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THE FINNISH ECONOMY is starting a gradual recovery from the recession under the weight of a growing debt burden.
The Ministry of Finance on Thursday revealed that it expects the economy to expand by 1.6 per cent next year and by 1.5 per cent in both of the two following years, buoyed by the positive effects of decreasing interest rates on business investment and household consumption.
The recovery is being inhibited by the spending cuts and tax increases, however.
“There is both good and bad news on the economy,” Mikko Spolander, the director general of the economics department at the Ministry of Finance, was quoted saying at a press conference on Thursday, 19 December, by Helsingin Sanomat.
This year, the economy is estimated to contract by 0.3 per cent.
Despite the economic recovery and belt-tightening campaign undertaken by the government, the public debt burden is projected to rise to 86 per cent of gross domestic product by 2026. The Ministry of Finance argued that the imbalance between revenue generation and the service promise of the public sector is threatening to leave the public economy to an untenable situation in the long term.
“We must be capable of doing better,” the ministry wrote in its forecast.
Public expenditures have risen substantially this year, but tax revenue has only grown moderately. The funding deficit of public administrations is projected to widen to 4.2 per cent of gross domestic product this year before contracting to 3.5 per cent in 2025 and further to about two per cent in 2029.
Even though interest rates are on the decline, debt servicing costs are increasing. The Ministry of Finance expects the central administration to be liable for 4.8 billion euros in servicing costs in 2029, an amount that makes up 4.6 per cent of total expenditure.
The labour markets will experience a turnaround next year, as the economic recovery will boost labour demand.
The Ministry of Finance said employment growth will be supported by government decisions that increase immigration and labour supply. Immigration, it added, has been the driver of growth of the working-age population – a phenomenon that will translate to a lower employment rate in the shorter term but increase employment, labour supply and potential economic output in the longer term.
Also the dramatic slowdown in construction activity appears to have come to a halt, but the sector will require some time to recover, the ministry also noted.
The outlook for the national economy is also dimmed by the export-related concerns arising from fragility of the eurozone economy and, especially, the industrial problems in Germany. A central threat to global economic growth, meanwhile, is the protectionism promised by US President-elect Donald Trump.
The Ministry of Finance has a considerably more optimistic view of economic prospects for next year than the Bank of Finland, which revealed last week that it expects the economy to grow by no more than 0.8 per cent in 2025.
Aleksi Teivainen – HT
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Source: www.helsinkitimes.fi