FINLAND: GOVERNMENT UNVEILS 2 BILLION EURO

UNCLAS HELSINKI 000045 SENSITIVE SIPDIS E.O. 12958: N/A TAGS: ECON EFIN FI PREL SUBJECT: FINLAND: GOVERNMENT UNVEILS 2 BILLION EURO STIMULUS PACKAGE ¶1. Summary: The Government of Finland (GOF) agreed on a stimulus package January 30 which is expected to have an overall impact of EUR 2 billion. The package was presented to parliament on February 3 as part of an overall supplementary budget request, the primary objective of which is to promote employment by making investments in transport infrastructure, construction, education and research. Additionally, the package seeks to lower companies' labor costs by removing the national pension contribution paid by employers. GOF Finance Ministry officials told econoff February 4 that while the package was solid, Finland will carefully monitor the amount of debt needed to pay for the stimulus. Sami Ylaoutinen, Director of the Stability Unit at the Finance Ministry, underscored to econoff the GOF's interest in crafting a responsible stimulus that would not risk putting the long-term sustainability of public finances in jeopardy, given the impending decline in the working-age population that will be responsible for paying off the larger debt. ¶2. Politically, each of the four parties in the current coalition government is able to claim credit for various provisions. The Swedish People's Party, for example, pushed for EUR 30 million for the refurbishment of the Swedish Theater in Helsinki. The deficit created in the public finances due to the abolition of the social insurance contribution will be mainly financed by increasing energy and environmental taxes for industry and commerce, a key demand of the Green Party. The rise in popularity of the National Coalition Party has led the ruling Center Party to to make the occasional dig at the popular NCP Finance Minister Jyrki Katainen, who has been rated by the Financial Times as the most effective Finance Minister in Europe. End Summary. Finnish Economic Situation Deteriorating Rapidly, But Remains Sound -------------- -------------- ¶3. In Finland, the impact of the economic downturn is most acutely felt in central government finances. The GOF Finance Ministry predicts that the National Accounts deficit will be -2.3 GDP in 2009 and local government finances will also slip into deficit this year. The budget surplus that has made Finland the envy of Europe will melt away in 2009 and with the supplementary budget, Finland will face a -0.4 percent deficit. Public debt, which in 2008 stood at the �A;comparatively low level of 33 percent of GDP is also expected to rise sharply in 2009 and government forecasters predict that the public debt to GDP ratio will climb by at least 5 percentage points to 38 percent. (One risk scenario posits a rise to 60% in the next four years if there is no change in the economic situation.) Government Agrees on Stimulus Measures -------------- ¶4. The stimulus package adopted by the Finnish government on January 30 will weaken the balance of central government finances by EUR 912 million in 2009. Added to measures taken separately to boost financial markets, the total impact of the stimulus measure amounts to roughly 1.7 percent of GDP. In addition to the investments noted in para 1, the package includes provisions to lower labor costs by removing the national pension contribution paid by employers. This reduction is intended to be permanent. Finance Minister Katainen has stated publicly that since Finland is such a relatively small economy, whatever it does will not change the global economic situation. According to a press release, through this packgage the government hopes to "minimize the number of people who, as a result of the international economic downturn, have become affected by cyclical unemployment, and to carry them over the hard times." Over the next month, Parliament will debate the stimulus package, but since the government has endorsed it, parliament is expected to pass it with only minor changes. Politics and Economics -------------- ¶5. The Finnish government justifiably prides itself on a collaborative approach to government decisionmaking. According to Ylaoutinen, given the reality of the economic downturn, the government was under pressure to make the package appear generous. In a recent survey, the Center Party of Prime Minister Vanhanen polled an unprecedented 5 percentage points below the conservative National Coalition Party (NCP). Fighting for his party and struggling to demonstrate leadership, in mid-January PM Vanhanen proposed the initiation of a massive decade-long investment program, worth tens of billions of euros. Saying that he was "disappointed" with unbridled economic liberalism, Vanhanen said that the government needs to assume a stronger role under all circumstances, not just crises. Although he admitted that his proposal was "just a loose vision", its timing and scope was intended to contrast sharply with that presented by NCP Finance Minister Katainen, who in December 2008 called for a 100 million euro stimulus package, a measure that in comparison with Vanhanen's proposal, seems already outdated. The opposition Social Democrat Party (SDP) has criticized the government (and the current stimulus package) for doing too little, too late, but it has been unable to put forward viable alternatives or translate its criticism into increased support. ¶6. At the forefront of all politicians' minds is the Finnish experience in the early 1990s when a severe recession crippled the economy and destroyed families. Against this backdrop, the supplementary budget was quietly developed under the leadership of Ministry of Finance State Secretary Raimo Sailas who consulted with the Prime Minister and with all coalition parties. Despite the rising popularity of the junior coalition partner NCP, the process ran smoothly and swiftly. The consensus is that all governing coalition partners got something. BUTLER