Finland may scrap its central government deficit target, backing away from excessive austerity in a move Prime Minister Jyrki Katainen signaled will support the economy and help the government halt debt growth.
The six-party coalition may ease a target of narrowing the central government budget deficit to 1 percent of gross domestic product, Katainen said yesterday in an interview with state-owned broadcaster YLE Radio Suomi. He reiterated the aim of ending debt growth by 2015.
“We must assess the means we have of reaching the maximum of 1 percent central government deficit,” Katainen said. “As the amount of austerity needed has increased, the 1 percent deficit target has retreated further.”
Finland is mired in its second recession in four years, according to the statistics office, after the euro-area debt crisis and slowing growth in world trade reduced export demand. The contraction is weighing on the AAA rated government’s finances ahead of March 21 talks in which the Cabinet will decide on further spending cuts and tax increases.
The government 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.
Finland’s central government deficit was 3.4 percent of GDP last year, and its general government shortfall, which also includes municipalities and pension funds, stood at 1.9 percent, according to the statistics office. The general government deficit is in line with the European Union 3 percent rule.
The move to back away from the deficit goal gained support from the Labor Institute for Economic Research today.
“The attempt to reach the deficit goal by significant austerity measures could in the current circumstances cause the economy to contract and tax revenue to decline,” Chief Economist Eero Lehto said in an e-mailed statement. “Large spending cuts and tax increases wouldn’t in that case help reach the target.”
The northernmost euro member’s economy, which contracted 0.2 percent last year, will grow 0.6 percent this year and 2.5 percent in 2014, the institute forecast.
“Two things stand out in ensuring the credibility of our fiscal policy,” Katainen said. Those are, “genuinely bringing down government debt so that each investor with Finnish bonds can rely on this country not amassing excessive debt, and taking decisions that add to the number of jobs and foster economic growth.”