Finland Keeps Debt Target as Government Seeks New Direction

Finland’s government is looking for new alternatives as it seeks to reduce spending to limit deficits and debt growth while struggling to emerge from a recession.

“We must absolutely find a new direction on jobs, the sustainability gap and budget,” Prime Minister Jyrki Katainen told reporters in Helsinki today at his Cabinet’s half-term review. “Finland needs new private-sector jobs.”

The government reiterated targets agreed on in June 2011 to end debt growth by 2015 and to pursue austerity if the central government budget deficit consistently exceeds 1 percent of gross domestic product. The shortfall was estimated at 3.6 percent last year and 3 percent this year, according to a Finance Ministry Dec. 20 outlook. The coalition has also agreed to protect the northernmost euro member’s AAA credit rating.

Finland fell into a recession in the first half of last year as the euro crisis deepened, hurting confidence and sapping demand. National output remains below the 2008 level after two recessions in four years and Finland is in its fifth year of budget deficits instead of the surpluses it needs to pay for its aging population.

The government said its priorities for the remaining two years of its term are to create jobs and make business more competitive to foster economic growth. It will agree on specific measures in talks on the next four-year spending framework slated for March 21.

Faster Reforms

Finland must accelerate the pace of economic reforms, “selling and communicating” the reforms to the public, said Angel Gurria, secretary-general of the Organization for Economic Cooperation and Development. He spoke to the ministers in Helsinki ahead of their meeting today.

The economy will grow 0.3 percent this year after shrinking an estimated 0.1 percent in 2012, the European Commission said last week. Next year, growth will accelerate to 1.2 percent, assuming the government’s policies won’t change, the executive said.

The overall budget deficit was estimated at 1.6 percent of GDP in 2012 and 1.5 percent this year. Finland plans to set up a fund to provide financing to start-up companies, Katainen said. The fund will also include private equity, he said. The Cabinet will assess amending taxation on small and medium-sized companies traded on exchanges to correspond with taxation of non-listed businesses.

The government has so far struggled to find common ground on budget cuts, settling on tax increases for most of the balancing. It raised value added tax rates by 1 percentage point at the start of the year, bringing the main rate to 24 percent. Social security accounts for about 43 percent of the government’s expenditure and health care for about 14 percent, including funds spent by municipalities, according to the Finance Ministry.

Finland is the only euro-area country with a stable AAA credit rating intact at three rating companies. Germany’s debt grade has a negative outlook at Moody’s Investors Service.

Statistics Finland will publish fourth-quarter GDP data tomorrow.

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