Austerity Zeal Wears Thin in Finland as Spending Talks Begin

Commitment to austerity is showing signs of waning in Finland, where a recession has prompted the government to reconsider its fiscal targets.

Prime Minister Jyrki Katainen’s six-party coalition will meet today in Helsinki to discuss a budget framework for the next four years. The government will need to balance measures to help reach its goals of halting debt growth and supporting a AAA rating without hampering the economy.

“Economic outlook has weakened since last year,” Finance Minister Jutta Urpilainen said to reporters today on her way to the talks. “It’s important that the government be able to take decisions, and I believe we’ll be able to decide on measures that support economic growth and create jobs.”

Finland’s economy shrank last year as Europe’s debt crisis deepened, hurting exports and eroding consumer confidence in the northernmost euro nation. The country is now mired in its second recession in four years, making the government’s budget goals less attainable and adding to the cost of caring for Europe’s fastest-aging population.

“The government has woken up to the fact that economic growth won’t be as fast as assumed,” said Pasi Kuoppamaeki, chief economist at Danske Bank A/S (DANSKE) in Helsinki.

The government targets ending debt growth by 2015 and bringing the central government deficit to within 1 percent of gross domestic product from last year’s 3.4 percent. Katainen signaled on March 17 Finland may scrap the budget goal to avoid excessive austerity in a bid to support the economy.

Foster Growth

The coalition will examine whether reaching the target “is best done through as many spending cuts and tax increases as possible or by ending debt growth and by taking measures that foster growth,” Katainen said on March 17.

Finland’s jobless rate climbed to 8.7 percent in January from 7.8 percent a year earlier as companies including Kemira Oyj (KRA1V), the maker of water-treatment chemicals, and crane maker Konecranes Oyj (KCR1V) cut jobs to stay profitable.

Labor unions and employers last night failed to reach an agreement over a wage deal spanning most industries that the government had asked for, according to statements by the organizations.

“I would have hoped for a moderate labor market deal to support the government’s fiscal policy,” Urpilainen said. “The government still needs to make its own decisions.”

Corporate Tax

The nation faces pressure to lower company taxes from 24.5 percent after Sweden and Denmark both cut their rates to 22 percent. The Confederation of Finnish Industries, Finland’s main employer organization whose members contribute more than 70 percent of national output, last month called for a 15 percent corporate tax rate to create 100,000 new jobs.

“They’ll probably lower the corporate tax rate,” Kuoppamaeki said. “Still, they probably won’t cut it to 15 percent. That would be too radical in this situation.”

Urpilainen, who heads the Social Democrats, signaled she may now agree to cutting corporate taxes. Her party has prioritized tax increases in previous fiscal policy decisions.

“Reducing company taxes, and in general easing taxation with the aim of boosting growth and stimulating job creation, will bring in more tax revenue over the long term,” she said.

Finland is the only euro-member with a stable AAA rating at Standard & Poor’s, Moody’s Investors Service and Fitch Ratings. Germany and Luxembourg have negative outlooks on their top credit grades at Moody’s, and the Netherlands faces a downgrade at all three companies.

Tax Reform

“These decisions are also key to keeping the credit rating as high as possible,” Kuoppamaeki said. “Budget cuts are only one measure, as rating companies have said in the past Finland must also take structural reforms, including raising the retirement age.”

Katainen also signaled last week his National Coalition Party is willing to lower taxes that hamper job creation.

“There is only one goal to our tax reform goals: to add to the number of jobs in Finland,” he said on March 16. “We want to reduce taxes that discourage employment and tighten those that aren’t so detrimental to work.”

Finland’s general government deficit, which includes municipalities and pension funds, was 1.9 percent last year, according to the statistics office. That shortfall is in line with the European Union 3 percent rule, which Finland hasn’t breached since 1996.

The government is also set to reveal new forecasts. The Finance Ministry forecasts gross domestic product will expand 0.4 percent this year, state-owned broadcaster YLE reported on March 19, citing people it didn’t identify. That compares with a 0.5 percent projection on Dec. 20.

“The growth outlook is weaker and the government needs to react,” Kuoppamaeki said. “The best way would be to stimulate the economy, which Finland can’t do, so it will have to reduce expenditure to match lower revenue to stop the budget deficit from widening.”

To contact the reporter on this story: Kati Pohjanpalo in Helsinki at kpohjanpalo@bloomberg.net

To contact the editor responsible for this story: Tasneem Brogger at tbrogger@bloomberg.net

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