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A Brief Presentation of the Economic Development in Finland

Director for Performance Audit Hannu Rajamäki National Audit Office of Finland Vilnius 10 June 2011

“The officials in the Finnish Ministry of Finance are constantly worried about Finland running into debt. Using their graphs and calculations, they know exactly how to make citizens quake with fear at the terrible consequences of becoming too heavily indebted. Listening to their gloomy predictions, you might imagine that the out-of-control debt spiral has been a particularly difficult problem in Finland for a long time. But it is not quite like that – at least not yet.

In reality, Finland is a country that has constantly avoided becoming too heavily indebted. …” Dr. Sixten Korkman, CEO, the Research Institute of the Finnish Economy, 2011 2

Recent economic development in Finland

2007-2009 crisis in Finland

- Finnish financial sector was insulated from the crisis

Banking sector was in good condition Household debt increased but less than in many other countries

Long-term housing price development relatively moderate (however, EU Commission warns about relative overpricing of real estate) In contrast the global recession hit real economy hard

Worldwide collapse in trade Composition of Finnish exports (capital goods, ICT) Exports declined by 20,5 % in 2009 In 2009 GDP declined by 8 %

Biggest drop since 1918

GDP growth and level 1990-2012

4 2 % 8 6

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m. € 180000 160000 140000 120000 0 1990 -2 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010* 2012* 100000 80000 -4 -6 -8 -10 60000 40000 20000 0 GDP grow th (year-to-year change) GDP (in 2000 prices)

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SOURCE: Statistics Finland, forecasts Ministry of Finance 5

Export led drop, indexed (2000=100)

120 110 100 160 150 140 130 90 2000 2001 2002 Exports Private consumption SOURCE: Statistics Finland 2003 2004 2005 Public consumption 2006 2007 Private investment 2008* 2009* Public investment 6

Fiscal stimulus in Finland

In response to the severe economic crisis the government implemented a vast array of fiscal stimulus measures

According to the Ministry of Finance the stimulus measures amount to 1,8 % of GDP in 2009 and 1,6 % in 2010 (in 2011 the expected effect of those measures will be 0,5 %)

Stimulus among the highest in the euro area as a share of economic activity

Stimulus measures include both tax cuts and increased spending

Estimated stimulus measures in 2009

Tax cuts Earned income Pension income Estate and gift tax Employer's national pension contribution VAT on food Total Increased spending Construction Infrastructure Business subsidies Labour policy and job training Advancing funding from EU-programs Total Tax cuts and increased spending As % of GDP m. € 1360 225 155 440 80 2260 50 % 8 % 6 % 16 % 3 % 83 % 180 175 25 35 40 455 2715 1,54 7 % 6 % 1 % 1 % 1 % 17 % 100 % Source: Confederation of Finnish Industries EK 8

Effects of fiscal stimulus

Effects of various stimulus measures remains to be analyzed

In general, it seems that fiscal stimulus has been appropriate

Has supported employment and domestic demand

Due to sharp decline in GDP and significant fiscal stimulus public fiscal stance has weakened considerably

Fiscal consolidation is a key challenge in the coming years

Unemployment rate and employment rate 1990-2010 Unemployment rate (left) Employment rate (right)

20 18 16 14 12

70 65 60 10 8 6

* *

4 2 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011* 2012 55 50 45 40 SOURCE: Statistics Finland, forecasts Ministry of Finance 10

Financial stability map for Finland Macroeconomy Banks’ sustainability Housing prices Risk premia

Source: Bank of Finland

dec 2009 dec 2010 may 2011 Indebtedness

15 -15

Fiscal stance, % of GDP

70 60 10 50 5 0

1990 1992 1994

-5

1996 1998 2000 2002 2004 2006 2008 2010*

2012*

30 20 -10 10 0 Central government surplus Government surplus Government debt SOURCE: Statistics Finland, forecasts Ministry of Finance 12

Slaloming in a crowded funding environment

the year 2010 a year of rebounding economic activity but shadowed by serious public debt crisis in Europe the 2009 recession was one of the deepest ever in Finnish economic history Finland’s strong public finances deteroriated sharply in 2009 in 2010 Finnish general government debt to 3,2 % GDP

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first steps were taken towards stabilisation of public finances

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in 2011 the policy of fiscal austerity will continue; general government finances are improving (deficit about 1,3 % GDP) public debt will continue to rise: the figure will top EUR 100 billion in 2012 (52 % GDP) in spite of recent development in the government deficit and an increase in public debt the sovereign credit ratings on the Republic of Finland are stable (long-term / AAA / Standard & Poor’s) elections in April --- new parliament; new government ???

Central Government Debt of Finland, years 1995 – 2010 € billions

% 14

Finland: Interest spreads to Germany

10 year 5 year months: 4/ 2010 – 4/2011 15

NAOF:s audit activities 2010 - 2011

Annual financial audits:

Ministry of Finance State Treasury Annual audit of State’s Financial Statement

Fiscal Policy, sustainability - budget deficit, borrowing and lending operations - reports on central government lending

Annual follow up of the Central Government’s Debt Management Strategy and Operations

annual update of debt management strategy risk management reports (monthly) discussion with MoF / Money Market dep.

discussions with State Treasury, Director of Finance and Deputy Director of Finance, Manager of Risk Management

Performance Audits

none 2010 no audit plans for 2011 (except European Financial Stability Facility / System) 16