REPORT FROM THE COMMISSION Finland Report prepared in accordance with Article 126(3) of the Treaty
Date: 2015-11-16
Institutions: Directorate-General for Economic and Financial Affairs, European Commission
Subjects: Finland, budget deficit, budgetary control, budgetary equilibrium, economic stabilisation, macroeconomics, public debt, stability pact, structural adjustment

EN 

   EN 

   EUROPEAN COMMISSION  Brussels, 16.11.2015  COM(2015) 803 final   REPORT FROM THE COMMISSION Finland  Report prepared in accordance with Article 126(3) of the Treaty  
 
 
REPORT FROM THE COMMISSION 

Finland 

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

1. 

INTRODUCTION 

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 473/20132. 

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 deficit and 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.  

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 3 September 2012, available at: 
http://ec.europa.eu/economy_finance/economic_governance/sgp/legal_texts/index_en.htm. 
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". 

2 

 
 
 
                                                            
The  report  updates  the  previous  Commission's  assessment  of  the  excess  of  the  deficit  and 
debt ratio over the Treaty reference values of 12 May 20153. The May report concluded that 
overall neither the deficit nor the debt criterion in the Treaty was considered to be complied 
with. However, no further steps under the EDP were taken as, following the May report, the 
incoming  government  had  announced  new  consolidation  measures  in  the  government 
programme.  On  the  basis  of  this  announcement,  the  Commission  services  published  an 
addendum to the assessment of the Stability Programme4 which concluded that when the new 
measures are accounted for, the headline deficit would remain below the reference value in 
2016 and the debt-to-GDP ratio would grow less than anticipated in the spring forecast. On 
28  September  2015,  Finland  submitted  an  update  of  the  Stability  Programme  together  with 
the Draft Budgetary Plan (DBP). 

The general government deficit in Finland reached 3.3% of GDP in 2014, thus exceeding the 
3%-of-GDP reference value. In its DBP Finland plans the deficit to increase further to 3.4% 
of GDP in 2015, but to decrease to 2.8% in 2016. According to the Commission 2015 autumn 
forecast, the deficit is forecast to decline to 3.2% of GDP in 2015, 2.7% of GDP in 2016 and 
further to 2.3% in 2017. The notified deficit for 2014 and the planned deficit ratio for 2015 
provide prima facie evidence of the existence of an excessive deficit in Finland in the sense 
of  the  Treaty  and  the  Stability  and  Growth  Pact,  before,  however,  considering  all  relevant 
factors as set out below. 

General  government  debt  amounted  to  59.3%  of  GDP  in  2014,  below  the  60%-of-GDP 
reference  value.  Both the  DBP  and the  Commission  2015 autumn  forecast  indicate that  the 
gross debt ratio would be above the 60%-of-GDP reference value of the Treaty in 2015 and 
2016  (62.5%  of  GDP  in  2015  and  64.5%  in  2016  based  on  the  Commission  forecast  and 
62.6% in 2015 and 64.3% in 2016 based on the DBP). The planned and projected debt ratio 
for  2015  and  2016  provide  evidence  that  there  appears  to  be  prima  facie  a  risk  of  the 
existence of an excessive deficit in Finland in the sense of the Treaty and the  Stability and 
Growth Pact, before, however, considering all relevant factors as set out below. 

The Commission has therefore prepared the following report to comprehensively assess the 
excess over the Treaty reference values, in order to examine whether they are complied with 
after  all  relevant  factors  have  been  considered. Section  2  of  the  report examines  the  deficit 
criterion, Section 3 discusses debt developments. Section 4 deals with relevant factors. The 
report  takes  into  account  the  Commission  2015  autumn  forecast  released  on  5  November 
2015.  

2. 

DEFICIT CRITERION 

According to Finland’s September 2015 fiscal data notification, validated by Eurostat on 21 
October  2015,  its  general  government  deficit  amounted  to  3.3%  of  GDP  in  2014,  against 
2.5% of GDP in 2013. 

3  

4 

COM(2015) 246 final, 
http://ec.europa.eu/economy_finance/economic_governance/sgp/pdf/30_edps/126-
03_commission/2015-05-13_fi_126-3_en.pdf 

http://ec.europa.eu/economy_finance/economic_governance/sgp/pdf/20_scps/2015/26_fi_scp_addendu
m_en.pdf 

3 

 
 
                                                            
Based on the DBP, the deficit will reach 3.4% of GDP in 2015 and decline to 2.8% in 2016 
(see table 2). According to the Commission 2015 autumn forecast, the deficit will reach 3.2% 
in 2015 and 2.7% in 2016.  

Although in excess of 3% of GDP, the deficit is close to the Treaty reference value in 2014 
and is forecast by both the national authorities and the Commission to remain so in 2015.  

The  excess over  the  3%-of-GDP  reference  value  in  2014  can  be  considered  exceptional,  as 
the  2014  deficit  was  negatively  affected  by  the  changeover  to  the  ESA2010  methodology, 
and  in  particular  the  change  in  the  treatment  of  swaps.  The  specific  "EDP  deficit"  concept 
which  existed  under  ESA  95  has  been  discontinued  with  the  transition  to  ESA  2010.  The 
“EDP deficit” defined under ESA 95 included the net impact of interest flows on swaps and 
forward rate agreements. Since the introduction of ESA 2010 in 2014, this special treatment 
for swaps under EDP statistics has disappeared and these are treated as financial transactions 
directed at derivatives and not as interest. As a result, the 2013 deficit was revised upwards 
by 0.3% of GDP. Finland continues to use the swap agreements and in 2014, the income from 
those  was  0.3%  of  GDP.  According  to  the  previously-used  concept,  the  deficit  would  have 
remained at 3%-of-GDP in 2014. 

For  2015,  the  effect  of  the  changeover  to  ESA  2010  was  fully  known  and  could  be 
incorporated in the budget preparation process. Therefore, the excess is no longer exceptional 
in 2015. According to the Commission 2015 autumn forecast the general government balance 
is  expected  to  improve  slightly  on  the  back  of  the  positive  contribution  from  cyclical 
conditions in 2015 while the structural balance remains unchanged.  

In 2016, the narrowing of the deficit is mainly due to discretionary fiscal measures, especially 
on  the  expenditure  side.  Planned  expenditure  cuts  reduce  the  spending  on  development 
cooperation,  education  and  training  and  the  subsidies  to  enterprises.  Interest  expenditure  is 
decreasing,  but  this  is  more  than  offset  by  a  decline  in  revenue  from  government  assets. 
Labour market partners have decided to increase the unemployment insurance contributions 
as of 2016, helping to reduce the deficit in social security funds.  

Therefore, the excess over the 3%-of-GDP reference  value is  temporary in the sense  of the 
Treaty and the Stability and Growth Pact. In particular, the budgetary forecasts as provided 
by the Commission and the DBP indicate that the deficit will fall below the reference value in 
2016.  

In sum, the deficit in 2014 and 2015 remains  close to, but above the 3%-of-GDP reference 
value. The existing and planned excess over the reference value is also temporary in the sense 
of the Treaty and the Stability and Growth Pact. In 2014 the deficit could also be considered 
to be exceptional. However, given that the deficit is not considered to be exceptional in 2015, 
the  deficit  criterion  in  the  sense  of  the  Treaty  and  Council  Regulation  (EC)  No  1467/97 
appears not to be fulfilled before analysing the relevant factors. 

3. 

DEBT CRITERION  

The general government gross debt-to-GDP ratio has increased rapidly over the recent years, 
growing from 32.7% of GDP in 2008 to 59.3% in 2014, on the back of deficits (as revenue 
shrank during the severe economic downturn and expenditure remained elevated) and stock-
flow adjustments arising from the financial investments of the earnings-related social security 
funds. The deficit and the stock-flow adjustment contributed roughly equally to the growth of 
nominal debt over these years. 

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Finland's DBP envisages public debt  to increase to  62.6%  of GDP in  2015 and to continue 
increasing  to  64.3%  of  GDP  in  2016.  Also  according  to  the  Commission  2015  autumn 
forecast, public debt is expected to exceed the 60%-of-GDP reference value, reaching 62.5% 
of GDP in 2015 and 64.5% of GDP in 2016 (Table 1).  

According to the Commission forecast, the projected nominal growth is insufficient to offset 
the  impact  of  interest  expenditure  on  the  debt  ratio  in  2015,  resulting  in  a  debt-increasing 
snowball  effect.  In  2016  however,  the  snowball  effect  would  disappear.  The  role  of  stock-
flow adjustments declines over the forecast horizon, as the surplus of the social security funds 
is expected to diminish. 

The analysis above thus suggests that, before consideration is given to all relevant factors, the 
debt criterion in the sense of the Treaty and Council Regulation (EC) No 1467/97 appears not 
to  be  fulfilled  based  on  the  2016  draft  budgetary  plan  as  well  as  the  Commission  2015 
autumn forecast. 

Table 1: Debt dynamics  

4. 

RELEVANT FACTORS 

Article  126(3)  of  the  TFEU  stipulates  that  the  Commission's  report  “shall  also  take  into 
account whether the government deficit exceeds government investment expenditure and take 

5 

20122013201420152016Government gross debt ratio 52.955.659.362.564.5Change in debt ratio b (1 = 2+3+4)4.42.73.83.22.0Contributions:• Primary balance (2)0.71.32.12.01.5• “Snowball” effect (3)0.70.50.60.20.0of which:     Interest expenditure1.41.31.21.21.1Real GDP growth0.70.60.2-0.2-0.4Inflation (GDP deflator)-1.4-1.4-0.9-0.8-0.7• Stock-flow adjustment (4)3.00.91.11.00.5Notes:a In percent of GDP.b The change in the gross debt ratio can be decomposed as follows:where t is a time subscript; D, PD, Y and SF are the stock of government debt, the primary deficit, nominal GDP and the stock-flow adjustment respectively, and i and y represent the average cost of debt and nominal GDP growth. The term in parentheses represents the “snow-ball” effect, measuring the combined effect of interest expenditure and economic growth on the debt ratio.Source: Eurostat and Commission 2015 autumn forecasttttttttttttttYSFyyiYDYPDYDYD1*1111 
 
 
 
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  Council  and  the  Commission”  need  to  be  given  due 
consideration.  

When assessing compliance on the basis of the deficit criterion, if the ratio of the government 
debt to GDP exceeds the reference value, relevant factors shall be taken into account in the 
steps leading to the decision on the existence of an excessive deficit, as the double condition 
of the overarching principle — that, before these relevant factors are taken into account, the 
general  government  deficit  remains  close  to  the  reference  value  and  its  excess  over  the 
reference value is temporary — is met. Relevant factors shall be taken into account also when 
assessing compliance on the basis of the debt criterion. 

The following subsections consider in turn: (1) the medium-term economic position; (2) the 
medium-term  budgetary  position  including  an  assessment  of  compliance  with  the  required 
adjustment  towards  the  MTO  and  the  development  of  public  investment;  (3)  the 
developments in the medium-term government debt position, its dynamics and sustainability; 
(4) other factors considered relevant by the Commission; and (5) other factors put forward by 
the Member State.  

The  report  reflects  the  factors  mentioned  above  based  on  the  notified  data  and  the 
Commission 2015 autumn forecast. 

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 2012-14. In 2014, GDP contracted by 0.4%. 
The  growth  outlook  is  slowly  improving  for  2015  and  2016  (Table  2).  The  crisis  has 
negatively affected  Finland's  potential  growth, having  averaged  0%  over the last  four years 
and  being  negative  (at  -0.1%)  over  2013  and  2014,  as  according  to  estimates  by  the 
Commission  based on the commonly-agreed methodology. In 2015 potential output growth 
is  estimated  at  -0.1%  whereas  in  2016  it  is  estimated  at  0.1%.  The  contraction  of  potential 
output  is  caused  by  declining  contributions  of  labour  inputs  and  the  estimated  negative 
contribution  of  total  factor  productivity,  which  reflects  the  ongoing  restructuring  of  the 
economy. Moreover, the positive contribution of capital also declined over the crisis period, 
due  to  low  investment.  Overall,  real  GDP  in  2014  was  5.9%  below  the  level  recorded  in 
2008, whereas potential output has grown by just 0.6% over this period. 

As  real  GDP  declined over  2012-14,  the  output  gap  widened  to  -2.9%  of  potential  GDP  in 
2014  and  it  is  expected  to  start  closing  gradually  in  2015  to  -2.5%  as  GDP  is  estimated  to 
grow slightly above potential. In 2016, GDP growth is also forecast to remain above potential 
growth, reducing the output gap to -2.0% of GDP. 

6 

 
 
Table 2: Macroeconomic and budgetary developmentsa 

These negative cyclical developments have had a significant impact on the public deficit and 
the  debt-to-GDP  ratio,  but  looking  forward,  the  economy  is  expected  to  grow  above  its 
potential growth rate. 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 
DBP, but this would no longer be the case in 2016. Based on the Commission 2015 autumn 
forecast, cyclically-adjusted debt would be 57.5% of GDP in 2015 and 60.7% in 2016 (Table 
3). 

Table 3. General government deficit and debt (% of GDP) 

Recent structural reforms 

The  most  important  recent  reform  is  the  pension  reform  agreed  by  the  social  partners  in 
September 2014. The reform links the retirement age to life expectancy as recommended by 
the  Council  in  July  2014.  According  to  the  national  authorities,  the  reform  is  expected  to 
improve long-term fiscal sustainability by approximately 1% of GDP. However, this reform 
remains to be enacted. The adoption of the legal acts by the Parliament is expected for later 

7 

 201220132014COMCOMCOMCOMNational authoritiesCOMNational authoritiesCOMReal GDP (% change)-1.4-1.1-0.40.30.20.71.31.1Potential GDP (% change) 0.0-0.1-0.1-0.10.00.100.5Output gap (% of potential GDP)-1.6-2.6-2.9-2.5-2.6-2.0-1.6-1.4General government balance-2.1-2.5-3.3-3.2-3.4-2.7-2.8-2.3Primary balance-0.7-1.3-2.1-2.0-2.2-1.5-1.7-1.2One-off and other temporary measures-0.1-0.10.10.00.00.00.00.0Government gross fixed capital formation4.04.14.13.94.13.94.13.9Cyclically-adjusted balance-1.2-1.1-1.7-1.7-1.9-1.50.0-1.5Cyclically-adjusted primary balance0.20.2-0.4-0.6-0.7-0.4-0.8-0.4Structural balance b-1.1-1.0-1.8-1.7-1.9-1.5-1.9-1.5Structural primary balance0.30.3-0.5-0.6-0.7-0.4-0.8-0.4Notes:a In percent of GDP unless specified otherwise.b Cyclically-adjusted balance excluding one-off and other temporary measures.Source: Eurostat and European Commission 2015 autumn forecast, 2016 Draft Budgetary Plan201620172015201220132014COMNational authoritiesCOMNational authoritiesCOMDeficit criterionGeneral government balance-2.1-2.5-3.3-3.2-3.4-2.7-2.8-2.3General government gross debt52.955.659.362.562.664.564.365.7General government gross debt adjusted for the effect of the cycle 57.560.72017Debt criterionSources: Eurostat, European Commission 2015 autumn forecast, 2016 Draft Budgetary Plan, data communicated by the national authorities20162015 
 
 
 
this year, with the objective to implement the reform from 2017 onwards. Consequently, also 
the  budgetary  effect  would  not  be  apparent  before  2017.  Also,  a  decision  regarding  the 
extended unemployment benefits for workers close to the retirement age ("the unemployment 
tunnel")  has  not  been  taken  under  the  current  pension  reform.  This  could  limit  the  positive 
impact that the pension reform is expected to have on the labour supply, as older unemployed 
will remain eligible for unemployment benefits until reaching the pension age.  

The government is envisaging further reforms, which, once enacted and implemented, could 
contribute  towards  fiscal  sustainability.  The  government's  Strategic  Programme  of  27  May 
2015  foresees  structural  reforms  that  are  generally  in  line  with  the  findings  of  the  2015 
Country  Report  and  the  country  specific  recommendations  (CSRs).  To  improve  non-cost 
competitiveness,  the  government  is  planning  measures  that  foster  start-ups,  fast-growth 
companies  and  change-of-generation  in  businesses.  The  government  has  committed  not  to 
increase the operating costs for the industry during its parliamentary term. The government 
has  set  an  ambitious  goal  for  reducing  unit  labour  costs  by  15%.  This  is  envisaged  by 
applying  continued  wage-moderation  (5  pps),  structural  labour  market  reforms  (5  pps)  and 
one-off  reduction  of  labour  costs  (5  pps).  To  achieve  the  reduction  of  labour  costs,  the 
government  has,  in  September  2015,  made  a  proposal  that  includes  the  reduction  of  public 
sector  holidays,  reduction  of  overtime  pay  and  Sunday's  supplementary  pay  as  well  as 
reduction  of  employers'  contribution  to  social  security.  These  proposed  measures  are  being 
debated,  and  the  government  has  agreed  to  implement  any  other  measures  agreed  by  the 
social partners if the same result (5% reduction of labour costs) is achieved.  

Regarding  the  labour  market,  the  government  plans  to  reform  social  and  unemployment 
benefits  to  increase  incentives  to  work,  to  shorten  periods  of  unemployment,  to  reduce 
structural  unemployment  and  to  save  public  resources.  The  government  published  its 
proposal regarding the  social- and healthcare services reform on 9 November 2015. One of 
the  government's  strategic  goals  over  the  next  four  years  is  to  simplify  legislation  and 
regulation  in  order  to  improve  the  business  environment.  The  task  and  service  provision 
obligations of the municipalities are planned to be reduced.  

On  28  September  2015  the  Governemnt  published  the  implementation  plan  for  the  key 
projects  and  reforms  of  the  Government's  strategic  programme5.  The  implementation  plan 
includes  the  deadlines  for  the  preparation  of  necessary  legislation  for  reforms  and 
implementation  phases.  Most  of  the  deadlines  for  providing  legislative  proposals  to  the 
parliament are in early 2016.  

4.2.  Medium-term budgetary position 

Structural deficit and fiscal consolidation 

Based  on  the  Commission's  current  calculations,  Finland’s  structural  balance  was  -1.8%  of 
GDP in 2014. In 2015, the structural balance is expected to remain unchanged6 and in 2016 to 
improve by 0.2% of GDP, so that in 2016 the structural balance reaches -1.5% of GDP.  

5 

6  

http://valtioneuvosto.fi/documents/10184/321857/Toimintasuunnitelma+strategisen+hallitusohjelman+
k%C3%A4rkihankkeiden+ja+reformien+toimeenpanemiseksi.pdf 
While according to the figures in table 2 the structural balance seems to improve by 0.1% of GDP, this 
is only due to rounding. 

8 

 
 
                                                            
Based on the relevant forecast vintages of the Commission forecast, Finland was subject to 
exceptionally bad economic conditions in 2014, namely a real GDP contraction, and therefore 
exempt  from  delivering  any  fiscal  effort.  Finland  was  assessed  to  be  at  its  MTO  (-0.5%  of 
GDP) in the beginning of 2014, but deviated from it in the course of 2014 on the back of a 
deterioration of the structural balance by 0.8% of GDP.  

In 2015, the structural balance is expected to remain unchanged, pointing to a risk of some 
deviation  (gap  of  -0.1%  of  GDP)  from  the  required  fiscal  effort  of  0.1%  of  GDP.  The 
expenditure benchmark is forecast to be respected. However, over the years of 2014 and 2015 
taken together, there is a risk of a significant deviation based on the structural balance pillar 
(average gap of -0.4% of GDP compared to the threshold of significant deviation of 0.25% of 
GDP  on  average  over  two  years),  while  the  expenditure  benchmark  points  to  compliance 
(positive average gap of 0.5% of GDP). This calls for an overall assessment. The difference 
between the two pillars is explained by revenue shortfalls negatively affecting the structural-
balance pillar and the difference in the potential growth benchmarks used. On the one hand, 
the  current  estimate  of  potential  GDP  growth  underlying  the  structural  balance  estimate  is 
lower than the medium-term average used in the expenditure benchmark (frozen based on the 
Commission 2013 winter forecast). The former seems to provide a more adequate estimate of 
medium-term  potential  growth  rate  at  the  current  juncture  because  the  macroeconomic 
outlook  in  Finland  has  changed  negatively  compared  to  the  one  expected  in  2013.  On  the 
other  hand,  the  difference  in  growth  benchmarks  also  captures  the  effects  of  lower-than-
expected  inflation.  Whereas  the  expenditure  benchmark  uses  the  deflator  from  the  relevant 
vintages of the forecast, the structural balance reflects actual inflation which turned out much 
lower  than  previously  forecast,  suggesting  that  in  this  specific  respect  the  expenditure 
benchmark  seems  to  be  a  better  indicator  of  the  fiscal  effort  at  the  current  juncture.  On 
balance,  the  overall  assessment  points  to  a  risk  of  some  deviation  from  the  required 
adjustment towards the MTO over 2014-15 taken together, which will need to be reassessed 
ex post taking into consideration whether the economic situation of the country in 2014 (i.e. 
negative real growth) justifies the observed loosening of the structural balance.  

In 2016, the structural balance is projected to improve by 0.2% of GDP, pointing to a risk of 
some deviation (gap of -0.3% of GDP) from the required adjustment of 0.5% of GDP. Over 
2015-16 taken together, the deviation based on the structural balance is 0.2% of GDP. There 
is a projected deviation of 0.1% of GDP in 2016 based on the expenditure benchmark, which 
is  however  respected  over  2015  and  2016  taken  together.  The  difference  in  the  potential 
growth  rates  used  has  a  considerable  positive  effect  (0.4%  of  GDP)  on  the  expenditure 
benchmark.  On  that  basis,  the  overall  assessment  based  on  the  Commission  2015  autumn 
forecast  points  to  a  risk  of  some  deviation  from  the  required  adjustment  path  towards  the 
MTO in 2016. 

Government expenditure and investment 

Government investment as a share of GDP has been increased compared with the start of the 
crisis. In 2008, gross fixed capital formation by the government sector amounted to 3.6% of 
GDP.  In  2013  it  reached  4.2%  of  GDP  and  in  2014  4.1%  of  GDP.  According  to  the  DBP, 
investment is expected to amount to 4.1% of GDP in 2015 and 2016. Throughout the period, 
the  general  government  deficit  ratio  in  both  headline  and  structural  terms  is  lower  than  the 
government investment-to-GDP ratio. Overall, general government investment, as a share of 
GDP, is among the highest in the euro area. 

9 

 
 
Finland's general government sector has recorded primary deficits since 2012 and is expected 
to remain in primary deficit also in 2015 and 2016. The effective interest rate paid on debt 
has  decreased  significantly  in  recent  years.  Interest  expenditure,  as  a  share  of  GDP,  is 
forecast by both the Commission as well as by the national authorities to fall over the forecast 
horizon. 

Current expenditure, excluding interest, has been on an increasing trend. In fact, it increased 
by 9 pps. of GDP since 2004. It should be noted that 5.7 pps. of the change occurred in 2009, 
when nominal GDP contracted by 6.5%. At 58.3% of GDP, it was the highest in the EU in 
2014. Expenditure has increased in all sub-sectors of the general government over the years 
2004  to  2014,  but  the  increase  has  proportionally  been  the  highest  in  the  earnings-related 
pension  funds  sector.  When  considering  general  government  expenditure  by  function,  it 
appears  that  expenditure  growth  is  mainly  driven  by  healthcare  and  pension  expenditure, 
reflecting  the  ageing  society.  Expenditure  has  also  increased  for  general  public  services, 
despite the fact that expenditure related to public debt transactions (i.e. interest expenditure), 
which is taken into account under this category, has fallen as a share of GDP. 

Quality of public finances 

Finland has enacted, in national law, the structural-budget-balance rule foreseen by the Fiscal 
Compact and enshrined specific implementing provisions in secondary legislation. Finland’s 
fiscal  framework  is  tied  to  multiannual  expenditure  ceilings  and  has  recently  been 
strengthened  by  a  provision  obliging  the  central  government  to  consider  the  impact  of  its 
policy measures on the fiscal balance of local authorities and social-security funds. However, 
there seems to be limited flexibility to react to challenges arising during the running year. If a 
growth forecast is revised significantly downwards during the year, as happened in 2013 and 
2014, there is no process to adjust the expenditure limits accordingly. 

4.3.  Medium-term government debt position 

Long-term sustainability of public finances 

The  general  government  gross  consolidated  debt-to-GDP  ratio  stood  at  59.3%  of  GDP  in 
2014. Based on medium-term projections building on the Commission's spring 2015 forecast, 
the debt is expected to rise to close to 80% of GDP by 2025 (based on the no-policy-change 
scenario, under the assumption that the structural primary balance position evolves according 
to  the  Commission's  spring  2015  forecast  until  2016),  remaining  above  the  60%-of-GDP 
Treaty threshold. The increase would be mostly driven by the costs of ageing. 

Finland  is  assessed  to  be  at  low  risk  of  fiscal  stress  in  the  short  term,  but  is  at  high 
sustainability risk in the medium term and medium 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  run.  However,  the  latest  pension  reform,  agreed  by  the  social  partners  in 
autumn  2014,  is  not  included  in  these  assessments,  as  the  necessary  legislation  should  be 
finalised by end-2015 and the reform laws are expected to enter into force as of 2017.  

Stock-flow adjustment 

The  stock-flow  adjustment  has  a  large  effect  on  changes  in  general  government  debt  in 
Finland. In 2012, the stock-flow adjustment accounted for 70% of the increase in the debt-to-
GDP ratio. Thereafter, in 2013 and 2014, it accounted for roughly 30% of the change in the 
debt ratio. A similar impact is forecast for 2015, while in 2016 the stock-flow adjustment is 

10 

 
 
projected to account for one fourth of the change in the debt-to-GDP ratio. This is because 
the  earnings-related  pension  system,  included  in  the  general  government  sector,  is  partially 
pre-funded and is in surplus. The surplus stood at 1.9% of GDP in 2013 and at 1.4% of GDP 
in 2014. In 2015, the DBP projects the surplus to diminish to 0.5% of GDP and grow to 0.8% 
of GDP in 2016. The surplus is included in the general government balance but is not used to 
pay off general government debt. These funds show up as a net accumulation of assets in the 
stock-flow adjustment. Finland's general government net-financial-assets position is forecast 
at 51.0% of GDP in 2015, down from 54.7% of GDP in 20147. The OECD projects net assets 
to amount to 47.2% of GDP by the end of 2016. Among OECD countries, this is one of the 
highest positive net-financial-asset positions. 

Total stock of debt guaranteed by the government 

Finland  had  central-government  guarantees  amounting  to  17.4%  of  GDP  in  2014.  Among 
those, guarantees linked to the financial sector amounted to 0.9% of GDP in 2014. The bulk 
of  the  guarantees  (12%  of  GDP)  are  issued  to  a  wide  group  of  non-financial  corporations, 
mainly  through  the  Finnvera  corporation  -  a  specialised  state-owned  financing  company. 
Taking into account the strong position of the financial sector8 and the low observed pay-outs 
from the guarantees, the risks associated with the debt guaranteed by the government do not 
appear to be significant. 

Impact of the cycle 

As  Finland  has  experienced  difficult  economic  times  over  2012-13  and  a  large  negative 
output  gap, estimated  at  -2.9 %  of GDP  in  2014,  has  opened,  the  debt-to-GDP  ratio  is  also 
influenced  by  the  cyclical  developments.  When  corrected  for  the  effects  of  the  cycle,  the 
Commission forecast for general government debt is estimated at 57.5% of GDP in 2015, but 
above the reference value in 2016 (60.7% of GDP).  

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  criterion,  financial  assistance  to  euro-area  Member 
States  with  a  debt-increasing  impact  has  been  taken  into  account.  According  to  the 
Commission 2015 autumn forecast, the cumulative impact of this assistance would amount to 
2.8%  of  GDP  in  2015.  Thus,  Finland's  general  government  gross  debt  would  be  59.7%  of 
GDP in 2015 and 61.8% in 2016 if the debt related to financial-stabilisation operations was 
deducted. 

7  
8  

OECD Economic Outlook no 97, Annex Table 33. 
As discussed in the 2015 Country Report 
http://ec.europa.eu/europe2020/pdf/csr2015/cr2015_finland_en.pdf 

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4.5. 

Other factors put forward by the Member State  

In  a  letter  received  by  the  Commission  on  3  November  2015,  the  Finnish  authorities 
emphasised  that  the  government  has  taken  the  measures  foreseen  in  the  May  Strategic 
Programme.  The  authorities  make  reference  to  the  updated Stability  Programme  (submitted 
on  28  September  2015)  which  provides  information  about  the  plans  to  reduce  the  general 
government deficit until 20199. They note also that the September Stability Programme uses a 
conservative  estimate  of  the  Government's  plans,  including  only  the  sufficiently  detailed 
measures while the government in fact plans an even higher consolidation effort. 

Finland  also  argues  that  the  excess  of  the  deficit  over  the  3%  of  GDP  reference  value  was 
exceptional  due  to  negative  annual  real  GDP  growth  at  -0.4%  of  GDP  in  2014.  The 
government  does  not  point  to  currently  known  factors  which  would  allow  considering  the 
deficit exceptional in 2015. However, the authorities argue that expenditure associated with 
the refugee crisis should be taken into account as a relevant factor under both the deficit and 
the debt  criterion and  provide information  regarding the projected costs associated with the 
increased number of asylum seekers in 2015, noting that this could be an event outside the 
control  of  the  government  that  could,  ex  post,  be  ground  to  consider  exceptional 
circumstances also in 2015. Whereas the costs are currently difficult to estimate, the currently 
known additional expenditure based on the data provided amounts to 0.06% of GDP in 2015, 
thus not sufficient to explain the breach over the 3%-of-GDP reference value of the Treaty in 
2015.  The  authorities  foresee  that  in  2016  the  immigration-related  additional  costs  could 
amount to 0.3% of GDP. 

Among  the  other  relevant  factors  that  should  be  taken  into  account  when  considering 
compliance with the deficit criterion, the government emphasizes the broad compliance with 
the  preventive  arm  requirements.  In  addition,  the  Finnish  authorities  note  that  the  low 
inflation and low interest  rate environment has had  a negative influence on the deficit. The 
outturn  of  the  2015  inflation  is  now  estimated  to  be  1½  pps  lower  than  forecast  during  the 
2015 budget preparation, resulting in lower revenues. A low interest rate environment has a 
negative effect on the general government budget, as the loss of revenue from Finland's assets 
exceeds the gains from the lower interest expenditure. 

Among  the  other  relevant  factors  that  should  be  taken  into  account  when  considering 
compliance  with  the  debt  criterion,  the  Finnish  authorities  point  out  that  the  debt-to-GDP 
ratio would remain below the 60% reference value in 2015 if adjusted for the effects of the 
cycle  as  well  as  when  taking  into  account  the  solidarity  operations.  Among  the  relevant 
factors  in  2016,  the  authorities  emphasize  the  broad  compliance  with  the  preventive  arm 
requirements and the accumulation of financial assets. 

5. 

CONCLUSIONS 

Deficit criterion 

The general government deficit in Finland reached 3.3% in 2014 and is planned to increase 
further  to  3.4%  of  GDP  in  2015.  Both  the  draft  budgetary  plan  and  the  Commission  2015 
autumn  forecast  expect  the  general  government  balance  to  fall  below  the  3%-of-GDP 
reference  value  of  the  Treaty  in  2016.  On  this  basis,  the  excess  over  the  3%-of-GDP 

9  

The updated Stability Programme is briefly discussed in the Staff Working Document accompanying 
the Commission opinion on Finland's 2016 Draft Budgetary Plan.  

12 

 
 
                                                            
reference  value  of  the  Treaty  can  be  considered  close  and  temporary.  The  excess  over  the 
reference  value  can  be  qualified  as  exceptional  within  the  meaning  of  the  Treaty  and  the 
Stability and Growth Pact in 2014. This report examined relevant factors, notably medium-
term  economic  position,  structural  reforms  and  progress  towards  the  MTO.  Especially,  as 
Finland's  budgetary  position  is  strongly  affected  by  the  effects  of  the  cycle  and  is  broadly 
compliant with the required progress towards the MTO, the analysis presented in this report 
suggests that the deficit criterion as defined in the Treaty and in Regulation (EC) No 1467/97 
should be considered as currently complied with. 

Debt criterion 

While general government gross debt was below 60% in 2014, the 2015 DBP envisages it to 
reach  62.6%  of  GDP  in  2015,  i.e.  above  the  60%-of-GDP  reference  value.  Similarly,  the 
Commission 2015 autumn forecast projects gross debt above the reference value at 62.5% of 
GDP in 2015 and 64.5% in 2016. As demonstrated in this report, while the planned breach of 
the  debt  criterion  is  fully  explained  by  Finland's  financial  support  to  safeguard  financial 
stability in the euro area in 2015, this would no longer be the case in 2016. 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.  Additionally,  it  should  be 
noted that the debt ratio reflects the effects of Finland's current cyclical position, but also this 
factor  cannot,  by  itself,  explain  the  excess  over  the  60%-of-GDP  reference  value  in  2016. 
This report also examined other relevant factors, notably finding that Finland is expected to 
broadly comply with the required adjustment path towards the MTO in 2015 and 2016, which 
should help ensure – in the medium term – that debt decreases at a sufficient pace. On this 
basis,  the  analysis  presented  in  this  report  suggests  that  the  debt  criterion  as  defined  in  the 
Treaty and in Regulation (EC) No 1467/97 should be considered as currently complied with. 
However, as Finland's debt-to-GDP ratio has been on an increasing trend, and it is forecast to 
continue  rising  over  the  medium  term  under  a  no-policy-change  assumption,  the  pension 
reform and  other  structural  reforms increasing productivity and supply of labour  are key to 
enhance  Finland's  growth  prospects  in  the  medium  term.  Their  swift  adoption  and 
implementation would contribute to address the CSRs and improve fiscal sustainability. 

13