Finland faces austerity budget and EU pressure as national debt climbs

Finland, ranked the world’s happiest country for nine consecutive years according to Tempo.co, faces an uneasy mood ahead of a colder-than-usual winter and its toughest austerity budget in years. National debt reached 90.3 percent of gross domestic product in the second quarter, climbing sharply from roughly 65 percent before the COVID-19 pandemic, as reported by Finland’s national statistical institution.

Finland Confronts Steep Fiscal Deficits and EU Pressure

Finland’s debt and deficit levels have reached their worst state since the 1990s, when a banking crash and the collapse of the Soviet Union pushed the Nordic nation into a deep depression. The State Treasury projected last month that the fiscal deficit would hit 4.2 percent of gross domestic product in 2026. Brussels has piled pressure on Helsinki to bring down the borrowing gap under European Union rules requiring member states to stay below 3 percent of gross domestic product. The European Council opened an excessive deficit procedure in January, giving Finland until the end of 2028 to reach the target.

Political Parties Debate Spending Cuts Versus Tax Hikes

Prime Minister Petteri Orpo’s government, which took office in June 2023, previously aimed to save about 9 billion euros during its parliamentary term. Economists warn that whoever wins the upcoming April election will need to cut between 8 billion and 11 billion euros, according to Jarkko Kivisto, an advisor to the Bank of Finland’s monetary policy and research department. Earlier this year, all but one political party agreed to support a debt brake committing the next government to tighten the deficit to about 2 percent of gross domestic product by 2031.

Orpo’s center-right National Coalition is the only party promising an additional 9 billion euros in cuts without raising taxes, meaning public services will bear the brunt. In contrast, the Social Democrats plan to split reforms between spending cuts and tax increases. Kivisto cautioned that the deficit is large enough to require a package including both tax increases and expenditure cuts.

Defense Spending and Energy Pressures Drive Borrowing

Trouble to the east contributes significantly to the fiscal strain, as Finland ramped up defense spending after joining NATO following Russia’s full-scale invasion of Ukraine. Helsinki previously relied on Moscow for about a third of its energy and faced much higher costs transitioning to other suppliers. Finland committed to buying 64 F-35A fighter jets from the United States in an 8.4 billion euro deal and raised annual military spending from $4.5 billion to over $8 billion, according to the Stockholm International Peace Research Institute. The government announced in April that it would further increase defense spending to 3.2 percent of gross domestic product, nearing NATO’s 3.5 percent target.

Unemployment and Economic Growth Show Mixed Signals

While Finland’s at-risk-of-poverty rate remains lower than the European Union average, unemployment reached 10.3 percent in August, standing just above Spain’s 10 percent according to Eurostat data. Youth unemployment hit 23.3 percent against a bloc average of 15.4 percent. Lauri Holappa, director of the Finnish Centre for New Economic Analysis, warned that a new round of austerity would harm domestic consumption because more than a quarter of the population works in the public sector. Meanwhile, parts of the export sector are booming on strong metal and shipbuilding orders, offering potential relief if European demand holds steady.

There is a possibility that the export sector can steer us out of this recession.

Lauri Holappa