A Brief Presentation of the Economic Development in Finland

Director for Performance Audit Hannu Rajamäki

National Audit Office of Finland

Vilnius 10 June 2011

2

“The officials in the Finnish Ministry of Finance are constantly worried about Finland running into debt. Using their graphs and calculations, they know exactly how to make citizens quake with fear at the terrible consequences of becoming too heavily indebted. Listening to their gloomy predictions, you might imagine that the out-of-control debt spiral has been a particularly difficult problem in Finland for a long time. But it is not quite like that – at least not yet.

In reality, Finland is a country that has constantly avoided becoming too heavily indebted. …”

Dr. Sixten Korkman, CEO, the Research Institute of the Finnish Economy, 2011

3

Recent economic development in Finland

4

2007-2009 crisis in Finland

- Finnish financial sector was insulated from the crisis- Banking sector was in good condition

- Household debt increased but less than in many other countries

- Long-term housing price development relatively moderate (however, EU Commission warns about relative overpricing of real estate)

- In contrast the global recession hit real economy hard- Worldwide collapse in trade

- Composition of Finnish exports (capital goods, ICT)

- Exports declined by 20,5 % in 2009

- In 2009 GDP declined by 8 %- Biggest drop since 1918

5

-10

-8

-6

-4

-2

0

2

4

6

8

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010* 2012*

%

0

20000

40000

60000

80000

100000

120000

140000

160000

180000

m. €

GDP grow th (year-to-year change) GDP (in 2000 prices)

GDP growth and level 1990-2012

SOURCE: Statistics Finland, forecasts Ministry of Finance

------

---

6

Export led drop, indexed (2000=100)

90

100

110

120

130

140

150

160

2000 2001 2002 2003 2004 2005 2006 2007 2008* 2009*

Exports Private consumption Public consumption Private investment Public investment

SOURCE: Statistics Finland

7

Fiscal stimulus in Finland

- In response to the severe economic crisis the government implemented a vast array of fiscal stimulus measures

- According to the Ministry of Finance the stimulus measures amount to 1,8 % of GDP in 2009 and 1,6 % in 2010 (in 2011 the expected effect of those measures will be 0,5 %)

- Stimulus among the highest in the euro area as a share of economic activity

- Stimulus measures include both tax cuts and increased spending

8

Estimated stimulus measures in 2009

Tax cuts m. €

Earned income 1360 50 %

Pension income 225 8 %

Estate and gift tax 155 6 %

Employer's national pension contribution 440 16 %

VAT on food 80 3 %

Total 2260 83 %

Increased spending

Construction 180 7 %

Infrastructure 175 6 %

Business subsidies 25 1 %

Labour policy and job training 35 1 %

Advancing funding from EU-programs 40 1 %

Total 455 17 %

Tax cuts and increased spending 2715 100 %

As % of GDP 1,54

Source: Confederation of Finnish Industries EK

9

Effects of fiscal stimulus

- Effects of various stimulus measures remains to be analyzed

- In general, it seems that fiscal stimulus has been appropriate

- Has supported employment and domestic demand

- Due to sharp decline in GDP and significant fiscal stimulus public fiscal stance has weakened considerably

- Fiscal consolidation is a key challenge in the coming years

10

Unemployment rate and employment rate 1990-2010

0

2

4

6

8

10

12

14

16

18

20

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011* 2012

%

40

45

50

55

60

65

70

%

Unemployment rate (left) Employment rate (right)

SOURCE: Statistics Finland, forecasts Ministry of Finance

* *

11

Financial stability map for Finland

dec 2009

Macroeconomy

Banks’ sustainabilityHousing prices

IndebtednessRisk premia

dec 2010

may 2011

Source: Bank of Finland

12

Fiscal stance, % of GDP

SOURCE: Statistics Finland, forecasts Ministry of Finance

-15

-10

-5

0

5

10

15

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010* 2012*

%

0

10

20

30

40

50

60

70

%

Central government surplus Government surplus Government debt

13

Slaloming in a crowded funding environment

- the year 2010 a year of rebounding economic activity but shadowed by serious public debt crisis in Europe

- the 2009 recession was one of the deepest ever in Finnish economic history

- Finland’s strong public finances deteroriated sharply in 2009

- in 2010 Finnish general government debt to 3,2 % GDP first steps were taken towards stabilisation of public finances in 2011 the policy of fiscal austerity will continue; general

government finances are improving (deficit about 1,3 % GDP)

- public debt will continue to rise: the figure will top EUR 100 billion in 2012 (52 % GDP)

- in spite of recent development in the government deficit and an increase in public debt the sovereign credit ratings on the Republic of Finland are stable (long-term / AAA / Standard & Poor’s)

- elections in April --- new parliament; new government ???

14

Central Government Debt of Finland, years 1995 – 2010

€ billions %

15

Finland: Interest spreads to Germany

months: 4/ 2010 – 4/2011

5 year

10 year

16

NAOF:s audit activities 2010 - 2011- Annual financial audits:

- Ministry of Finance- State Treasury

- Annual audit of State’s Financial Statement- Fiscal Policy, sustainability

- budget deficit, borrowing and lending operations- reports on central government lending

- Annual follow-up of the Central Government’s Debt Management Strategy and Operations

- annual update of debt management strategy- risk management reports (monthly)- discussion with MoF / Money Market dep.- discussions with State Treasury, Director of Finance and Deputy

Director of Finance, Manager of Risk Management

- Performance Audits- none 2010- no audit plans for 2011 (except European Financial Stability Facility /

System)