Council opinion

of 20 January 2004

on the Updated Stability Programme of Finland 2003 to 2007

(2004/C 29/01)

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European Community,

Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies(1), and in particular Article 5(3) thereof,

Having regard to the recommendation of the Commission,

After consulting the Economic and Financial Committee,

HAS DELIVERED THIS OPINION:

On 20 January 2004 the Council examined Finland's updated stability programme, which covers the period 2003 to 2007. The updated programme complies with the data requirements of the revised "code of conduct" on the content and format of stability and convergence programmes.

The budgetary strategy underlying the update is based on keeping the expenditure-to-GDP ratio unchanged throughout the programme period, while the revenue ratio, after a temporary decline in 2004, is to resume a gradual upward trend towards the end of the programme period. The government's budgetary strategy objective is to have central government finances in balance by 2007; however, according to the programme this target will not be achieved under the current medium-term projections.

The macroeconomic scenario presented in the 2003 updated stability programme projects a strengthening of economic activity from 1,4 % in 2003 to 2,7 % in 2004, which appears warranted in the light of most recent data. Subsequently, GDP growth is expected to reach its trend rate, averaging 2,5 % between 2005 and 2007. Employment, falling by 0,2 % in 2003, is expected to go up by 0,3 % on average in 2004 to 2007. Inflation is forecast to rise gradually from 1,0 % in 2003 towards 1,8 % by 2007. The near-term projections are closely in line with the Commission's Autumn 2003 forecast. Given the assumption of a favourable external environment, the projected stabilisation of GDP growth in the later years of the programme represents a rather cautious view.

The programme projects a substantial decline in the general government surplus from 4,2 % of GDP in 2002 to 2,3 % in 2003 and below 2 % in 2004(2). For the later years of the programme a surplus of 2 % or above is to be restored, in line with the newly defined expenditure ceilings. Both the central government and to a smaller degree local governments account for the trend weakening of the financial position between 2003 and 2007, while the social security funds will be upholding the surplus at the general government level. The projected decline in the cyclically adjusted surplus by 0,6 percentage points of GDP between 2003 and 2005 is partly due to direct (income) and indirect (alcohol) tax cuts and lower receipts from corporate taxes. The cyclically adjusted surplus is seen to fall from 4,3 % of GDP in 2002 to 3,0 % in 2003 and further in 2004 to 2,4 %. In 2005 and beyond the cyclically adjusted surplus will stabilise over 2 % of GDP. These are broadly in line with the Commission cyclically adjusted balance calculations. In spite of the higher than expected outcome in 2002, the general government debt to GDP ratio is projected to continue to decline modestly, from 45,1 % of GDP in 2003 to 44,6 % of GDP in 2007.

In spite of the expected persistent small deficits in central and local government finances, the budgetary stance in the programme of running a comfortable general government surplus provides sufficient safety margin against a breach of the 3 % of GDP reference value for the government deficit in normal cyclical fluctuations.

The decline in the government surplus is mainly due to higher-than-planned income tax cuts in 2000 to 2004 and higher-than-planned discretionary spending at central government level in 2001 to 2003. The previous high surpluses have created some additional fiscal room for manoeuvre, such that under plausible macro-economic and budgetary assumptions, the Stability and Growth Pact's medium-term objective of a budgetary position of close-to-balance or in surplus should be maintained over the programme period. However, a tendency of exceeding the medium-term spending guidelines, as observed in the past, constitutes a risk to the government's budgetary strategy. Therefore, the multi-annual spending limits introduced by the new government which are now more binding should help to keep expenditure under control.

The stability programme pays due attention to the sustainability of public finances. On the basis of current policies, public finances appear to be on a sustainable footing to meet the budgetary costs of ageing populations, benefiting from the sustained running of budget surpluses, and a reformed pension system that is to a large extent pre-funded. Sustainability should also be underpinned by reforms, both planned and underway, which aim at raising the employment rate, and the Finnish authorities should proceed with their implementation according to the time frame indicated in the stability programme.

The recent tax cuts and some further measures planned are intended not only to boost employment and job creation, but also to stem the erosion of tax bases as a consequence of their increasing international mobility of production factors (labour and capital). In order to safeguard the achievements of the past decade of placing public finances on a sustainable path, strict compliance with the newly defined expenditure ceilings will be all the more crucial.

The economic policies as presented in the updated programme are broadly consistent with the Broad Economic Policy Guidelines, specifically those with budgetary implications, which recommended for Finland, inter alia, the introduction of multi-annual spending limits and the reduction of the high level of structural unemployment.

(1) OJ L 209, 2.8.1997.

(2) With the exception of 2002, the general government surpluses have been revised downwards for the whole programme period.