REPORT FROM THE COMMISSION Finland Report prepared in accordance with Article 126(3) of the Treaty
Date: 2016-05-18
Institutions: Directorate-General for Economic and Financial Affairs, European Commission
Subjects: Finland, budget deficit, budget policy, gross domestic product, public debt, public expenditure, public finance, short-term economic prospects, stability pact, structural policy

EUROPEAN 
COMMISSION 

Brussels, 18.5.2016  
COM(2016) 292 final 

REPORT FROM THE COMMISSION 

Finland 

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

EN 

   EN 

 
 
 
 
  
 
 
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 
procedure1, 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 provides 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. 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  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. 
On  13  January  2015  the  Commission  adopted  a  Communication  on  Flexibility3,  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 

1 

2 

3  

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. 
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). 
Commission Communication on making the best use of the flexibility within the existing rules of the 
Stability and Growth Pact – COM(2015) 12 final. 

2 

 
 
 
                                                            
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 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  –  in  the  context  of  a  report  pursuant  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. 

This  report  updates  the  Commission's  previous  assessment  of  the  excess  of  the  deficit  and 
debt  ratio  over  the  Treaty  reference  values  of  16  November  20154.  The  November  report 
concluded  that  overall  the  deficit  and  the  debt  criteria  of  the  Treaty  were  considered  to  be 
complied with. On 14 April 2016, Finland submitted its stability programme for 2017 – 2020. 

General  government  debt  amounted  to  63.1%  of  GDP  in  2015,  above  the  60%-of-GDP 
reference  value.  Both  the  stability  programme  and  the  Commission  2016  spring  forecast 
indicate that the gross debt ratio is expected to continue to rise in 2016 and 2017. The notified 
debt-to-GDP  ratio  in  2015  provides  evidence  of  a  prima  facie  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 this 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 the debt criterion and Section 4 deals with the relevant factors. The report takes into 
account the Commission 2016 spring forecast released on 3 May 2016.  

2. 

DEFICIT CRITERION  

According  to  the  spring  2016  notification,  Finland's  deficit  amounted  to  2.7%  of  GDP  in 
2015. The deficit will remain below the Treaty reference value until 2017 both based on the 
stability  programme  and  on  the  Commission  2016  spring  forecast.  According  to  the 
Commission forecast, the deficit will decline to 2.5% of GDP in 2016 and to 2.3% of GDP in 
2017,  based  on  the  usual  no-policy  change  assumption.  According  to  the  stability 
programme, the deficit would decline to 2.1% of GDP by 2017. Hence, the deficit criterion in 
the Treaty is fulfilled. 

3. 

DEBT CRITERION  

The  general  government  gross  debt-to-GDP  ratio  increased  rapidly  over  the  recent  years, 
growing  from  32.7%  of  GDP  in  2008  to  63.1%  in  2015,  on  the  back  of  high  deficits  with 
respect to nominal GDP developments 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. 

4 

COM(2015) 803 final, 
http://ec.europa.eu/economy_finance/economic_governance/sgp/pdf/30_edps/126-
03_commission/2015-11-16_fi_126-3_en.pdf 

3 

 
 
                                                            
Finland's stability programme envisages the public debt ratio to increase to 65.0% of GDP in 
2016 and to continue increasing to 66.7% of GDP in 2017. The debt-to-GDP ratio is planned 
to peak in 2018-19 and reach 67.4%. Thereafter, it is planned to marginally decline to 67.2% 
in 2020. According to the Commission 2016 spring forecast, public debt is expected to reach 
65.2% of GDP in 2016 and grow to 66.9% of GDP in 2017 (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  2016,  resulting  in  a  small  debt-
increasing snowball effect. By 2017 however, the snowball effect is set to fade out. 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 Finland's 2016 stability programme as well as the Commission 2016 
spring forecast. 

Government gross debt ratio 
Change in debt ratio b (1 = 2+3+4)
Contributions:
• Primary balance (2)
• “Snowball” effect (3)
of which:
     Interest expenditure
Real GDP growth
Inflation (GDP deflator)

Table 1: Debt dynamicsa 

2012
52.9

4.4

0.8
0.7

2013
55.5

2.5

1.4
0.3

2014
59.3

3.9

1.9
0.7

1.4
0.7
-1.4
3.0

1.3
0.4
-1.3
0.8

1.2
0.4
-0.9
1.2

2015
63.1

3.8

1.5
0.7

1.2
-0.3
-0.2
1.6

2016
65.2

2.1

1.4
0.2

1.2
-0.4
-0.5
0.5

2017
66.9

1.7

1.1
0.0

1.1
-0.5
-0.6
0.5

• Stock-flow adjustment (4)
Notes:
a In percent of GDP.
b The change in the gross debt ratio can be decomposed as follows:
D
y
−
Y
y
+
t

PD
Y
t

D
Y
t

D
Y
t

i
t
1

+

=

−

*

1
−

1
−

1
−

1
−

t

t

t

t

t

t

⎛
⎜⎜
⎝

⎞
+⎟⎟
⎠

SF
t
Y
t

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 2016 spring forecast

4 

 
 
 
 
4. 

RELEVANT FACTORS 

Article  126(3)  TFEU  stipulates  that  the  Commission's  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  Council  and  the  Commission”  need  to  be  given  due 
consideration.  

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  medium-term  budgetary  objective  (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 2016 spring 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 2015, GDP increased by 0.5%. 
The  growth  outlook  is  expected  to  improve  in  2016  and  2017  (Table  2).  The  prolonged 
downturn  has  negatively  affected  Finland's  potential  growth.  Estimated  in  accordance  with 
the  commonly-agreed  methodology,  potential  growth  averaged  0.1%  over  2009  to  2015, 
being negative (at -0.1%) in 2013 and 2014. In 2016, potential output growth is estimated to 
remain  unchanged  from  2015  whereas  in  2017  it  is  estimated  at  0.4%.  The  contraction  of 
potential output has been 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  lower  investment.  Overall,  real  GDP  in  2015  was  5.3%  below  the  level 
recorded in 2008, whereas potential output grew by just 0.5% in total over 2009-2015 period. 
This  could  be  explained  by  the  restructuring  process,  in  which  the  electronics  industry  has 
lost  its  important  role  in  the  Finnish  economy  and  other  industries,  often  with  lower 
productivity  levels,  expand  their  capacity  to  fill  the  void.  The  2016  Country  Report  for 
Finland has emphasized the endowment of human capital, stable institutional framework and 
good  conditions  for  doing  business  as  fundamental  strengths  that  should  contribute  to  total 
factor productivity growth in the future.  

With real GDP below potential over 2012-14, the output gap widened to -2.8% of potential 
GDP in 2014 and is estimated to have reached -2.3% in 2015 as GDP grew above potential. 
In 2016, GDP growth is also forecast to remain above potential growth, reducing the output 
gap to -1.6% of GDP. 

5 

 
 
Table 2: Macroeconomic and budgetary developmentsa 

2012

2013

2014

2015

2016

2017

COM

COM

COM

COM

COM

National 
authorities

COM

National 
authorities

Real GDP (% change)
Potential GDP (% change) 

Output gap (% of potential GDP)

General government balance
Primary balance
One-off and other temporary 
measures
Government gross fixed capital 
formation
Cyclically-adjusted balance

Cyclically-adjusted primary balance

-1.4
0.0

-1.6

-2.2
-0.8

-0.1

4.0

-1.2

0.2

-0.8
-0.1

-2.3

-2.6
-1.4

-0.1

4.2

-1.3

0.0

-0.7
-0.1

-2.8

-3.2
-1.9

0.1

4.1

-1.6

-0.3

0.5
0.0

-2.3

-2.7
-1.5

0.0

4.0

-1.4

-0.2

0.7
0.0

-1.6

-2.5
-1.4

0.0

4.1

-1.6

-0.5

-1.2
0.3

Structural balance b
Structural primary balance
Notes:
a In percent of GDP unless specified otherwise.
b Cyclically-adjusted balance excluding one-off and other temporary measures.
Source : Eurostat and European Commission 2016 spring forecast, 2016 Draft Budgetary Plan

-1.4
-0.2

-1.6
-0.4

-1.6
-0.5

-1.2
0.0

0.9
0

-1.9

-2.5
-1.4

0.0

4.1

-1.5

-0.3

-1.5
-0.3

0.7
0.4

-1.2

-2.3
-1.1

0.0

4.1

-1.5

-0.4

-1.5
-0.4

1.4
0

-1.2

-2.1
-1.0

0.0

4.1

-1.4

-0.3

-1.4
-0.3

When corrected for  the  effects of  the cycle over the last three years, the debt ratio  in 2015 
remained below the Treaty reference value, but this is no longer expected to be the case in 
2016. Based on the Commission 2016 spring forecast, cyclically-adjusted debt is estimated at 
61.8% of GDP in 2016 and 65.0% in 2017 (Table 3). 

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

2012

2013

2014

2015

2016

2017

COM

National 
authorities

COM

National 
authorities

Deficit 
criterion

Debt 
criterion

General government balance

-2.2

-2.6

-3.2

-2.7

-2.5

General government gross 
debt
General government gross 
debt adjusted for the effect of 
the cycle 

52.9

55.5

59.3

63.1

65.2

58.5

61.8

-2.5

65.0

-2.1

66.7

-2.3

66.9

65.0

Sources: Eurostat, European Commission 2016 spring forecast, 2016 Stability Programme, data communicated by the national authorities

Recent structural reforms  

Finland  has  implemented  structural  reforms  with  the  view  to  reducing  government 
expenditure  and  to  increase  the  growth  potential  of  the  economy.  The  pension  reform 
eventually linking the statutory retirement age to life expectancy has been enacted and will 
start to have impact as of 2017. The government has announced its orientations regarding the 
updated plan to reform the healthcare and social services, in order to bring their expenditure 
growth under control.  

Pensions.  The  most  important  recent  reform  is  the  pension  reform  legislated  at  the  end  of 
2015 which enters into force in 2017. The reform links the retirement age to life expectancy 

6 

 
 
 
 
 
as recommended by the Council. According to the national authorities, the reform is expected 
to  improve  long-term  fiscal  sustainability.  No  decision  has  been  taken  under  the  current 
pension  reform  regarding  the  extended  unemployment  benefits  for  workers  close  to  the 
retirement  age.  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. 

Labour  market.  On  an  aggregate  level,  wage  increases  have  been  moderate  since  the 
centrally  agreed  wage  deal  of  late  2013  that  has  been  extended  into  2016.  However,  in  the 
low  inflation  and  low  growth  environment,  the  strategy  of  restoring  cost  competitiveness 
through  low  wage  adjustments  has  had  only  a  limited  effect.  On  29  February  2016,  the 
central labour market organisations reached an agreement, refered to as the Competitiveness 
Pact,  to  increase,  from  2017,  annual  working  time  without  additional  compensation,  not  to 
carry  out  any  centrally  agreed  wage  increases  in  2017  and  to  shift  social  security 
contributions more towards the employees. Public sector employees' holiday bonuses would 
be temporarily reduced by 30%. There is also an intention to extend the possibilities for local 
bargaining. Employer and employee organisations have started sectoral collective agreement 
negotiations  on  introducing  the  terms  of  the  Competitiveness  Pact  into  industry  level 
agreements. These will determine whether the Pact will be implemented.  

In parallel, the government launched in April 2016 a reform of unemployment security aimed 
at encouraging quick acceptance of job offers and tightening the obligation to accept work as 
well  as  the  obligation  to  participate  in  employment-promoting  activation  measures.  In 
addition, shortening the duration of earnings-related unemployment security by one fourth is 
foreseen. In 2017 and 2018, unemployment benefits may, under certain conditions, be used to 
finance mobility grants, start-up grants and wage subsidies.  

Administrative reform. The government is advancing the reform proposal for improving the 
arrangement  of  social  and  healthcare  services.  The  government  aims  at  preparing  the 
legislative proposals by the end of 2016 and to implement the reform from 2019 onwards.The 
aim  is  to  reduce  health  disparities  and  to  better  control  the  costs.  A  regional  government 
(county) system will be established, led by councils elected by direct elections. In addition to 
social and healthcare services, the counties would also be given other duties such as rescue 
services, environmental healthcare, regional development and business-promotion and land-
use  management.  The  reform  will  extend  the  freedom  of  choice  of  social  welfare  and 
healthcare services, thus also promoting competition in the provision of social and healthcare 
services.  The  social and healthcare services  reform  aims to  achieve total savings of EUR 3 
billion (1.5% of GDP) in the long term through the comprehensive integration of social and 
healthcare  services,  larger  entities  in  charge  of  providing  the  services  than  at  present,  and 
digitalisation.  

Services  markets.  The  most  significant  legislative  change  in  the  retail  sector  has  been  the 
liberalisation of the opening hours of shops from the beginning of 2016. At the beginning of 
February 2016, an amendment to the Land Use and Building Act came into force. This will 
accelerate regional land use planning and increase the opportunities for regional councils to 
react more quickly to changes in the operating environment of the wholesale and retail trade. 

7 

 
 
4.2.  Medium-term budgetary position 

Structural deficit and fiscal consolidation 

In  2015,  the  structural  balance  improved  by  0.2  pp  of  GDP,  exceeding  the  recommended 
adjustment towards the MTO, and the expenditure benchmark was met with a margin of 0.7% 
of  GDP.  Therefore,  Finland  was  compliant  with  the  requirements  of  the  preventive  arm  in 
2015. 

In 2016, the structural  balance  is set  to worsen by 0.2pp, pointing to a risk of a significant 
deviation  (gap  of  -0.7%  of  GDP)  from  the  required  adjustment  of  0.5%  of  GDP.  The 
expenditure  benchmark  is  met.  This  calls  for  an  overall  assessment.  On  the  one  hand,  the 
current estimate of potential GDP growth underlying the structural balance estimate (0.0%) is 
lower than the medium-term average used in the expenditure benchmark (0.8%, frozen based 
on  the  Commission  2013  winter  forecast).  The  latter  can  no  longer  be  considered  fully 
relevant  given  that  the  prolonged  downturn  has  durably  affected  Finland’s  medium-term 
growth  prospects.  Indeed,  if  the  medium-term  potential  growth  rate  underlying  the 
expenditure benchmark were to be updated based on the data in the Commission 2015 spring 
forecast (as will be the approach from 2017 onwards), the expenditure benchmark would not 
be fully met but would indicate some deviation from the adjustment path towards the MTO. 
On the other hand, the difference between the signals given by the two pillars also reflects the 
effects  of  lower  than  expected  inflation.  In  the  draft  budgetary  plan  for  2016,  submitted  in 
November 2015, the GDP deflator was forecast at 1.2%. A similar forecast was made by the 
Commission  in  autumn  2015.  In  the  2016  spring  forecast,  the  GDP  deflator  is  forecast  at 
0.8%. This negatively affects public revenues through reduced tax collection. Although most 
of the social security transfers are indexed to the CPI, for 2016 there was already a previous 
decision to freeze the index adjustments. Therefore the lower-than-expected inflation has had 
less  of  an  impact  on  the  public  expenditures  and  the  overall  impact  on  the  general 
government  balance  has  been  negative.  Whereas  during  the  time  of  the  preparation  of  the 
2016  budget  the  headline  balance  was  expected  to  improve  by  0.5  pp  (in  the  Commission 
2015  autumn  2015  forecast),  the  improvement  based  on  the  spring  2016  forecast  is  0.2pp. 
Although the lower improvement in the headline balance is partly explained by the additional 
immigration-linked  expenditure  that  was  added  to  the  2016  budget  proposal  after  the  draft 
budgetary plan was presented, the lower improvement in headline balance is also the result of 
the lower inflation. In addition, there are no windfall gains for the Finnish public sector from 
the low interest rate environment, because the lower interest expenditure is more than offset 
by  the  lower  interest  revenues  received  by  the  social  security  funds.  Taking  into  account 
these factors, the structural balance pillar would indicate some deviation from the adjustment 
path towards the MTO.  

Considering these factors, the overall assessment points to a risk of some deviation from the 
recommended adjustment path towards the MTO in 2016. In its 2016 Stability Programme, 
Finland  requested  that  expenditure  linked  to  additional  immigration,  amounting  to  0.2%  of 
GDP  would  be  taken  into  account  while  assessing  the  progress  towards  the  MTO.  If  this 
estimate  of  the  increase  in  refugee-related  expenditure  was  excluded  from  the  deficit,  the 
conclusion of the overall assessment would remain unchanged.  

Government expenditure and investment 

Government investment as a share of GDP has increased since 2008 when gross fixed capital 
formation by the government sector amounted to 3.6% of GDP. In 2015 it amounted to 4.0% 

8 

 
 
of GDP in 2015. According to the stability programme, investment is expected to amount to 
4.1% of GDP in 2016 and 2017. 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. 

Finland's general government sector has recorded primary deficits since 2012 and is expected 
to remain in primary deficit also over 2016- 2017. 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. 
Finland's public finances, however, do not benefit from the decline in interest rates as public 
sector  assets  (at  the  end  of  2015,  employment  pension  schemes  managed  assets  that 
amounted  to  85%  of  GDP,  total  assets  of  the  general  government  amounted  to  ca  130%  of 
GDP  based  on  the  national  accounts  data)  have  been  partially  invested  in  interest-bearing 
assets. The loss of interest revenue there more than offsets the gain from the reduced interest 
expenditure on government debt.  

Current expenditure excluding interest has been on an increasing trend. In fact, it increased 
by 9 pps. of GDP since 2005. It should be noted that 6.5 pps. of the change occurred in 2009, 
when nominal GDP contracted by 6.5%. At 58.3% of GDP, the level was the highest in the 
EU in 2015 Expenditure has increased in all sub-sectors of the general government over the 
years 2004 to 2014, but the increase has been proportionally 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  of  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. 

4.3.  Medium-term government debt position 

Long-term sustainability of public finances 

The  general  government  gross  consolidated  debt-to-GDP  ratio  stood  at  63.1%  of  GDP  in 
2015. Based on medium-term projections building on the Commission's spring 2016 forecast, 
the debt is expected to rise to close to 76% of GDP by 2026 (based on the no-policy-change 
scenario, under the assumption that the structural primary balance position evolves according 
to  the  Commission's  spring  2016  forecast  until  2017),  remaining  above  the  60%-of-GDP 
Treaty threshold. The increase would be mostly driven by the costs of ageing. Based on the 
Stability Programme scenario, which assumes that the budgetary plans in the programme are 
fully implemented, the debt-to-GDP ratio would increase more slowly, reaching ca 72% by 
2026. 

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.  The  impact  of  the  latest  pension  reform,  legislated  in  autumn  2015, 
will  be  included  in  the  assessment  once  the  Economic  Policy  Committee  has  conducted  its 
peer review, following Finland's request. 

9 

 
 
Stock-flow adjustment 

The stock-flow adjustment has a large impact on general government debt developments in 
Finland.  This  i.a.  reflects  the  general  government's  high  net-financial-assets  position,  at 
50.7% of GDP in 2015, down from 54.0% of GDP in 20145. The OECD projects net assets to 
amount  to  47.0%  of  GDP  by  the  end  of  2016.  Among  OECD  countries,  this  is  one  of  the 
highest positive net financial asset positions. The stock-flow adjustments routinely occur as 
the  earnings-related  pension  system,  included  in  the  general  government  sector,  is  partially 
pre-funded and is in surplus. The surplus is included in the general government balance but is 
not  used  to  pay  off  general  government  debt.  These  funds  are  accounted  for  as  net 
accumulation of assets in the stock-flow adjustment. 

In  2012,  the  stock-flow  adjustment  accounted  for  70%  of  the  increase  in  the  debt-to-GDP 
ratio. Thereafter, in 2013 - 2014, the adjustment accounted for roughly 30% of the change in 
the debt ratio. In 2015, the impact of the stock-flow adjustment was again higher, amounting 
to 40% of the change in debt-to-GDP ratio. This was caused by employment pension schemes 
selling  the  majority  of  their  holdings  of  central  government  bonds,  thereby  reducing  the 
amount  of  intra-government  debt  that  is  taken  into  account  in  the  general  government  debt 
consolidation process from 2.6  billion  euros in 2014 euros to 1 billion euros in 2015. Such 
sale  was  economically  reasonable  as  the  market  value  of  Finland's  debt  is  higher  than  the 
nominal value. The funds' investment decisions are independent from the central government, 
although the funds are under the regulatory oversight by the government. The funds are not 
mandated  to  have  holdings  of  Finnish  government  debt.  Therefore,  the  sale  of  government 
bonds owned by the pension funds could continue further, increasing the gross consolidated 
debt-to-GDP  ratio.  Due  to  the  independent  nature  of  the  investment  decisions,  it  is 
complicated  to  forecast  the  sale  or  acquisition  of  central  government  debt  by  the  pension 
funds. However, the forecast for 2016 assumes that the impact of the stock-flow adjustment 
will  be  lower  than  in  2015.  In  2016,  the  Stability  Programme  projects  the  pension  funds' 
surplus to stand at 1.1% of GDP.  

Total stock of debt guaranteed by the government 

Finland  had  central  government  guarantees  amounting  to  21.5%  of  GDP  in  2015,  up  from 
17.4%  of  GDP  in  2014.  This  ratio  is  high  in  comparison  to  other  European  countries. 
Guarantees linked to the financial sector amounted to 1.9% of GDP in 2015. At the end of 
2015, a total of 41% of the stock of central government guarantees consisted of guarantees to 
enterprises  (excl.  housing  corporations).  These  are  issued  to  a  wide  group  of  non-financial 
corporations, mainly through the Finnvera corporation - a specialised state-owned financing 
company  promoting  export  and  growth  of  enterprises.  Guarantees  granted  to  housing 
corporations  account  for  23%  and  those  to  the  rest  of  the  world  for  15%  of  the  stock  of 
guarantees.  The  remaining  21%  is  divided  between  households  (mainly  student  loans), 
financial  and  insurance  corporations  and  general  government.  The  losses  linked  to  the 
guarantees have been low until now. 

Impact of the cycle 

Finland has experienced bad 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  thus  strongly 
influenced  by  cyclical  developments.  When  corrected  for  the  effects  of  the  cycle,  the 

5 

OECD Economic Outlook no 98, Annex Table 33. 

10 

 
 
                                                            
Commission  forecast  for  general  government  debt  is  estimated  to  have  stood  at  58.5%  of 
GDP in 2015, but to be above the reference value in 2016 (61.8% 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 2016 spring forecast, the cumulative impact of this assistance would amount to 
2.8%  of  GDP  in  2015.  Thus,  Finland's  general  government  gross  debt  would  have  been  at 
60.3%  of  GDP  in  2015  and  would  be  at  63.9%  in  2016  if  the  debt  related  to  financial-
stabilisation operations was deducted. 

4.5. 

Other factors put forward by the Member State  

On 9 April 2016, the Finnish authorities transmitted a letter with relevant factors pursuant to 
Article  2(3)  of  Regulation  (EC)  No  1467/97.  The  authorities  emphasised  the  impact  of  the 
cycle on general government debt, compliance with the obligations under the preventive arm 
of  the  SGP,  the  government's  commitment  to  the  fiscal  consolidation  target  set  in  the 
government programme, and the growth-enhancing structural reforms that are currently being 
prepared. In addition, Finland put forward the impact of the immigration-related expenditure, 
analysed  the  impact  of  low  inflation  environment  on  public  revenues  and  expenditures  and 
also  concluded  that  the  negative  net  impact  from  the  low  interest  rate  environment  on  the 
general government balance could amount to 0.3% of GDP in 2015 due to the lower revenues 
from the interest-bearing assets, mostly owned by the employment pension schemes. 

The factors put forward by the Finnish authorities have been taken into account in the present 
report.  The  impact  of  the  cycle  has  been  analysed  in  Section  4.1  and  compliance  with  the 
obligations under the preventive arm is assessed in Section 4.2. In assessing the compliance 
with  the  preventive  arm,  the  low-inflation  environment,  impact  of  the  low  interest  rate 
environment and the immigration-related expenditure are also taken into account. Structural 
reforms are considered in Section 4.1. 

5. 

CONCLUSIONS 

The  general  government  gross  debt  increased  to  63.1%  of  GDP  in  2015,  above  the  Treaty 
reference value. The 2016 Stability Programme envisages it to reach 65.0% of GDP in 2016 
and 66.7% of GDP in 2017. Similarly, the Commission 2016 spring  forecast projects gross 
debt above the reference value, at 65.2% of GDP in 2016 and 66.9% in 2017. In 2015, the 
breach  of  the  debt  criterion  was  no  longer  fully  explained  by  Finland's  financial  support  to 
safeguard the financial stability in the euro area, but the debt-to-GDP ratio would have been 
at 60.3%, narrowly over the Treaty reference value. The debt-to-GDP ratio increased strongly 
in  2015  due  to  the  stock-flow  adjustments,  as  the  social  security  funds,  part  of  general 

11 

 
 
government,  were  liquidating  some  of  their  holdings  of  the  central  government  securities. 
The social security funds have accumulated assets in parallel to the increase of the central and 
local government debt and these assets far outweigh the debt, resulting in positive net asset 
position  of  the  general  government.  Additionally,  it  should  be  noted  that  the  debt  ratio 
reflects the effects of Finland's current cyclical position. Debt corrected for the effects of the 
cycle would have remained below 60% of GDP in 2015, but would be above the reference 
value in 2016. 

This report also examined other relevant factors, notably finding that Finland is expected to 
broadly  comply  with  the  recommended  adjustment  path  towards  the  MTO  in  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 
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 country-specific recommendations and improve fiscal sustainability. 

12