Government to borrow billions to avert mass unemployment

Katainen wants to build bridge over recession

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Minister of Finance Jyrki Katainen (Nat. Coalition Party) sees a positive side to the current international economic crisis: the situation has stabilised, and the actual problems are known, making it possible to start searching for the right remedies.
      Katainen briefed reporters on economic prospects for the coming years on Friday. Later in the week the government will decide on its stimulus package: a supplementary budget, in addition to a number of measures aimed at making the financial market function better.
     
And what are these prospects? The economy is shrinking, unemployment growing, and the state debt increasing.
      Katainen put forward three possible scenarios. In the likeliest of these, Finland’s GDP will shrink this year by more than two per cent and the unemployment rate will rise to eight or nine per cent. In the worst possible case, GDP could decline by four per cent. A more detailed forecast is coming later this week.
      Katainen says that it is clear that tax revenue will decline considerably. In the proposed supplementary budget, the tax revenue estimate has been cut by nearly EUR 2.6 billion.
      Also increasing are the costs of dealing with unemployment, and the additional costs of economic stimulation. The government is prepared now to borrow about EUR 30 billion over the next three years.
      At the end of last year the state debt was about EUR 54.4 billion, or about EUR 10,200 for each Finn.
     
The additional debt means growing interest costs.
      “At the present interest rate level this means that we will be paying one billion euros more each year in interest. We could do all kinds of things with that money”, Katainen said. With the additional loan, state debt will rise to 45 per cent of Finnish GDP. This is not nearly as high as in the depths of the recession of the 1990s, when the state debt peaked at 67 per cent of GDP.
      Comparing the current situation with the previous recession, Katainen sees the crisis this time as being the result more of cyclical than structural reasons. Finland is in trouble because the activities of Finnish companies are affected by factors from outside the country. This means that the recession will not turn around through actions taken by Finland itself.
     
“These actions will not change the cyclical picture, but we can alleviate the symptoms of the disease, and build a bridge over the worst period”, he explained.
      The government has three possible ways of reducing the deficit in public spending: raising taxes, cutting back on benefits, or by making structural reforms.
      “We do not want to raise taxes. Under no circumstances do we want to spending or benefits, so structural reforms are what is left over”, Katainen said.
      The main lesson of the previous recession was that it is important not to allow mass unemployment to grow, because dealing with it is even more expensive than economic stimulus - to say nothing of the suffering caused by unemployment.
     
Finally, Katainen noted that Finland will not make it through the slump if Finns themselves do not believe in themselves, and in the possibilities afforded by the Finnish economy. He noted that the income of most wage earners is growing this year at a very high rate. Naturally, this only applies to those who are keeping their jobs.
      All pensioners will also see their incomes rise.


Previously in HS International Edition:
  Economists: Finland better prepared for economic problems than in early 1990s (8.10.2008)
  Sailas believes that many stimulus proposals by HS readers will be implemented (12.1.2009)
  Smoking ruins behind, thick mists ahead as the economy enters a new year (4.1.2009)
  Increasingly pessimistic Finance Ministry not predicting depth of slump (19.12.2008)

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