Finland Unveils Plan to Plug Budget Hole as Cabinet Formed

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Finland’s new government announced an economic plan that includes across-the-board spending cuts on everything but defense to plug a budget hole and resurrect the northernmost euro economy.

Prime Minister-elect Juha Sipila of the Center Party spent three weeks hammering together an alliance, which will include Alexander Stubb of the National Coalition as finance minister and euro-skeptic The Finns Party’s Timo Soini as foreign and Europe minister. The government is set to take power on Friday.

Finland has “big, painful decisions ahead,” Sipila, a self-made millionaire, said at the press briefing in Helsinki.

The new coalition, which won 124 seats in the 200-member legislature in April’s election, conceded it won’t be able to end growth in public debt over the next four years, even as it targets 4 billion euros in spending cuts. The government also unveiled a 1.6 billion-euro investment package, including 600 million euros on infrastructure and 1 billion euros on “key strategic projects.”

The biggest reductions will be made to benefits, a total of more than 1 billion euros by 2020, and social and health-care spending will be cut by about 450 million euros. Education spending will be lowered by about 560 million euros and development aid by 200 million euros.

“Austerity will limit domestic demand in the short run but the structural measures should boost confidence and growth over the longer term,” said Pasi Kuoppamaki, chief economist at Danske Bank A/S in Helsinki, in a note.

Repairing Damage

More than 1 billion euros of impact will come from freezing indexation on various state payments, such as many social benefits, grants to municipalities and funding for universities, which will now remain at current levels. Military spending will be increased by 130 million euros.

After three years of recession, the government will need to repair the damage done by the demise Nokia Oyj’s mobile-phone business and a slump in trade with Russia. The decline of the nation’s paper industry has also wiped out thousands of jobs, leaving unemployment above 10 percent as growth hobbles along at half the euro-area average.

Public debt has doubled since 2008, prompting a rebuke from the European Union after Finland breached its debt and deficit limits.

Sipila targets a revival of talks with labor unions and employer organizations on ways to boost competitiveness after negotiations collapsed earlier this month. Should a deal reducing labor costs by 5 percent be reached by Aug. 21, the government will cut income tax by 1 billion euros and refrain from implementing further austerity of 1.5 billion euros, he said.

The Center Party will have six ministers in the cabinet, including economy minister, while the National Coalition and The Finns party will each have four. The parties hold internal meetings today to decide on joining the government and plan to appoint their ministers by Thursday night.

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