REPORT FROM THE COMMISSION Finland Report prepared in accordance with Article 126(3) of the Treaty on the Functioning of the European Union
Date: 2020-05-20
Institutions: Directorate-General for Economic and Financial Affairs, European Commission
Subjects: Finland, budget deficit, budget policy, budgetary control, epidemic, gross domestic product, infectious disease, macroeconomics, public debt, stability pact

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 20.5.2020  COM(2020) 540 final  REPORT FROM THE COMMISSION Finland  Report prepared in accordance with Article 126(3) of the Treaty on the Functioning of the European Union  
 
 
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  

On  20  March  2020,  the  Commission  adopted  a  Communication  on  the  activation  of  the 
general escape clause of the Stability and Growth Pact. The clause, as set out in Articles 5(1), 
6(3),  9(1)  and  10(3)  of  Regulation  (EC)  1466/97  and  Articles  3(5)  and  5(2)  of  Regulation 
(EC) 1467/97, facilitates the coordination of budgetary policies in times of severe economic 
downturn.  In  its  Communication,  the  Commission  shared  with  the  Council  its  view  that, 
given  the  expected  severe  economic  downturn  resulting  from  the  COVID-19  outbreak,  the 
current  conditions  permit  activation  of  the  clause.  On  23  March  2020,  the  Ministers  of 
Finance of the Member States agreed with the assessment of the Commission. The activation 
of  the  general  escape  clause  allows  for  a  temporary  departure  from  the  adjustment  path 
towards  the  medium-term  budgetary  objective,  provided  that  this  does  not  endanger  fiscal 
sustainability in the medium term. For the corrective arm, the Council may also decide, on a 
recommendation  from  the  Commission,  to  adopt  a  revised  fiscal  trajectory.  The  general 
escape  clause  does  not  suspend  the  procedures  of  the  Stability  and  Growth  Pact.  It  allows 
Member States to depart from the budgetary requirements that would normally apply while 
enabling  the  Commission  and  the  Council  to  undertake  the  necessary  policy  coordination 
measures within the framework of the Pact. 

Data  notified  by  the  Finnish  authorities  on  31  March  2020  and  subsequently  validated  by 
Eurostat1 show that the general government deficit in Finland reached 1.1% of GDP in 2019, 
while general governent gross debt stood at 59.4% of GDP. According to the 2020 Stability 
Programme, Finland plans a deficit of 7.2% of GDP in 2020, while debt is planned at 69.1% 
of GDP. 

The planned deficit for 2020 provides prima facie evidence of the existence of an excessive 
deficit as defined by the Stability and Growth Pact. 

Against this background, the Commission has therefore prepared this report, which analyses 
Finland’s  compliance  with  the  deficit  criterion  of  the  Treaty.  The  debt  criterion  can  be 
considered to be met as the debt ratio in 2019 was  below the Treaty reference value of 60% 
of  GDP.  It  takes  into  account  all  relevant  factors  and  gives  due  consideration  to  the  major 
economic shock linked to the COVID-19 pandemic.  

1 

https://ec.europa.eu/eurostat/documents/2995521/10294648/2-22042020-AP-EN.pdf/6c8f0ef4-6221-1094-

fef7-a07764b0369f 

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

2016 

2017 

2018 

2019 

-1.7  

-0.7 

-0.9 

-1.1 

2020 
COM 

-7.4 

2021 
COM 

-3.4 

Deficit 
criterion 

Debt 
criterion 

General 
government 
balance 
General 
government 
gross debt 

63.2  

61.3 

59.6 

59.4 

69.4 

69.6 

Source: Eurostat, 2020 Stability Programme, Commission 2020 spring forecast 

2. 

DEFICIT CRITERION  

Based  on  the  2020  Stability  Programme,  Finland’s  general  government  deficit  in  2020  is 
planned to reach 7.2% of GDP,  above and not close to the Treaty reference value of 3% of 
GDP.  

The excess over the Treaty reference value in 2020 is exceptional, as it results from a severe 
economic  downturn.  Taking  into  account  the  impact  of  the  COVID-19  pandemic  on 
Finland’s  economy,  the  Commission  spring  forecast  projects  a  contraction  of  real  GDP  in 
2020 by 6.3%. 

The excess over the Treaty reference value is not temporary based on the Commission 2020 
spring forecast, which projects the deficit to remain above 3% of GDP in 2021.  

In  sum,  the  planned  deficit  for  2020  is  above  and  not  close  to  the  3%  of  GDP  Treaty 
reference value. The excess is considered to be exceptional but not temporary as defined by 
the Treaty and the Stability and Growth Pact. Hence, the analysis suggests that  prima facie 
the deficit criterion as defined by the Treaty and Regulation (EC) No 1467/97 is not fulfilled. 

3. 

RELEVANT FACTORS 

Article 126(3) of the Treaty 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. That 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”.  

Those 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 to the Commission” need to be 
given  due  consideration.As  specified  in  Article  2(4)  of  Regulation  (EC)  No  1467/97,  as 
regards  the  deficit  criterion,  since  the  government  debt-to-GDP  ratio  exceeds  the  60% 
reference value and the double condition is not met – i.e. that the deficit remains close to the 
reference  value  and  that  its  excess  over  the  reference  value  is  temporary  –  those  relevant 
factors cannot be taken into account in the steps leading to the decision on the existence of an 
excessive deficit on the basis of the deficit criterion for Finland. However, the Commission 
recognises  the  exceptional  nature  of  the  circumstances  leading  to  the  assessment  of 
compliance with the deficit criterion in 2020. 

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In the current situation, a key additional factor to take into consideration regarding 2020  is 
the recent activation of the general escape clause in the light is the economic impact 
of the COVID-19 pandemic, which has a very substantial impact on the budgetary 
situation and results in a highly uncertain outlook. The pandemic has also led to the 
activation of the general escape clause. 

3.1. 

 COVID-19 pandemic 

The  COVID-19  pandemic  has  led  to  a  major  economic  shock  that  is  having  a  significant 
negative  impact  throughout  the  European  Union.  The  consequences  for  GDP  growth  will 
depend  on  the  duration  of  both  the  pandemic  and  of  the  measures  taken  by  national 
authorities and at European and global level to slow its spread, protect production capacities 
and  support  aggregate  demand.  Member  States  have  already  adopted  or  are  adopting 
budgetary  measures  to  increase  the  capacity  of  health  systems  and  provide  relief  to  those 
individuals  and  sectors  that  are  particularly  affected.  Significant  liquidity  support  measures 
and  other  guarantees  have  also  been  adopted.  Subject  to  more  detailed  information,  the 
competent statistical authorities are to examine whether those measures entail an immediate 
impact on the general government balance or not. Together with the fall in economic activity, 
those measures will contribute to substantially higher government deficit and debt positions. 

3.2 

Medium-term economic position  

Already prior to the crisis, Finland’s economic growth was slowing down. Economic growth 
is severely affected as a result of the COVID-19 pandemic and the measures taken to contain 
it.  Real  GDP  is  forecast  to  contract  sharply  by  about  6.3%  in  2020,  before  rebounding  to 
3.7%  in  2021.  Private  consumption  and  private  investment  are  expected  to  be  the  main 
drivers of the slowdown in 2020, while government consumption and investment will support 
the economy. The macroeconomic forecast underlying the Stability Programme assumes that 
Finland’s gross domestic product will contract by 5.5% in 2020 and grow by 1.3% in 2021, 
driven by the  same  combination of factors.  The sharp drop of GDP in  2020 is  a mitigating 
factor in the assessment of Finland’s compliance with the deficit criterion in 2020. 

High  uncertainties  and  rising  unemployment  are  expected  to  shrink  domestic  demand  in 
2020.  Households  are  expected  to  increase  precautionary  savings,  delaying  discretionary 
spending  and  reducing  consumption.  Private  investment  is  set  to  fall  sharply  due  to  the 
uncertain  outlook  in  both  the  housing  market  and  the  business  sector.  Contribution  of  net 
exports will be negative. The labour market, already stagnant prior to the crisis, is set to be 
strongly affected. Unemployment is set to rise markedly by mid-2020.  

There is an exceptionally high level of uncertainty about the evolution of the pandemic and 
the timeline of de-confinement measures, and their impact on economic activity.. Downside 
risks  to  the  forecast  scenarios  mostly  relate  to  the  length  and  severity  of  the  pandemic-
induced domestic and foreign demand shock. A more prolonged crisis in some leisure-related 
activities,  such  as  the  cruise  ship  industry,  could  cause  a  sizeable  additional  shock  to 
Finland’s  public  finances.  On  the  other  hand,  Finland’s  main  trading  partners  appear  to  be 
entering  a recovery period more quickly than previously expected. 

3 

 
 
3.3 

 Medium-term budgetary position 

On  13  July  2018,  Finland  was  recommended  to  ensure  that  the  nominal  growth  rate  of  net 
primary  government  expenditure  does  not  exceed  2.9%  in  2019  (‘the  expenditure 
benchmark’), corresponding to a structural adjustment of  -0.2% of GDP.2 Based on outturn 
data and the Commission forecast the growth of primary government expenditure led to some 
deviation  from  the  recommended  adjustment  path  towards  the  medium-term  budgetary 
objective  in  2019.  The  structural  balance  also  points  to  some  deviation  in  2019.  Therefore, 
the  overall  assessment    indicates  some  deviation  from  the  recommended  adjustment  path 
towards the medium-term budgetary objective in 2019.   

The economic slowdown and the measures taken by the government to contain the spread of 
the COVID-19 virus are set to take a heavy toll on public finances. In the first supplementary 
budget  for  2020,  the  government  introduced  many  fixed-term  and  targeted  measures  to 
combat  the  impact  of  the  coronavirus  pandemic  on  human  health  and  the  economy.  The 
measures include discretionary investments totalling approximately EUR 4.1 billion in 2020–
2024.  They  weigh  particularly  on  the  2020  budget  that  frontloaded  expenditure  related  to 
implementation of the 2019-2023 government programme. 

The  pandemic  relief  measures  adopted  by  mid-April  2020  have  a  fiscal  cost  amounting  to 
1.7% of GDP in 2020. Most of the measures consist of subsidies for the most affected sectors 
of the economy, helping SMEs and the self-employed get through the lockdown period. The 
government  also  decided  to  lower  temporarily  social  contributions.  Spending  on  healthcare 
and  medical  supplies,  public  order  and  border  protection  is  also  covered.  In  addition,  the 
impact of automatic stabilisers ranging from 3% to 4% of GDP, i.e. lower tax revenues and 
higher  expenditure  on  social  security,  will  further  weigh  on  public  finances.  Overall,  the 
impact of the crisis is currently projected to worsen the general government balance to -7.2% 
of GDP in 2020.  

Although  an  economic  recovery  is  expected  in  2021,  government  revenues  are  expected  to 
remain below their pre-crisis forecasts, based on a no-policy-change assumption. The bulk of 
expenditure related to the pandemic is expected to be fully cancelled by the end of 2020, but 
some business support programmes are set to continue. The government is also expected to 
incur  some  losses  from  the  loans  and  investments  it  has  guaranteed.  Consequently,  the 
general  government  balance  projected  for  2021  is  -3.4%  of  GDP,  according  to  the 
Commission forecast.  

The  fiscal  projections  are  surrounded  by  a  high  degree  of  uncertainty  stemming  from  the  
macroeconomic  developments,  the  amount  of  guarantees  called,  the  budgetary  costs  of  the 
relief  measuress  adopted  to  mitigate  the  COVID-19  pandemic  and  the  need  to  adopt 
additional measures.  

3.4.  Medium-term government debt position 

According to the Commission 2020 spring forecast, general government debt is expected to 
rise  from  59.4%  of  GDP  in  2019  to  69.6%  by  2021.  The  debt  sustainability  assessment 
indicates  that  notwithstanding  some  risks,  the  debt  position  remains  sustainable  over  the 
medium-term,  which  also  takes  account  of  important  mitigating  factors  (including  the  debt 

2 Council Recommendation of 13 July 2018 on the 2018 National Reform Programme of Finland and delivering 
a Council opinion on the 2018 Stability Programme of Finland, OJ C 320, 10.9.2018, p. 112. 

4 

 
 
                                                            
profile). In particular, while the debt position deteriorates as a result of the COVID-19 crisis, 
the debt ratio in the baseline is expected to be on a sustainable (declining) trajectory over the 
medium term .3 

Graph 1: Government debt-to-GDP ratio, Finland, % of GDP 

80

75

70

65

60

55

50

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

Baseline

Adverse scenario

Source: Commission services 

3.5 

Other factors put forward by the Member State  

On  11  May  2020,  the  Finnish  authorities  transmitted  a  letter  with  relevant  factors  in 
accordance with Article 2(3) of Regulation (EC) No 1467/97. The analysis presented in the 
previous  sections  already  broadly  covers  the  key  factors  put  forward  by  the  authorities. 
Additional factors not yet mentioned above are the government’s plans for structural reforms 
and  enhancing  long-term  sustainability.  They  cover  in  particular  preparations  for  the  social 
and health care services reform as well as of a roadmap to reduce the fiscal sustainability gap. 
Furthermore, the letter recalls that Finland has a strong net asset position, which can be used 
to promote future growth and improve the long-term sustainability of the economy. Finally, 
the government affirms that it will outline an economic policy package in the budget sesssion 
in  autumn  2020.  It  will  also  prepare  a  fully-fledged  Stability  Programme,  including  multi-
annual  targets  for  general  government  finances.  The  letter  emphasises  that  the  Stability 
Programme submitted on 30 April 2020 presented only the independent macroeconomic and 
fiscal forecasts for 2020-2022 and  not the government’s officially adopted fiscal targets. 

3   The baseline is based on the Commission Spring 2020 forecast. Beyond 2021, a gradual adjustment of fiscal 
policy  is  assumed,  consistent  with  the  EU  economic  and  fiscal  coordination  and  surveillance 
frameworks.  Real  GDP  growth  is  projected  according  to  the  so-called  EPC/OGWG  T+10 
methodology. In particular, (real) actual GDP growth is driven by its potential growth and affected by 
any  additional  fiscal  adjustment  considered  (through  the  fiscal  multiplier).  Inflation  is  assumed  to 
converge gradually to 2%. Interest rates assumptions are set in line with financial market expectations. 
Under  the  adverse  scenario,  higher  interest  rates  (by 500 bps.)  and  lower  GDP  growth (by  -0.5  pp.), 
with respect to the baseline, are assumed (throughout the projection horizon). 

5 

 
 
 
                                                            
4. 

CONCLUSIONS 

According to the 2020 Stability Programme, Finland’s headline general government deficit in 
2020  is  planned  to  reach  7.2%  of  GDP,  above  and  not  close  to  the  3%  of  GDP  Treaty 
reference value. The planned excess over the reference value is considered to be exceptional 
but not temporary.  

In line with the Treaty and the Stability and Growth Pact, this report also examined relevant 
factors. As specified in Article 2(4) of Regulation (EC) No 1467/97, as  regards compliance 
with the deficit criterion in 2020, however, since the government debt-to-GDP ratio exceeds 
the  60%  reference  value  and  the  double  condition  is  not  met  –  i.e.  that  the  deficit  remains 
close  to  the  reference  value  and  that  its  excess  over  the  reference  value  is  temporary  –  the 
relevant  factors  cannot  be  taken  into  account  in  the  steps  leading  to  the  decision  on  the 
existence of an excessive deficit on the basis of the deficit criterion for Finland.  

Overall,  the  analysis  suggests  that  the  deficit  criterion  as  defined  in  the  Treaty  and  in 
Regulation (EC) No 1467/1997 is not fulfilled.  

6