REPORT FROM THE COMMISSION Finland Report prepared in accordance with Article 126(3) of the Treaty
Date: 2017-05-22
Institutions: Directorate-General for Economic and Financial Affairs, European Commission
Subjects: Finland, budget deficit, budgetary expenditure, economic growth, gross domestic product, labour market, public debt, stability pact, stability programme, structural adjustment

EN 

   EN 

   EUROPEAN COMMISSION  Brussels, 22.5.2017  COM(2017) 532 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 on the Functioning of 
the European Union 

1. 

INTRODUCTION 

Article  126  of  the  Treaty  on  the  Functioning  of  the  European  Union  (TFEU  or  the  Treaty) 
lays  down  the  excessive  deficit  procedure  (EDP).  That  procedure  is  further  specified  in 
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 provides that if a Member State does not fulfil the requirements under 
one or  both of those criteria the Commission  has  to  prepare a report. This  report must 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”. 

This report, which represents the first step in the excessive deficit procedure (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.  

The  report  updates  the  Commission's  previous  assessment  of  the  excess  of  the  deficit  and 
debt ratio over the Treaty reference values of 18 May 20163. The May 2016 report concluded 
that  overall,  the  deficit  and  the  debt  criteria  of  the  Treaty  were  considered  to  be  complied 
with. On 28 April 2017, Finland submitted its 2017 Stability Programme. 

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”, adopted by the Economic and Financial Committee on 5 July 2016, 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  COM(2016)  292 

final,  http://ec.europa.eu/economy_finance/economic_governance/sgp/pdf/30_edps/126-

03_commission/2016-05-18_fi_126-3_en.pdf 

2 

 
 
 
                                                            
General government debt amounted to 63.6% of GDP in 2016. This is above the 60% of GDP 
reference  value.  The  Stability  Programme  indicates  that  the  gross  debt  ratio  is  expected  to 
peak  at  64.7  %  of  GDP  in  2017  and  turn  onto  a  gradual  downward  path  as  from  2018.  In 
2020 the debt-to-GDP ratio is forecast at 62.7% of GDP. In contrast, the Commission 2017 
spring forecast expects the debt ratio to continue to rise in 2017 and 2018 reaching 66.2% of 
GDP in 2018, at the end of the forecast horizon. The notified debt-to-GDP ratio in 2016 and 
the projected debt ratios for 2017 and 2018 in the Commission 2017 spring forecast provide 
evidence of a prima facie existence of an excessive deficit in Finland for the purpose 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 the launch of an excessive deficit 
procedure is warranted after all relevant factors have been considered. Section 2 of the report 
examines the deficit criterion and section 3 examines the debt criterion. Section 4 deals with 
the  relevant  factors,  including  the  assessment  of  compliance  with  the  required  adjustment 
path towards the medium-term budgetary objective (MTO). The report takes into account the 
Commission 2017 spring forecast released on 11 May 2017.  

Table 1. General government deficit and debt (% of GDP) 

2. 

DEFICIT CRITERION  

According to the spring 2017 notification, Finland's general government deficit was 1.9% of 
GDP in 2016. The deficit is projected to remain below the Treaty reference value in 2017 and 
2018 both based on the Stability Programme as well as based on the Commission 2017 spring 
forecast. According to the Commission forecast, the deficit is projected to increase to 2.2% of 
GDP  in  2017  and  then  decline  to  1.8%  of  GDP  in  2018,  based  on  the  no-policy  change 
assumption.  According  to  the  Stability  Programme,  the  deficit  is  projected  to  increase  to 
2.3% before declining to 1.6% of GDP by 2018.  

Finland  thus  complies  with  the  deficit  criterion  as  defined  in  the  Treaty  and  in  Regulation 
(EC) No 1467/97. 

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 63.6% in 2016, on the back of large primary deficits 
and  stock-flow  adjustments  arising  from  the  financial  investments  of  the  earnings-related 

3 

20132014COMCOMCOMNational authoritiesCOMNational authoritiesDeficit criterionGeneral government balance-2.6-3.2-2.7-1.9-2.2-2.3-1.8-1.6General government gross debt56.560.263.763.665.564.766.264.5General government gross debt adjusted for the effect of the cycle 59.763.165.62017Debt criterion201620152018Sources: Eurostat, European Commission 2017 spring forecast, 2017 stability programme, data communicated by the national authorities 
 
 
pension funds. The deficit and the stock-flow adjustment contributed roughly equally to the 
growth  of  nominal  debt  over  those  years.  In  2016,  the  debt  ratio  rose  on  the  back  of  the 
primary deficit (0.9% of GDP) but that increase was offset by the "snow-ball" effect (-0.3% 
of  GDP)  and  the  stock-flow  adjustment  (-0.7%  of  GDP).  The  "snow-ball"  effect  started  to 
curb  the  increase  in  the  debt  ratio  in  2016,  when  nominal  GDP  growth  accelerated.  The 
stock-flow  adjustment  had  been  increasing  the  debt  ratio  until  2015,  mainly  driven  by  the 
surplus  of  the  statutory  earning-related  pension  funds4.  In  2016,  the  stock-flow  adjustment 
reduced the debt ratio because the State treasury used its accumulated cash buffers to pay off 
the  debt  at  the  end  of  the  year  and  the  amount  of  security  deposits  in  connection  with 
derivative  instruments  declined5.  These  favourable  factors  outweighed  the  surplus  of  the 
pension funds, which was also smaller than previously. As a result, the debt ratio declined. 

Finland's  Stability  Programme  envisages  public  debt  to  increase  to  64.7%  of  GDP  in  2017 
and  to  remain  broadly  unchanged  at  64.5%  of  GDP  in  2018.  The  debt-to-GDP  ratio  is 
planned  to  decline  to  62.7%  in  2020.  According  to  the  Commission  2017  spring  forecast, 
public  debt  is  expected  to  reach  65.5%  of  GDP  in  2017  and  continue  to  grow  to  66.2%  of 
GDP in 2018 (Table 1).  

According to the Commission forecast, the primary deficit is projected to increase slightly to 
1.1%  of  GDP  in  2017  and  decline  to  0.8%  of  GDP  in  2018.  The  projected  expansion  of 
nominal  GDP  is  expected  to  limit  the  increase  in  the  debt  ratio  in  2017  and  especially  in 
2018.  The  stock-flow  adjustment  component,  however,  is  assumed  to  turn  to  positive  and 
increase the debt ratio in 2017-2018.  

Both Finland's Stability Programme and the Commission 2017 spring forecast estimate that 
in 2016, the debt ratio adjusted for the influence of the cycle is less than 60% of GDP, below 
the Treaty reference value. Based on the 2017 Stability Programme, Finland is projected to 
fulfil  the  forward  looking  debt  rule  in  2017  and 2018.  However,  based  on  the  Commission 
forecast,  Finland  is  forecast  not  to  comply  with  the  debt  reduction  benchmark  in  2017  and 
2018, with gaps of 0.8% and 0.5% of GDP respectively. 

The  analysis  thus  suggests  that  prima  facie  the  debt  criterion  for  the  purpose  of  the  Treaty 
and  Regulation  (EC)  No  1467/1997  is  not  fulfilled  based  on  the  2016  outturn  data  and  the 
Commission 2017 spring forecast as well as the 2017 Stability Programme before, however, 
consideration is given to all relevant factors set out below. 

4 Due to the statutory status of the earnings-related pension system, the surplus of pension system is included in 
the  financial  position  of  general  government.  The  pension  funds,  which  manage  a  portfolio  with  a  value  of 
close to 90% of GDP in 2016, earn property income which is not used to cover deficits in the central or the 
local government subsector. 

5 State Treasury uses derivatives such as interest rate swaps in connection to the central government debt. 

4 

 
 
                                                            
Table 2: Debt dynamics 

4. 

RELEVANT FACTORS 

Article  126(3)  TFEU  provides  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".  These  factors  are  further  clarified in  Article 2(3)  of  Regulation  (EC) 
No 1467/97, which also provides 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  case  of  an  apparent  breach  of  the  debt  criterion,  the  analysis  of  the  relevant  factors  is 
particularly warranted given that debt  dynamics are to  a larger extent  influenced  by factors 
outside  the  control  of  the  government  than  is  the  case  for  the  deficit.  This  is  recognised  in 
Article 2(4) of Regulation (EC) No 1467/97, which provides that the relevant factors shall be 
taken into account when assessing compliance on the basis of the debt criterion irrespective 
of the size of the breach. 

5 

20142015201620172018Government gross debt ratio 60.263.763.665.566.2Change in debt ratio b (1 = 2+3+4)3.73.5-0.11.90.7Contributions:• Primary balance (2)1.91.60.91.10.8• “Snowball” effect (3)0.60.0-0.3-0.1-0.9of which:     Interest expenditure1.21.21.11.01.0Real GDP growth0.4-0.2-0.9-0.8-1.1Inflation (GDP deflator)-0.9-1.0-0.5-0.3-0.8• Stock-flow adjustment (4)1.21.9-0.70.90.9Notes: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 2017 spring forecasttttttttttttttYSFyyiYDYPDYDYD1*1111 
 
   
 
In that respect, at least the following three main aspects need to be considered (and have been 
considered in the past) when assessing compliance with the debt criterion given their impact 
on the debt dynamics and sustainability: 

1.  adherence to the MTO or the adjustment path towards it, which, is supposed to ensure 
sustainability  or  rapid  progress  towards  sustainability  under  normal  macroeconomic 
circumstances.  As  by  construction  the  country-specific  MTOs  take  into  account  the 
debt  level  and  implicit  liabilities,  compliance  with  the  MTO  or  the  adjustment  path 
towards it should ensure convergence of the debt ratios towards prudent levels at least 
in the medium term; 

2.  structural reforms, already implemented or detailed in a structural reform plan, which 
are  expected  to  enhance  sustainability  in  the  medium  term  through  their  impact  on 
growth,  thereby  contributing  to  bring  the  debt-to-GDP  ratio  on  a  satisfactory 
downward  path.  Overall,  adherence  to  the  MTO  (or  the  adjustment  path  towards  it) 
alongside  with  the  implementation  of  structural  reforms  (in  the  context  of  the 
European  Semester)  is  expected  under  normal  economic  conditions  to  bring  debt 
dynamics on a sustainable path through the combined impact on the debt level itself 
(through  the  achievement  of  a  sound  budgetary  position  at  the  MTO)  and  on 
economic growth (through the reforms).  

3.  unfavourable  macroeconomic  conditions,  and  in  particular  low  inflation,  which  can 
hamper  the  reduction  of  the  debt-to-GDP  ratio  and  make  compliance  with  the  SGP 
provisions  particularly  demanding.  The  debt  reduction  benchmark  assumes  by 
construction that GDP deflator growth returns to the long-term average value of 2% 
by  2021,  which  makes  compliance  with  the  forward-looking  debt  benchmark 
particularly  demanding.  Under  such  conditions,  adherence  to  the  MTO  or  the 
adjustment path  towards  it is  a key relevant  factor in  assessing  compliance with  the 
debt criterion. 

In view of those provisions, 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.  

4.1.  Medium-term economic position 

Cyclical conditions and potential growth 

After Finland's real GDP declined 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 0.3% 
and growth accelerated to 1.4% in 2016. The Finnish GDP is expected to continue growing in 
2017 and 2018 (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  2016,  being  negative  (at  -0.1%)  in  2013.  In  2014,  potential 
output  growth  is  estimated  to  have  remained  unchanged  from  2013.  In  2015  and  2016, 
potential  growth  is  estimated  at  0.2%  and  0.4%  respectively.  The  contraction  of  potential 
output has been caused by declining labour inputs and the estimated negative contribution of 

6 

 
 
 
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 2016 was 4.5% below the level recorded in 2008, whereas 
potential output grew by just 2.2% in total over 2009-2016 period. It could be explained by 
the  restructuring  process,  in  which  the  importance  of  the  electronics  industry  declined  and 
other  industries,  often  with  lower  productivity  levels,  expanded  their  share  in  total  output. 
The  Commission's  2017  Country  Report  on  Finland  emphasized  Finland's  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 -2.9% of potential 
GDP  in  2014  and  remained  broadly  stable in  2015.  The  gap  is  estimated  to  have  reached  -
1.8%  in  2016  when  GDP  grew  faster  than  potential.  In  2017,  GDP  growth  is  forecast  to 
remain above potential growth, reducing the output gap to -1.4% of GDP. 

Table 3: Macroeconomic and budgetary developmentsa 

When corrected for the effects of the cycle over the last  three years, the debt  ratio in  2016 
remained  narrowly  below  the  Treaty  reference  value  at  59.7%  of  GDP,  but  it  is  no  longer 
expected to be the case in 2017. Based on the Commission 2017 spring forecast, cyclically-
adjusted debt is estimated at 63.1% of GDP in 2017 and 65.6% in 2018 (Table 1). 

7 

 20132014COMCOMCOMCOMCOMNational authoritiesCOMNational authoritiesReal GDP (% change)-0.8-0.60.31.41.31.21.71.8Potential GDP (% change) 0.20.00.20.40.90.00.80.0Output gap (% of potential GDP)-2.3-2.9-2.7-1.8-1.4-1.6-0.5-0.8General government balance-2.6-3.2-2.7-1.9-2.2-2.3-1.8-1.6Primary balance-1.4-1.9-1.6-0.9-1.1-1.4-0.8-0.7One-off and other temporary measures-0.10.10.00.00.00.0-0.10.0Government gross fixed capital formation4.24.23.93.93.90.03.90.0Cyclically-adjusted balance-1.3-1.5-1.2-0.9-1.3-1.4-1.5-1.1Cyclically-adjusted primary balance0.0-0.30.00.2-0.30.0-0.50.0Structural balance b-1.2-1.6-1.1-0.9-1.3-1.4-1.4-1.0Structural primary balance0.0-0.40.00.2-0.3-0.5-0.4-0.1Notes:b Cyclically-adjusted balance excluding one-off and other temporary measures.Source: Eurostat and European Commission 2017 spring forecast, 2017 stability programme2018a In percent of GDP unless specified otherwise.201620172015 
 
 
  
 
 
Structural reforms 
In  its  Communication  of  13  January  20156,  the  Commission  strengthened  the  link  between 
effective  implementation  of  structural  reforms,  investment,  and  fiscal  responsibility  in 
support of jobs and growth, within the existing rules of the SGP.  

As  described  in  the  Commission's  2017  Country  Report,  Finland  has,  overall,  made  some 
progress in addressing the 2016 country-specific recommendations (CSRs). The first batch of 
legislative  proposals  for  the  social  and  healthcare  service  reforms  was  presented  to  the 
parliament  in  March  2017.  Those  laws  will  establish  the  legal  framework  for  the  18  new 
counties  that  will  take  over  from  the  municipalities  the  responsibility  for  the  social  and 
healthcare services as from 2019. In 2016 the social partners signed the Competitiveness Pact 
(the  Pact)  aimed  at  improving  Finland’s  cost  competitiveness  from  2017  The  Pact  also 
extends the possibilities for local bargaining for organised employers. The obligation for the 
unemployed to accept a job offer as well as the obligation to participate in activation schemes 
were  tightened.  In  addition,  the  duration  of  earnings-related  unemployment  benefits  was 
reduced. In order to promote entrepreneurship, the government put forward a package which 
provides additional opportunities for company creation and growth. Some amendments to the 
establishment  conditions  for  retail  outlets  have  been  adopted.  De-regulation  measures  have 
been passed by the parliament for the transport sector and are underway for gas markets.  

Pensions. A major pension reform entered into force in 2017. The reform will link the future 
retirement age to life expectancy as recommended by the Council. According to the national 
authorities, 
long-term  fiscal  sustainability  by 
approximately 1% of GDP.  

is  expected 

the  reform 

improve 

to 

Labour  market.  On  an  aggregate  level,  wage  increases  have  been  moderate  since  the 
centrally  agreed  wage  deal  of  late  2013  that  was  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. The central labour market organisations 
reached  an  agreement  on  the  Pact  in  February  2016.  During  the  spring  and  early  summer, 
employer  and  employee  organisations  carried  out  industry  level  collective  agreement 
negotiations to introduce the Pact into about 300 industry- or company-level agreements. To 
facilitate the conclusion of the industry-level agreements, the government announced in early 
June that it would cut taxes on labour income in all income categories as of 2017 depending 
on the coverage of the Pact. In the end, over 90% of employees were covered by the Pact and 
income taxes were cut by 0.4% of GDP as of 2017.  

The Pact includes the following measures to reduce labour costs: i) annual working time will 
be  increased  by  24  hours  without  additional  compensation  from  2017;  ii) wages  will  be 
frozen  for  12  months;  iii) a  larger  share  of  social  security  contributions  will  be  shifted 
permanently  towards  the  employees.  In  line  with  the  Pact,  public  sector  employees'  annual 
holiday bonuses, which roughly correspond to 50% of a month's salary, will be temporarily 
(2017-2019)  reduced  by  30%,  lowering  public  spending.  The  savings  that  are  expected  to 
materialise  as  a  result  of  the  Pact  will  be  used  to  reduce  employers'  labour  costs.  Over  the 
long-run,  the  Pact  is  expected  to  have  positive  impacts  on  exports,  real  GDP,  employment 

6 COM(2015) 12 final 

8 

 
 
 
                                                            
and public finances. Estimates of the impact of lower wage costs on employment range from 
20 000 to  40 000 depending on the method and assumptions used.  The social  partners also 
agreed to extend local bargaining possibilities for organized employers.  

In  parallel,  the  government  launched  in  April  2016  a  reform  of  unemployment  insurance 
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,  in  January  2017  the  duration  of  earnings-related  unemployment  benefits  was 
reduced  from  500  to  400  days  and  further  reforms  of  the  earnings-related  unemployment 
insurance  in  order  to  activate  job  seekers  more  are  under  preparation.  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 determined to reform the social and healthcare 
services. The parliament has started to discuss the legislation that will establish the new layer 
of government, the counties, in 2019. The legal proposals for the most controversial parts of 
the  reform,  in  particular  a  law  defining  patients’  freedom  to  choose  their  service  provider, 
were presented in the parliament in early May 2017. The counties have also other duties in 
addition  to  social  and  health  tasks  such  as  organising  rescue  services,  public  employment 
services, regional development and business-promotion as well as the management of land-
use. The reform will extend the freedom of choice of social welfare and healthcare services, 
thus  also  promoting  competition  in  their  provision.  A  temporary  administration  will  start 
preparing  the  launch  of  activities  in  July  2017,  when  laws  come  into  force  following  the 
completion  of  the  parliament  process,  which  is  still  ongoing..  Elections  for  the  new  county 
councils will be held in the spring 2018 and the new counties will start to operate from the 
beginning of 2019. The social and healthcare services reform aims to achieve total savings in 
the  long  term  through  comprehensive  integration  of  social  and  healthcare  services,  larger 
entities in charge of providing the services than at present, and digitalisation.  

Services markets. Progress has been made in opening up services sectors such as retail trade 
and transport to competition, and proposals have been put forward to increase competition in 
other domestic service sectors. Establishment conditions for retail outlets will be eased. The 
legislation that came in force in May 2017 increases the minimum surface of the more tightly 
regulated large retail units from 2 000 to 4 000 square meters. The possibilities to establish 
those  units  in  areas  other  than  the  city  centres  will  be  increased  and  access  to  outlets  will 
become a more important factor in planning than the outlets’ nature and size. The first phase 
of legislative amendmends to reform transport sector was approved by the parliament in April 
2017 while gas market reforms have been announced and the draft legislation prepared. 

4.2.  Medium-term budgetary position 

Structural balance and adjustment towards the MTO 

Finland's Medium-Term Objective (MTO) for the structural balance is -0.5% of GDP which 
the government aims to achieve in 2019. The MTO appears sufficiently stringent under what 
can  be  considered  as  normal  economic  conditions  to  ensure  debt  rule  compliance  in  the 
medium and long term. According to the Commission 2017 spring forecast, it would require a 
structural improvement of 0.8% of GDP over 2018-2019. At the same time, the Commission 
forecast does not expect the structural balance to improve at unchanged policy in 2018, the 
last year of the Commission projections. As a result, achieving the MTO in 2019 will require 
substantial additional measures. 

9 

 
 
In the Draft Budgetary Plan (DBP) for 2017, Finland indicated that the budgetary impact of 
the  exceptional  inflow  of  refugees  was  significant  and  provided  adequate  evidence  of  the 
scope and nature of these additional budgetary costs. In particular, the expenditure increase in 
2016 was estimated at 0.3% of GDP. In the 2017 Stability Programme, the budgetary impact 
of the refugees has turned out to be lower than expected with an increase in expenditure by 
0.17 pp of GDP in 2016. In 2017 the budgetary impact of refugees is projected to decrease by 
0.15 pp of GDP.  

In 2016, the structural balance improved by 0.3 pp of GDP to  -0.9% of GDP, pointing to a 
risk of some deviation (deviation of 0.1% of GDP) from the required structural adjustment of 
0.3%  of  GDP  after  taking  into  account  an  allowance  of  0.2%  of  GDP  related  to  the 
exceptional inflow of refugees7. The growth of government expenditure, net of discretionary 
revenue  measures  and  one-offs,  complied  with  the  expenditure  benchmark  with  a  positive 
margin.  This  calls  for  an  overall  assessment.  The  difference  between  the  two  indicators  is 
mainly  driven  by  revenue  shortfalls  (0.3%  of  GDP)  that  could  be  linked  with  low  inflation 
and low interest rate environment and seem to distort the structural balance indicator. Taking 
that  factor  into  consideration,  the  structural  balance  pillar  would  also  point  to  compliance 
with  the  recommended  structural  adjustment,  in  line  with  the  conclusion  based  on  the 
expenditure  benchmark  indicator.  Therefore,  the  overall  assessment  points  to  compliance 
with the recommended adjustment path towards the MTO in 2016.  

In  its  DBP  for  2017,  Finland  requested  a  temporary  deviation  of  0.5%  of  GDP  from  the 
required  structural  adjustment  path  towards  the  MTO  in  2017,  in  view  of  major  structural 
reforms  with  a  positive  impact  on  the  long-term  sustainability  of  public  finances  (the  so-
called "structural reform clause"), as well as a temporary deviation of 0.1% of GDP to take 
investments8  (the  so-called  "investment  clause").  The 
account  of  EU  co-financed 
Commission's updated detailed analysis of the output gap estimate for 2017 on the basis of 
the Commission's spring forecast imply that in 2017 Finland meets the minimum benchmark, 
which is designed to ensure sufficient safety margin towards the 3% of GDP reference value 
of the Treaty. In particular, if the output gap was considered to be -2.5% of potential GDP in 
2016 as the plausibility tool suggests, the structural balance would be estimated at -0.5% in 
2016 (Finland's MTO). The extrapolation of the output gap on the basis of the tool and the 
common methodology would lead the structural balance to be projected at -1% in 2017 and 
2018.  Other  conditions  for  structural  reform  and  investment  clauses  are  also  met:  the 
structural reforms have been implemented; they are major reforms; and appear to have long-
run positive budgetary effects. Regarding the investment clause, the output gap is estimated 
larger than -1.5% of GDP in 2017 according to the above mentioned detailed analysis and the 
Commission’s  spring  forecast  projects  general  government  gross  fixed  capital  formation  to 
increase  by  2.0%  in  2017.  In  addition,  based  on  the  spring  forecast,  Finland  is  expected  to 
remain  sufficiently  close  to  its  MTO  in  2017-2018  and  according  to  the  government  plans, 
Finland  would  return  to  MTO  in  2019.  On  this  basis,  the  Commission  proposes  to  grant 
Finland a temporary deviation of 0.6% of GDP from the required adjustment path towards the 
MTO in 2017 in line with the "Commonly agreed position on Flexibility within the Stability 

7 In July 2016, the Council gave Finland a recommendation to improve the structural balance by 0.5% of GDP 

in 2016.  

8 European Structural and Investment Funds support the competitiveness, boost research and innovation, create 

employment as well as facilitate education and training. 

10 

 
 
                                                            
and Growth Pact" endorsed by the ECOFIN Council in February 20169. In November 2016, 
Finland's DBP for 2017 was assessed to be at risk of non-compliance with the requirements 
of the SGP. 

Taking  into  account  the  temporary  deviations  granted  in  2017  for  structural  reform  and 
investment  clauses,  and  the  previously-granted  allowance  under  the  unusual  event  clause, 
which is carried forward for a period of three years, Finland's structural balance is allowed to 
deteriorate  by  0.5%  of  GDP  in  2017.10  Based  on  the  spring  forecast,  both  pillars  point  to 
compliance  with  that  requirement.  An  overall  assessment  would  indicate  that,  on  the  one 
hand,  the  structural  balance  is  negatively  affected  by  revenue  shortfalls,  which  worsen  the 
balance by 0.3% of GDP. On the other hand, the medium-term average potential GDP growth 
(0.2%)  ¬  compared  with  the  potential  growth  rate  which  is  estimated  in  the  2017  spring 
forecast  for  2017  to  be  significantly  higher  (0.9%)  ¬  might  result  in  a  rather  stringent 
expenditure  growth  benchmark  for  2017.  The  expenditure  benchmark  indicator  is  also 
affected  by  a  difference  between  the  current  estimate  for  GDP  deflator  (0.5%)  and  the 
estimated deflator at the time when the requirement was set (0.9%). These differences in the 
estimated growth rates and the deflators would have an effect on the expenditure benchmark 
indicator which is estimated at 0.2% of GDP. Taking these factors into consideration, if the 
expected decrease of the budgetary impact in 2017 stemming from the exceptional inflow of 
refugees were deducted from the assessment, the overall assessment would not change..  

In  2018,  taking  into  account  the  previously-granted  allowances  under  the  unusual  event 
clause  and  the  structural  reform  and  investment  clauses,  the  recommended  structural 
adjustment  is  0.1%  of  GDP.11  The  structural  balance  is  projected  to  remain  unchanged, 
estimated  at  -1.4%  of  GDP,  pointing  to  some  deviation  from  the  recommended  structural 
adjustment (deviation 0.1% of GDP) while the expenditure benchmark points to compliance. 
This  calls  for  an  overall  assessment.  In  2018,  the  revenue  shortfall  continues  to  have  an 
impact on the structural balance (0.4 pp of GDP), while the estimated potential growth rate 
(0.8%)  continues  to  outpace  the  medium-term  average  potential  GDP  growth  rate  (0.4%) 
having  an  impact  on  the  expenditure  benchmark  indicator  (0.2%  of  GDP).  Taking  those 
factors  into  account,  both  indicators  would  point  to  compliance  with  the  recommended 
adjustment path towards the MTO in 2018. Therefore, on the basis of the overall assessment, 
Finland  is  expected  to  comply  with  the  requirements  of  the  preventive  arm  in  2018.  If  the 
expected decrease of the budgetary impact in 2017 stemming from the exceptional inflow of 
refugees were deducted from the assessment, the overall assessment would not change. 

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 2016 it amounted to 3.9% 
of GDP. According to the Stability Programme, the investment-to GDP ratio is expected to 
remain  at  3.9%  of  GDP  in  2017,  increase  to  4.0%  of  GDP  in  2018  and  gradually  decrease 
thereafter. Throughout the period, the general government deficit ratio in both headline and 

9 http://data.consilium.europa.eu/doc/document/ST-14345-2015-INIT/en/pdf 
10 The allowed deterioration in 2017 of 0.5% of GDP also takes into account that the observed distance from the 

MTO at the end of 2016 amounted to 0.4% of GDP. 

11  Based  on  the  matrix,  the  annual  structural  adjustment  towards  the  MTO  would  be  0.6%  of  GDP  in  2018. 
However,  this  requirement  is  adjusted  to  0.1%  of  GDP  after  taking  into  account  the  impact  of  the 
previously-granted allowances under the unusual event clause and the structural reform and investment 
clauses, which are carried forward for a period of three years.  

11 

 
 
                                                            
structural  terms  is  projected  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. 

The  ratio  of  general  government  current  expenditure,  excluding  interest,  to  GDP  peaked  in 
2014  at  52.4%  of  GDP.  The  expenditure  ratio  rose  significantly  as  a  consequence  of  the 
2008-2009 economic crisis, when current expenditure increased by 6.7% and nominal GDP 
contracted by 6.5%. At 51.0% of GDP, the level was one of the highest in the EU in 2016. 
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. 

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. Overall, Finland's public finances, however, do 
not  benefit  from  the  decline  in  interest  rates,  as  the  assets  which  are  held  by  the  statutory 
earnings-related pension funds, which are included in the public sector, are partially interest-
bearing  assets.  The  reduction  in  interest  revenue  from  these  assets,  as  a  result  of  lower 
interest rates, more than offsets the expenditure savings from the reduced interest payments 
on government debt. 

4.3.  Medium-term government debt position 

Long-term sustainability of public finances 

The  general  government  gross  consolidated  debt-to-GDP  ratio  stood  at  63.6%  of  GDP  in 
2016. Based on medium-term projections building on the Commission's winter 2017 forecast, 
the debt is expected to rise to close to 80% of GDP by 2027 (based on the no-policy-change 
scenario,  under  the assumption  that  the  structural  primary  balance  evolves  according  to  the 
Commission's  winter  2017  forecast  until  2018),  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, it is important to note that the 2017 pension reform is not 
taken into account in these sustainability risk assessments, as the necessary Economic Policy 
Committee peer review has not yet been completed. 

Stock-flow adjustment  

The stock-flow adjustment has  a large effect on changes in the general government debt  in 
Finland.  In  2010-2015,  the  stock-flow  adjustment  accounted  for  more  than  half  of  the 
increase  in  the  debt-to-GDP  ratio.  The  stock-flow  adjustments  routinely  occur  as  the 
earnings-related pension system, included in the general government sector, is partially pre-
funded and runs a surplus. The funds' investment decisions are independent from the central 
government, although the funds are under the regulatory oversight of the government. At the 
end of 2016, the pension schemes managed assets that amounted  to 85% of GDP, of which 
about 40% was invested in interest-bearing products. The share of interest-bearing assets in 
the  portfolios  of  pension  funds  has  been  on  a  decreasing  trend.  In  2016,  the  pension  funds 
liquidated  some  of  their  holdings  of  domestic  central  government  securities  increasing  the 
consolidated  general  government  debt.  In  2016,  for  the  first  time  the  share  of  equity 

12 

 
 
investment accounted for more than half of the assets. The remaining 10% of the assets are 
real  estate  investments.  Owing  to  the  accumulated  assets  in  the  pension  funds,  Finland's 
general government net-financial assets position was estimated at 50.7% of GDP in 201612.  

Total stock of debt guaranteed by the government 

Finland  had  central  government  guarantees  amounting  to  21.5%  of  GDP  in  2016,  up  from 
21.1% of GDP in 2015. That ratio is high in comparison to other Member States. At the end 
of 2016, about half of the stock of central government guarantees consisted of guarantees to 
enterprises  (excl.  housing  corporations).  They  are  issued  to  a  wide  group  of  non-financial 
corporations, mainly through the Finnvera corporation - a specialised state-owned financing 
company  promoting  exports  and  enterprise  growth.  Guarantees  granted  to  households' 
mortgages accounted for 28% at the end-2016. Both types of guarantees have nearly doubled 
since  2010.  The  rest  of  the  guarantees  are  linked  to  European  financial  stability  fund  and 
student loans. The losses linked to the guarantees have been low until now.  

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 59.7% of GDP in 2016, but 
above the reference value as of 2017 (63.1% 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 2017 spring forecast, the cumulative impact of that assistance would amount to 
2.7%  of  GDP  in  2016.  Thus,  Finland's  general  government  gross  debt  would  be  60.9%  of 
GDP in 2016 if the debt related to financial-stabilisation operations was deducted. 

4.5. 

Other factors put forward by the Member State  

On 9 May 2017, 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 low inflation environment on public 

12 OECD Economic Outlook no 100, Annex Table 33. 

13 

 
 
                                                            
revenue and expenditure and the negative net impact from the low interest rate environment 
on the general government balance.  

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,  and  impact  of  the  low  interest  rate 
environment are also taken into account. Structural reforms are considered in Section 4.1.  

5. 

CONCLUSIONS 

The general government gross debt decreased slightly from 63.7% in 2015 to 63.6% of GDP 
in  2016,  but  remained  above  the  Treaty  reference  value.  The  2017  Stability  Programme 
envisages the debt ratio to reach 64.7% of GDP in 2017 and then slightly decrease to 64.5% 
of  GDP  in  2018.  The  Commission  2017  spring  forecast  projects  gross  debt  above  the 
reference  value,  at  65.5%  of  GDP  in  2017  and  66.2%  in  2018,  based  a  no-policy-change 
assumption. This suggests that before consideration is given to all relevant factors, the debt 
criterion as defined in the Treaty does not appear to have been fulfilled prima facie in 2016. 
In line with the Treaty, this report also examined the relevant factors.  

In 2016, 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.  At  the  same  time,  Finland  is 
expected  to  comply  with  the  recommended  adjustment  path  towards  the  MTO  in  2017  and 
2018,  which  should  help  ensure  –  in  the  medium  term  –  that  the  debt  ratio  decreases  at  a 
sufficient pace. The debt corrected for the effects of the cycle would remain just below 60% 
of  GDP  in  2016.  Moreover,  Finland  has  made  some  progress  in  implementing  structural 
reforms, notably by addressing its 2016 country-specific recommendations in the area of cost 
competitiveness.  These  reforms  are  expected  to  contribute  to  enhancing  the  economy's 
growth  potential  and  reducing  the  risks  of  macroeconomic  imbalances,  thereby  having  a 
positive impact on debt sustainability in the medium to long term. In a letter sent on 9 May 
2017, Finland recalled that the cyclically-adjusted debt ratio remained below 60% of GDP in 
2016 and that it is projected to comply with the requirements under the preventive arm of the 
Pact.  

In  concluding,  the  current  analysis  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, 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  swift 
adoption and implementation of structural reforms increasing productivity and the supply of 
labour  are  key  to  enhance  Finland's  growth  prospects  in  the  medium  term,  which  would 
contribute to improve fiscal sustainability. 

14