HELSINKI (MNI) – The debt burden from the recession and the ageing
population make fiscal consolidation in Finland a “necessity”, the
governor of the Finnish central bank, Erkki Liikanen, said in the
introduction to the bank’s quarterly bulletin published Wednesday.

“General government finances have moved into deficit, and central
government debt is increasing rapidly,” said Liikanen, who also sits on
the Governing Council of the ECB. Without corrective policy measures,
“the combined central and local government deficit will stabilise at
just below 4%” of GDP.

“Clearly, fiscal consolidation is becoming a necessity,” he said.

Fortunately, central government debt declined before the recession,
which allowed policy-makers to avoid “emergency measures to restore
budget balance,” Liikanen noted.

A recovery from the slump is now under way, but recent high growth
rates “threaten to mask the fact that the state of the Finnish economy
is still substantially weaker than in the pre-recession period,” he

The governor called for “long-term” planning to restore public
finances to health: “It is important for fiscal consolidation to be
predictable and for the related plans to be credible.”

“This will enable households and firms to look forward to the
future with confidence, without uncertainty about upcoming tax
increases, for example, causing them to give up their consumption and
investment decisions,” he explained.

“In this way, the predictability of future developments in public
finances serves to support economic activity in a situation where fiscal
consolidation measures may, for their part, act as a drag on activity in
the short term.”

“In particular, the reforms relate to the lengthening of the time
spent in working life and the improvement of productivity in the
provision of basic public services,” he said.

“If prompt action is taken, stability in public finances can be
safeguarded, even in the case of no positive surprises in future
economic developments,” Liikanen predicted. “If positive surprises are
to happen, they will enable a reduction in public debt and thereby
create room for manoeuvre. Such room for manoeuvre could be used for
managing potential future economic crises.”

However, without new measures, it may be necessary later “to take
emergency action to restore public finances,” he warned. “It may then
prove insurmountable to prevent, for example, the erosion of health
services, infrastructures and education.”

“A decision not to take prompt action to consolidate public
finances and to implement structural reforms for improving long-term
fiscal sustainability would mean taking a big risk and shifting
responsibility on to future generations.”

–Antti Kerppola, +358 (0)41 528 2286;

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