Finland was along with Germany one of the biggest advocates of austerity during the European debt crisis. However, while Germany has set an example and has shown Europe the way to have an increasingly lower debt to GDP ratio, Finland is having a hard time reducing this ratio. The country’s government is increasingly concerned about what may happen in the coming years: if we don’t reduce debt now that rates are low and demographics are still on the cards, what will happen in the future?
Finnish Finance Minister Petteri Orpo says his country must start paying off part of the central government’s €120 billion debt before the opportunity to control the situation disappears, that is, before interest rates stop being so friendly.
The whole of the public administrations of Finland accumulate a debt of 137,000 million euros, more than 60% of GDP. In the third quarter of 2008, Finland’s total public debt fell below 30% of GDP.
Interest rates and aging
“We have to start repaying debt before the cost hits us,” Orpo said in an interview in Turku, on Finland’s southern coast. “As the population ages and we replace our fleet of Hornet fighter jets, paying down debt in the decade beginning in 2020 could become impossible without very strong growth and high employment.”
Since 2008, Finland has been unable to post a fiscal surplus, and central government debt has almost doubled since 2008. In that period, the Nordic country experienced what officials called a “lost decade” in a fatal combination starring by the global financial crisis and the fall of key industries for the country such as paper and consumer electronics, which eliminated 100,000 jobs in an economy with 5.5 million inhabitants.
It is true that Finland still has the second highest rating from Moody’s, S&P and Fitch Ratings, and that the interest paid on its bonds is among the lowest in the euro area, reflecting investors’ confidence in its ability to pay the interest on the debt. But debt levels are considerably higher than those of Denmark, Sweden and Norway.
Sweden and Denmark enjoy budget surpluses, while the public debt of Norway and Denmark is 36% of GDP and that of Sweden is 40%, ratios much lower than those of Finland. In addition, while in the rest of the Nordic countries the GDP began to grow in 2012, in Finland the expansionary cycle did not begin until 2016, four years later.
This year Finland’s gross domestic product could (finally) reach the level it was before the global financial crisis hit 10 years ago, with the Ministry of Finance forecasting an annual GDP expansion of 2.2% until 2022. Quarterly economic growth has reached its highest level in seven years and debt has fallen slightly relative to GDP. In absolute terms, however, the debt is growing and the authorities are wondering how they are going to address the demographic challenge with ever-increasing debt.
Finland’s population is aging at a rate almost double the European Union average and the proportion of people over 65 has grown by 4.4 percentage points in the last ten years, according to Eurostat. The curve is so steep that a few years ago Finland was the fastest-aging country in the entire EU. That increases the costs of health and care as well as the payment of pensions, which sustains a shrinking group of taxpayers and feeds a growing hole in public finances.
The increased pressure on government coffers makes the need for action more urgent, especially as Orpo warns that the current recovery in economic growth could end soon. “I’ve studied enough economics to know that at some point there will be a recession,” he explains. “As Finland joined very late in global economic growth, there is a danger that the growth will be short-lived.”
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