 lowered the debt-to-GDP ratio (for the last statistical
year, 2013, debt-to-GDP ratio is reduced from 57.0% under ESA 95 to 56.0%). 

2.                      
Deficit criterion

According
to the Draft Budgetary Plan as well as the Commission 2015 winter forecast,
Finland's general government deficit will remain below the Treaty reference
value during the period 2014 until 2016. According to the Commission forecast,
the deficit reached 2.7% of GDP in 2014 and is projected to decline thereafter
to 2.5% of GDP in 2015 and 2.2% of GDP in 2016 based on the no-policy change
assumption. According to the Draft Budgetary Plan, the deficit would have been
2.7% of GDP in 2014 and was forecast to decline to 2.4% of GDP in 2015. Hence,
the deficit criterion in the Treaty is fulfilled.

3.                      
Debt criterion 

The
general government gross debt ratio has increased rapidly over the last years,
growing from its low point of 32.7% of GDP in 2008 to 56.0% in 2013. According
to the Commission 2015 winter forecast, the debt is expected to have reached
58.9% of GDP in 2014 and to grow to 61.2% of GDP in 2015 and 62.6% in 2016. Finland's
Draft Budgetary Plan forecasted the debt to increase to 59.6% of GDP in 2014
and to 61.2% of GDP in 2015. The winter forecast debt figure for 2014 takes
into account the slower growth of central government debt in the second half of
the year.
Table 1: Debt
dynamics

4.                      
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 all 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 compliance with the deficit and debt criteria and which the Member State
has put forward to the Council and the Commission” 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. 

4.1.                
Medium-term economic position

Cyclical conditions and potential growth
After Finland's
real GDP collapsed by 8.3% in 2009, the country recovered gradually in 2010 and
2011, but experienced a new recession over 2012 - 2013. In 2014, Finland's
output is estimated to have remained broadly unchanged compared to the previous
year. Recently, productivity growth has been low and export market share losses
have accumulated, reflecting the ongoing restructuring of the economy. The
crisis has negatively affected Finland's potential growth. Based on the winter
forecast, potential growth is estimated to have declined from 2.2% in 2007 to
almost a standstill in 2014. In 2015, potential growth is expected to improve
only slightly, supported by capital accumulation and hours worked, while no
positive contribution is expected to come from the total factor productivity.
The sharp decline in potential growth has a negative impact on debt
sustainability.
As real GDP
declined in 2012 and 2013, the output gap widened to -3.1% of potential GDP in
2013 where it is expected to remain in 2014 as GDP is estimated to have stayed
unchanged. In 2015, growth is forecast to exceed potential growth, reducing the
output gap somewhat to -2.6% of potential GDP. 
Table
2: Macroeconomic and budgetary developments a
These negative
cyclical developments have had a significant impact on the debt ratio. If
corrected for the cycle over the last three years, the debt ratio in 2015 would
remain below the Treaty reference value both according to the Commission and
the national authorities. Based on the Commission winter forecast, cyclically
adjusted debt would be 55.8% of GDP in 2015. The national authorities agree
with this calculation. 
Table 3. General
government deficit and debt (% of GDP)[5]
Recent
structural reforms
In 2013, Finland
adopted a broad structural policy programme for improving growth conditions and
reducing the sustainability gap[6]. The
government foresees measures to balance local government finances, increase the
efficiency of the public sector, extend working careers by 2 years and improve
competition and competitiveness. More specific steps have been announced in the
context of the latest expenditure ceilings decision in March 2014[7] and
laid out in the National Reform Programme 2014[8].
Further implementing decisions were taken in August 2014[9], these
decisions are currently being carried out by the government. 
The Commission's
assessment of the reforms undertaken by the Finnish authorities in response to
the recommendations issued by the Council in July 2013 and in July 2014 in the
context of the EU semester is generally positive. The 2015 Country Report notes
that Finland is making some progress with the implementation of the 2014
Country Specific Recommendations. Comprehensive reforms for increasing the size
of municipalities, improvements of 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. A reform of the corporate income tax system aimed at
increasing the growth-friendliness of the tax system has entered into force in
2014, reducing the corporate income tax rate and increasing dividend taxation. 
A pension reform
has been agreed by the social partners in late September 2014. The reform links
pension age to life expectancy as recommended by the Council in July 2014. The
target is to implement the reform from 2017 onwards. According to the national
authorities, the reform will improve fiscal sustainability by approximately 1%
of GDP.
Political
parties have reached a consensus regarding the direction of the healthcare and social
care reforms. According to the 2014 National Reform Programme, the main
principle of the reform is the integrated provision of all social welfare and
healthcare services by five regional providers. Municipalities would continue
to participate in the provision of services, but a significant share of their
competencies is transferred to these five regions. Local services, such as
healthcare services, home help for the elderly and social welfare, can still be
provided close to home. At the end of 2014, legislative proposals related to
this reform were presented to the parliament 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 decide to merge 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. Although it is planned not to force mergers, the
government has set targets for the reduction of 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
of the local government sector (which currently stands at 1% of GDP).
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.

4.2.                
Medium-term budgetary position

Structural
deficit and fiscal consolidation
Finland's
headline deficit is below 3% of GDP and is forecast to remain so until 2016.
During the recovery of 2010-11, Finland's structural balance improved
significantly, reaching -0.8% of GDP by end-2011. In 2012 the structural
balance deteriorated to -1.0% of GDP. Finland had a medium-term objective (MTO)
of +0.5% of GDP until 2013, when it was adjusted to -0.5% of GDP. According to
the Commission 2015 winter forecast, Finland reached the MTO in 2013, as the
structural balance was -0.6% of GDP, sufficiently close to the MTO. 
According to
both national and Commission forecasts, Finland is expected to have moved away
from the MTO in 2014. With growth expected to return in 2015, Finland would be
expected to improve the structural balance by 0.1% of GDP. However, the Draft
Budgetary Plan foresees a continued deterioration of the structural balance
also in 2015, and, according to the winter forecast, the structural balance
would not change in 2015. While the Commission at this stage does not project a
significant deviation from the MTO in 2014 and/or 2015, the forecast implies
some deviation which, when repeated over time, could result in a significant
deviation in the future. 
The ratio of
general government expenditure to GDP is increasing. While the average over the
period 2006-2010 amounted to 50.6%, the ratio reached 57.8% in 2013 and is
projected to remain high in the Commission 2015 winter forecast; the ratio is
among the highest in the EU. 

4.3.                
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. However, the
latest pension reform is not yet included in these assessments. 
The debt would
continue to increase according to the current projections also beyond 2016.
According to the baseline scenario (relying on Commission forecasts, Economic
Policy Committee agreed long-run convergence assumptions of underlying
macroeconomic variables (real interest rate, real GDP growth, inflation) and
the assumption of constant fiscal policy beyond the forecast horizon), the debt
level would be relatively stable until 2019-2020 and continue to increase
thereafter. The increase would be driven by the costs of ageing.
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 stood at 1.9% of GDP
in 2013 and is estimated by the national authorities at 1.5% for 2014. In 2015,
the surplus is projected to diminish to 1.3% of GDP and to start growing
thereafter. The surplus is included in the general government balance but is
not used to pay off general government gross debt. These funds show up as net
accumulation of assets in the stock-flow adjustment. Therefore, Finland's
general government net financial assets position is forecast to amount to 56.5%
of GDP in 2014[10].
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 the government in order
to reduce debt. Balance-sheet management of the central government’s company
ownerships is envisaged to 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 shall be implemented to increase revenues transferred to the
government. The total amount of dividends of unlisted companies is intended to
be increased. The additional recognition of revenue arising from these measures
compared with that outlined earlier will be around EUR 1.9 billion in 2014–15.
Most of the proceeds will be directed to the repayment of central government
debt, but EUR 0.6 billion will be dedicated to investments in 2014 and 2015[11].
Total
stock of debt guaranteed by the government
Finland
had central-government guarantees amounting to 16.5% of GDP in 2013. Guarantees
linked to the financial sector amounted to 0.5% of GDP in 2013. Therefore,
risks related to contingent liabilities, guarantees, financial-rescue operations
and debt assumptions are limited.

4.4.                
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) of 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 to be taken into account.
According to the Commission 2015 winter forecast, the cumulative impact of this
assistance would amount to 2.9% of GDP in 2015. Thus, Finland's general
government gross debt would be 58.3% of GDP in 2015 if the debt related to
financial stabilisation operations was removed from the total and thus below
the reference value in the Treaty.

4.5.                
Other factors put forward by the Member State

In the letter
received by the Commission on 13 February 2015, Finland emphasised the role of
the cyclical situation and the solidarity operations in the accumulation of
debt. Finland also drew attention to the government's Structural Policy
programme agreed in August 2013, consolidation measures decided for 2015 and
beyond, and the sale of government assets in order to reduce debt and to
stimulate the economy as factors to be considered. The implications of
solidarity operations are discussed in Section 4.4 of the current report.
Section 4.1 addresses the recent structural reforms including the Structural
policy programme. Consolidation measures are covered in Section 4.2 and asset
sales in Section 4.3. 
According to
Ministry of Finance calculations (based on the Commission's 2015 winter
forecast), the debt level corrected for business-cycle effects would be 55.8%
of GDP in 2015 and 59.7% of GDP in 2016.

5.                      
Conclusions

General
government gross debt is planned to reach 61.2% of GDP in 2015, above the 60%
of GDP reference value. The risk of breaching the reference value is confirmed
by the Commission's 2015 winter forecast, which projects gross debt also at
61.2% of GDP. However, as demonstrated in this report, the planned breach is
fully explained by Finland's financial support to safeguard financial stability
in the euro area without which government debt would be below 60% of GDP. Additionally,
the debt level has been influenced by large purchases of financial assets by
the social security funds, resulting in the accumulation of assets in parallel
to the increase of debt. Finally, it should be noted that the debt ratio
reflects the effects of Finland's current cyclical position.
Overall,
the analysis presented in the report including the assessment of all relevant
factors suggests that the debt criterion as defined in the Treaty and in
Regulation (EC) No 1467/97 should be considered as currently complied with.
[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]               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 (OJ L 140, 27.5.2013, p. 11).
[3]               Article 2 of Regulation (EC) No 1467/97 provides that
"[…] The report shall reflect, as appropriate […] the
implementation of policies in the context of the prevention and correction of
excessive macroeconomic imbalances, the implementation of policies in the
context of the common growth strategy of the Union […]".
[4]               COM(2014) 432 final.
[5]               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.
[6]               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
[7]               Hallituksen päätös rakennepoliittisen ohjelman
toimeenpanosta osana julkisen talouden suunnitelmaa http://valtioneuvosto.fi/tiedostot/julkinen/kehysneuvottelut-2014/paatos/fi.pdf 
[8] http://www.vm.fi/vm/en/04_publications_and_documents/01_publications/02_economic_surveys/20140415Europe/Europa_2020_Spring_2014_NETTI.pdf
[9]               Government decision on strengthening the
implementation of the structural policy programme http://valtioneuvosto.fi/tiedostot/julkinen/pdf/2014/budjettineuvottelut-2014/rakennepoliittinen-ohjelma/government-decision-280814.pdf

[10]             OECD Economic Outlook no 93, Annex
Table 33.
[11]             General Government Fiscal Plan
2015 – 2018.