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Finnish economy deficit to remain "substantial" in 2021

Authorities say direct tax increases will be needed to finance the imbalance between revenue and expenditure.

Public debt relative to GDP will also grow in the coming years and is estimated to reach 75% in 2025.

Photograph published last week (10 December) by the Finnish government to celebrate the first anniversary of the Government led by Sanna Marin. Photo: Laura Kotila/Vnk.
Photograph published last week (10 December) to celebrate the first anniversary of the Government led by Sanna Marin. Photo: Laura Kotila/Vnk.

Finland, one of the champions of the European Union (EU) when it comes to demanding fiscal discipline, says its public accounts are out of balance and that they will continue to be so next year. According to the Finnish government, the reasons are the weak business environment and the measures taken in response to the Covid-19 pandemic. 

The authorities say direct tax increases will be needed in 2021 to finance this imbalance.

In its 'Economic Survey Winter 2020', published 17 December, the Ministry of Finance foresees that the current fiscal deficit will remain "substantial" in 2021, partly because the state will be forced to undertake important social and health expenses now delayed due to the coronavirus pandemic.

The government actions taken to support companies, citizens and the economy will also take their toll. And this additional need for financing will cause public debt to increase even more in the coming years.

"The imbalance between general government revenue and expenditure will remain above 5% of GDP in 2021. The deficit will gradually decline in the coming years but will, however, remain so high that it appears that the general government debt-to-GDP ratio will continue to grow throughout the early 2020s," the Ministry says in its winter forecast.

Forecast-figures-finnish-economy-winter-2020

Source: 'Economic Survey Winter 2020' by Ministry of Finance.

Increase taxes

The Ministry of Finance estimates that the imbalance of the general government accounts in relation to the Gross Domestic Product (GDP) will reach 6.1% in 2020 and 5.2% in 2021. In billions of euros, the deficit in general government finances will in 2020 grow from 2.3 to 14.4 billion euros and remain at 12.6 billion euros in 2021. 

Central government finances are expected to show a deficit of 14.3 billion euros in 2020, more than 6% relative to GDP. The recipe of the Ministry of Finance for dealing with the problem is quite orthodox and includes - of course - tax increases:

"In 2021, the central government deficit will shrink considerably with a sharp increase in revenue, boosted by rising direct taxes. In contrast, expenditure will not decrease in 2021 because most of the increases to subsidies and current expenditure granted in 2020 will be disbursed in 2021. These include the procurement of the vaccines and protective and testing equipment necessitated by the COVID-19 pandemic," the Ministry says.

On the other hand, the local government financial position is expected to further deteriorate, showing in 2021 a deficit of approximately 1.4 billion euros despite the recovery of the economy and the support measures undertaken by the central government.

Public debt

The government admits that this imbalance of public accounts will take a large bill in the future in terms of increasing public debt.

In 2020, public debt relative to GDP will increase from less than 60% to 69%. The growth of the debt ratio will slow down in 2021 when the pandemic abates and economic recovery sets in, but still it will keep increasing.

According to the government forecast, public debt will increase from less than 60% to 69% relative to GDP in 2020. The growth of the debt ratio will slow down in 2021 when the pandemic abates and economic recovery sets in, but still it will continue to increase. The public debt ratio is estimated to reach 75% in 2025.

"As a result of the COVID-19 pandemic, the imbalance of general government finances is exceptionally grave and public debt has reached unprecedented levels. Moreover, due to the ageing population, public spending appears to continue to grow faster than revenues," the Ministry of Finance says.

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