Next government might have to borrow money again

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The Ministry of Finance is making preparations for a time when Finland may have to borrow more money.
      A number of enlightened guesses both among civil servants and economists conclude that the government that takes office after the present one will have to take on debt, instead of paying it off, as the present government is doing.
      Finland's state debt is not among the highest by European comparisons, when calculated in proportion to GDP, but demographic forecasts portend that the number of ageing residents compared to those of working age will experience considerable growth in Finland.
     
"This government term is the last period in which the number of people of working age will not decrease", explains one official.
      Many believe that after that the inevitable direction of the economy will be downward, and that borrowing cannot be avoided.
      Finance Minister Jyrki Katainen (Nat. Coalition Party) does not want to make any assessments on when the turnaround might take place, but he feels that it might happen sometime during the next government term.
      "It is quite possible in the midst of these growing pressures. The primary objective is, nevertheless, to implement an economic policy under which it is not necessary to live on borrowed money", Katainen says.
      That kind of an economic policy would also include lower income taxes. Katainen says that more generous cuts in income taxes are possible in about 2010.
     
This year the surplus in the state budget is EUR 2.7 billion, which is to be spent on paying off the existing debt. After that the state will still owe about EUR 53 billion, which is about 31 per cent of GDP.
      No civil servants at the Ministry of Finance can be found who would be willing to be quoted on when Finland might switch from paying off debt to borrowing again, but the year 2012 is seen as a possible turning point.
      Pasi Holm, managing director of the Pellervo economic research institute PTT offers one possible year:
      "More money will probably have to be borrowed in about 2015. The state will starting to become indebted, as the costs of people going into retrirement and the changing population structure begin to exert their influence", he said.
     
A goal in the programme of the present government is to have a surplus in state finances equivalent to one per cent of GDP by the end of the four-year term.
      Holm predicts that a realistic goal for the next government could be merely to balance the state finances again.
     
Not everyone is painting horror scenarios. Jaakko Kiander, head of the Labour Institute of Economic Research, points out that the Finnish public sector has almost no net indebtedness, because the debt is balanced out by assets, such as cash reserves, real estate, and shares, as well as by pension funds.
      "In ptactical terms, the state does not have any net indebtedness at all. Finland is the world's richest country right after Norway, in terms of public finances", Kiander says.
      "It is estimated that the growth will continue after next year, and that the state finances will remain in surplus for sometime", he argues.
      However, it is not easy to pay off the state debt. Kiander says that it would be ideal to get the debt to the level where it was before the recession of the 1990s. In 1990 the debt stood at about ten per cent of GDP.


Previously in HS International Edition:
  Economic boom brings state more revenue than expected (3.10.2007)

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