Finance minister warns of likely spending cuts and tax hikes next year

The Finnish government plans to cut spending and raise taxes next spring; Minister of Finance Jutta Urpilainen (SDP) says that the measures probably cannot be avoided.


The belt-tightening stems from a government decision according to which the state debt is to be brought down by 2015, and the budget deficit must be cut to one per cent of GDP.
Market development in recent months have made that goal more difficult to reach. According to a forecast put out by the Ministry of Finance on Tuesday, the Finnish state debt will continue to grow in the upcoming two years. Reversing the trend would require tax hikes and spending cuts worth billions and euros, unless there is a significant improvement in the economic situation.
      
Economic growth next year should be 0.4 per cent, according to the most recent forecast by the Ministry of Finance. In the autumn, the expectation was for 1.8 per cent growth.
The forecast extends to 2013, when Finland is to borrow nearly eight billion euros. The government’s target for a deficit of one per cent would be the equivalent of about EUR 2 billion.
If the situation were the same two years later, the government’s policy programme would require spending cuts and tax increass worth about EUR 6 billion.
      
The government will be examining the economic situation on Wednesday evening. Decisions are to be made in March when the budget framework for the following year is set up.
The further spending cuts and tax hikes are expected to be difficult. The EUR 2.5 billion that was decided last summer caused considerable pain among the six government parties. The measures are to strike an even balance between lower spending and higher taxes.
      
Finance Minister Urpilainen would not say on Tuesday how far the balancing efforts would go and what they would target. Not even the National Coalition Party, which generally puts a high priority on financial discipline, is expected to push for as severe measures as the forecasts would indicate.
      
The chairman of the Finance Committee of the Finnish Parliament, Kimmo Sasi (Nat. Coalition Party), says that while EUR five billion would be an optimum goal, three billion would be realistic.
“On the tax side the goal is relatively easy, if VAT were raised by two percentage points”. Raising the VAT rate to 25 per cent would bring in about a billion euros more in tax revenue.


The Social Democrats have been opposed to Sasi’s proposed VAT hike. Urpilainen said on Tuesday that she was not taking a stand on the matter yet.
      
In addition to budget cuts and tax increases, Urpilainen emphasised the importance of municipal reform and other structural changes. “We mustn’t make any more cuts than is absolutely necessary”, Urpilainen said.


Source: HELSINGIN SANOMAT - INTERNATIONAL EDITION - BUSINESS & FINANCE

Sampo Bank: Finland is entering into recession

Sampo Bank estimates that Finland’s economy has sunk into recession. GNP is likely to decline during the current quarter and it will continue to do so until next summer.


A country is said to be in recession if its GNP decreases in two consecutive quarters.
“The bottom will be hit next summer. After that there is a small chance for a slight growth. Still, it pays to take into consideration that longer predictions are based on many uncertain assumptions”, says Sampo Bank leading advisor Lauri Uotila.


The sector worst hit by the eurozone debt crisis is the exports industry. Finland’s exporting has already diminished clearly.


Growth in the construction industry has ground to a halt, but the field of retail and wholesale trade is still growing in the country.
The level of unemployment Uotila expects to remain put at around eight per cent. The number of those employed will reduce somewhat through people entering into retirement.
“There is no reason why consumer demand could not stay high. Salaries and pensions keep rising and almost everybody is able to keep their jobs”, Uotila adds.
      
The Sampo Bank prediction is based on the assumption that the eurozone will clear its debt crisis through slow adjustments and without a fully-blown financial crisis, which would be caused for example by the collapse of a major European bank.


Chief Economist Pasi Kuoppamäki does not believe that the euro will collapse. He expects that the agreed measures, such as the strengthening of the role of the International Monetary Fund (IMF) and next spring’s setting up of the European Stability Mechanism (ESM), will be enough to balance the situation. “Even if Italy had to pay a slightly higher interest until then for its financing, this is not a huge issue for its national economy. Investors will still be found interested in investing in Italian bonds.”
      
For those with mortgages 2012 will be “relatively easy time”, Uotila says. Interest rates on loans are likely to drop below the inflation rate, which means a negative real interest rate. In other words, the inflation will reduce the loan capital spontaneously. Salaries will grow by about three per cent on average. Uotila does not believe the housing prices will start tumbling.


“The nominal prices may be reduced a little bit, but in real terms the prices will remain the same. Even if debts are record-high in relation to the available income, the loan servicing costs are very low”, Uotila concludes.


Source: HELSINGIN SANOMAT - INTERNATIONAL EDITION - BUSINESS & FINANCE

The impact of the crisis in Sweden

The European debt crisis has reached Sweden. Many forecasters, including for the Swedish government, believe this downturn will be short. But nothing supports this scenario. On the contrary, reality has caught up to the European economies, so Swedish growth recovery won’t return to normal for several years. For 2012 The Confederation of Swedish Enterprise expect growth of only 0.2 percent.

“We are not seeing an ordinary recession, but rather a structural debt crisis, which will remain deep for long. Any recovery will demand significant political reform. But in the best of scenarios, we see normal growth returning to Europe and Sweden only in a few years,” comments Stefan Fölster, Chief Economist at the Confederation of Swedish Enterprise.

The downturn in the Swedish economy will be substantial in the coming quarter, starting with larger companies, especially those exporting to Europe. But, we see those that export to China and Asia doing better. As suppliers to European exporters become affected, the negative spiral of the crisis will spread throughout the Swedish economy.

Industrial regions will experience the greatest negative effects in 2012, except for regions with significant mining industries.

Many local governments have been entirely too optimistic in their budgets, and will be forced to cut back when tax revenues don’t meet forecasts. But we do see that local governments who have worked to improve the local business climate are now facing the crises with greater stability,” concluded Mr. Fölster.

The Confederation of Swedish Enterprise Q3 Economic report is titled “Reality check”.

2011-10-04
Confederation of Swedish Enterpriseshttp://www.svensktnaringsliv.se/english/long-road-to-reach-end-of-tunnel_141275.html