March 24 (Bloomberg) -- Finland’s government started talks to set spending limits for the next four years, seeking to temper austerity as turmoil in Russia adds to the northernmost euro member’s economic woes.
“In the short-term, we mustn’t endanger the long-term goal by such austerity that would lead to higher unemployment or stamping out nascent growth,” Environment Minister Ville Niinistoe, who heads coalition member Green League, said in an interview in Helsinki on March 21. “We can’t afford to get into a vicious cycle of budget cuts. Yet we must in the long-term find ways to halt debt growth over some years.”
Three years of recession in the past five years have eroded Finland’s public finances. The economy, home to Nokia Oyj, is now under new pressure as the crisis stemming from Russia’s annexation of Crimea threatens to disrupt as much as 10 percent of Finland’s exports.
SEB AB last week cut the nation’s growth prospects, saying the economy will only expand 0.2 percent this year, citing the recent “escalation in events.” The country was already struggling to find new growth areas after its biggest companies in key industries, papermaking and technology, were pummeled by slack demand and competition. Finland has Europe’s fastest aging population and must find ways to pay for health care and pensions as fewer people work.
Russia’s economy, the world’s ninth biggest, will shrink for at least two quarters as penalties for annexing Crimea rattle markets, curb investments and raise borrowing costs, according to banks including state-run VTB Capital. The pain could intensify if U.S. and European leaders broaden sanctions.
“The Ukraine crisis may lead to an even bigger structural change and larger adjustment needs in the economy,” Bank of Finland Governor Erkki Liikanen said today. Responses must include “the ambitious and front-loaded implementation of the government’s structural policy program” and “immediate fiscal consolidation is also needed.”
Prime Minister Jyrki Katainen’s six-party coalition agreed in November on a plan to close the 4.7 percent of gross domestic product long-term gap in public finances and it’s already seeing “hundreds of millions of euros” of income, Niinistoe said. Some measures, such as changes to pensions and municipal mergers are still being drafted. The government and opposition struck a deal on health care overhaul yesterday.
“We need to renew the structures of the welfare society so that we have enough money to pay for our high level of wellbeing,” Niinistoe said.
The government will also discuss a new stimulus package to help an economy that’s “weaker than anyone could have guessed,” Finance Minister Jutta Urpilainen said on March 22.
Measures in the “hundreds of millions of euros” may target investments in research and development, clean technology, biotechnology, rail infrastructure and schools, Niinistoe said. This can be funded by scrapping corporate tax exemptions that are harmful to the environment, and by selling state assets such as Senaattikiinteistoet real estate, land and shares in non-strategic companies, he said.
The government plans to raise taxes and reduce spending by as much as 4 billion euros ($5.5 billion), Katainen has said. Urpilainen sees austerity of about 3 billion euros, she reiterated today. A government guideline set in 2011 stipulated that measures are split equally between tax increases and spending cuts.
“My stance is that we’ll hold onto the fifty-fifty principle,” Niinistoe said. “Purely cutting spending too easily hurts people’s services and well-being.”
Urpilainen today signaled the government may ease that principle “if the end result is just with regard to income distribution.”
Reijo Heiskanen, chief economist at OP-Pohjola Group, said the government should refrain from more tax increases and use privatization to boost investments.
“I’d gladly see the all austerity implemented as public-spending cuts,” he said by phone last week. “We’ve slipped in the wrong direction; we’ve so far overall raised taxes more than cut spending.”
The Finnish economy will grow 0.3 percent this year and 1.1 percent in 2015, the International Monetary Fund said on March 14. The government can stretch austerity over several years to avoid stifling economic growth, it said. That means the government won’t reach its target of halting growth in the debt-to-GDP ratio by the next general election in April 2015.
The ruling coalition will still “hold onto that target and aim to narrow the budget deficit each year,” Niinistoe said. Debt will breach the European Union’s 60 percent of GDP threshold this year, according to the Finance Ministry.
Katainen last week said the economy is already feeling the effects of the dispute to its east between Russia and Ukraine.
“As economic activity has waned, it has impacted our exports and hurt Russia’s ability to import,” he said. “This has already had a strong effect on us.”
The government’s talks are due to finish tomorrow with an agreement on spending limits for the next four years. The 2015 budget will be debated in August.
“Potential investments should be started as soon as possible, targeting long-term benefit such as important infrastructure projects or research and development, projects that would increase our production capacity in the long term,” Heiskanen said. “We need a positive surprise to reinforce trust in structural reforms and implement such austerity measures that won’t endanger future growth.”
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