Economic boom brings state more revenue than expected

Windfall to be used to pay off debt

Jyrki Katainen

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The Ministry of Finance last week published its third supplementary budget of the year, according to which the positive economic situation has increased state revenues beyond all expectations. At the same time, state spending has clearly declined.
      The figures are astounding.
     
In the original budget for this year, state income was to have exceeded spending by EUR 163 million, which was to have been used for paying off state debt.
      Now the revenue is exceeding spending by about ten times the amount that was anticipated. State income exceeds expectations by about EUR 1.3 billion. In addition, the sale of shares is bringing in an estimated EUR 864 million, instead of the anticipated EUR 444 million.
      The surplus in Finland's public finances, calculated according to the rules of the euro zone, is rising this year to 4.4 per cent of GDP, which is more than in any other euro country. The average in the euro zone is -1.6 per cent.
      Finland's surplus is more than double the 1.5 to 2 per cent, which was set as the goal in last year's budget for dealing with the problems caused by the ageing population.
      According to the stabilisation programme drawn up by Finland for the EU, the surplus will rise to 2.5 per cent of GDP over four years. The debt to production ratio will fall at the same time, "gradually to less than 35 per cent."
      But this year the surplus is 4.4 per cent, and the debt ratio is only 39 per cent. Signs indicate that next year will also be a good one for state finances.
     
The news is not persuading Finance Minister Jyrki Katainen (Nat. Coalition Party) to loosen up the purse strings and authorise more spending. He says that the extra money will be used to pay off state debt, even though there would be plenty of takers for the money.
      The government wants to stay within the spending framework set out in its budget plans. Therefore, state spending in 2011 will be only 1.3 billion higher than this year.
      "In exceptionally good times it is sensible to use money for paying off debt. By doing so we will have more money in bad times to directly respond to people's needs", Katainen says.
      He calculates one example: "If the interest rate level rises by one percentage point, state expenses will grow by EUR 550 million."
     
Katainen feels that total elimination of the state debt would not be a bad goal, because it would allow independent decision-making on the use of state funds.
      At the present debt level, EUR 2.5 billion a year is spent on paying interest on debt. "It is more than all of the spending of the Defence, Transport and Communications, or Business Ministries", Katainen points out.
      He says that the savings achieved in interest rates can be used for services when the ageing of the population leads to an increased demand for them. Another option is to raise taxes, which could have negative consequences for employment.
     
Katainen wants to use random windfall income for the payment of debt, and does not want to recycle the funds through the State Pension Fund, for instance - even though this was done during the previous government, and even though the economic result would probably be better.
      The average yield on the fund over a five year period has been 8.1 per cent, whereas the interest rate on state debt is an average four per cent. The state would gain four percentage points out of each euro that it puts into the pension fund, instead of paying off the debt.
      "We do not want to hide the surplus in the pension fund. Such things have been done before, but we want to bring the surpluses into the open for Parliament to see", Katainen says.


Links:
  Ministry of Finance website

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