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Bank of Finland warns of over-indebtedness

According to Bank of Finland Governor Erkki Liikanen, working careers have to be prolonged and productivity increased


Bank of Finland warns of over-indebtedness
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According to Bank of Finland Governor Erkki Liikanen, “[to] bring the public finances onto a sustainable footing will require substantial measures in addition to the decisions already announced by the Government”.
      “The deteriorating economic outlook puts Finland’s public finances in a different light", Governor Liikanen said when presenting the Bank of Finland economic forecast on Thursday.
      According to calculations by the Bank of Finland, without additional measures the country’s general government debt will rise to 59.7 per cent in relation to GDP in 2015.
      In other words, it will reach the limit set in the European Union’s Growth and Stability Pact.
      According to the agreement, the member states’ national debt has to be lower than 60% of GDP.
     
The Bank of Finland estimate differs somewhat from that of the Ministry of Finance.
      The Ministry reckoned in its economic review in October that the general government debt ratio will only reach 53.3 per cent by 2015.
      The general government debt refers to the combined debt of the government, the municipalities, and the pension funds. The Ministry of Finance will issue its next economic forecast on December 20th.
     
In the government programme, the aim is to turn the state’s debt ratio in a downward direction during this electoral term - in other words, by the year 2015.
      According to Liikanen, reaching this goal requires various cost-saving measures worth the equivalent of 2.5 per cent of GDP. This translates to just under five billion euros in the form of raised taxes, reduced spending, and structural reforms.
     
In Liikanen’s opinion, “particularly useful would be action to prolong working careers and reforms to boost labour productivity in basic public services.”
     
Liikanen emphasises that over the long term the situation is even worse, for as the cost of ageing rises, the upward trend in the debt ratio will accelerate.
      “So, the public economy is not on a sustainable path.”
      According to a review that stretches until the year 2040 published in the latest issue of the Bank of Finland journal Euro & talous, keeping the debt ratio at 60 per cent would require additional reductions to public spending worth 5.5 per cent of GDP.
     
The Bank of Finland's latest forecast for Finland's economic outlook is appreciably weaker than the last, with overall output expected to grow by no more than 0.4% in 2012, as against a prediction of 2.6% in June of this year. The bank anticipates growth of around 1.8% in 2013.
      These already less than heartwarming figures are based on an assumption that the ongoing euro crisis will not get any worse than it has already.
      In a worst-case scenario, in which the sovereign debt crisis blossoms into a global recession, Finland can expect to see a decline of around 2.0% in GDP in 2012 and only meagre growth of 0.7% in 2013.
      Liikanen, himself a former Minister of Finance and two-term European Commissioner, was unwilling to speculate on the likeliness of such a scenario coming to pass.


Links:
  Erkki Liikanen
  Bank of Finland press release: Governor Erkki Liikanen: New measures needed to ensure sustainable public finances
  Stability and Growth Pact (Wikipedia)

Helsingin Sanomat


  16.12.2011 - TODAY
 Bank of Finland warns of over-indebtedness

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