Economists question Finnish government’s budget and investment plans

THE FISCAL AUSTERITY pursued by the Finnish government could erode the economic situation and widen the debt ratio, warns Lauri Holappa, an economist at the Finnish Centre for New Economic Analysis (UTAK).

Holappa issued the warning in an interview last week with YLE, pointing to a recent study by the International Monetary Fund (IMF).

“The study examined the adjustment periods for fiscal policy in different countries, how well they have succeeded. The results were partly crushing,” he summarised to the public broadcasting company.

The study concluded that spending cuts implemented during an economic downswing fail to produce the desired results because they aggravate the economic situation and create pressure to add to public debt.

“Ultimately the outcome is that the debt ratio doesn’t improve; it may even start rising as a consequence of tight fiscal policy,” remarked Holappa.

The Finnish government is seeking to reduce the public debt burden as sluggish economic growth and eroding employment situation are ensuring the burden continues to grow.

“The Finnish economy diverged from the rest of the Nordics, like Sweden and Denmark, in the 2010s, when Finland fell behind these countries in the post-financial crisis era. This led to Finland’s public debt rising, while the other countries were turning around their debt trends,” he recounted.

Aki Kangasharju, the managing director of Etla Economic Research, said Finland’s debt burden is growing as a consequence of long-running muted growth, the after-effects of the coronavirus pandemic and population ageing.

The Finnish government, he viewed, made the right choice to stand by its fiscal adjustment target – even if the adjustments temporarily inhibit economic growth – but failed to decide on sufficient measures to support growth and productivity at the budget session held last week. It is consequently uncertain whether the debt ratio can be reversed and likely that the credit rating will take additional hits.

“What’s missing are proper growth measures. How can we get economic growth, how can we get better productivity?” he said to YLE.

Kangasharju and Mika Maliranta, the director at the Labour Institute for Economic Research (Labore), have also criticised the government’s plan to sell state assets to make investments in transport infrastructure projects such as road improvements and raise reimbursements for private health care costs, Helsingin Sanomat reported last Thursday.

While Kangasharju is concerned that the proceeds of asset sales will not be used effectively, Maliranta views that the very idea of selling assets to fund investments is “bad and misleading”.

Kangasharju stated to the newspaper that the government could certainly streamline what, in comparison to peer countries, is a fairly bloated asset portfolio.

“Whenever you give even a bit of money to a politician, they’ll spend it all and not all of it will be spent effectively,” he cautioned.

He urged the government to at least give up on raising reimbursements for private health care costs given that there is no evidence to suggest the raise will reduce waiting times in the public health care system. He would direct a larger share of the four-billion-euro investment programme at supporting scale-up companies through instruments such as Finnish Industry Investment.

“We don’t have [investor families] like the Wallenbergs [in Sweden], meaning we don’t have financing that small Finnish companies could use to become bigger. Presently they’re sold abroad for a couple of tens of millions,” said Kangasharju.

Asset sales were used to fund investments also under Prime Minister Juha Sipilä (Centre) and Antti Rinne (SDP). The programme outlines by the current government is significantly larger, though.

Maliranta told Helsingin Sanomat that productive investments should be funded by borrowing and not mixed needlessly with asset sales.

“Linking asset sales and investments makes things needlessly complicated,” he said, arguing that there is fundamentally no difference between borrowing and divestment. “When you sell assets, it means you’ll get less revenue from the assets in the coming years.”

Both of the economists commended the programme for focusing primarily on improving the rail and road network.

“Maintaining and developing existing infrastructure is often more effective than building new connections,” said Kangasharju. “Economists are widely in agreement that the basic infrastructure must be intact. Otherwise the economy doesn’t work.”

Aleksi Teivainen – HT