Despite topping the list of the happiest countries in the world for nine consecutive years, Finland is facing a period of increasing anxiety. With a winter expected to be harsh in terms of cold approaching, the Finns are also facing the largest package of austerity measures in years.
Ahead of the elections scheduled for April, the debate no longer centers on whether the cuts should be implemented, but rather on which public services, social benefits and pensions will bear the largest share.
Finland's debt and deficit budgets have reached their worst levels since the 1990s. At that time, the collapse of banks and the disintegration of the Soviet Union, one of the main export partners, plunged this Scandinavian country into a severe economic crisis.
A sharp rise in Finland's public debt ratio
Last month, Statistics Finland confirmed that public debt reached 90.3 percent of GDP in the second quarter. Before the Corona pandemic, this percentage was only about 65 percent.
Here again the reason lies in the eastern neighbour. Finland increased its defense expenditures after joining NATO. The Finns took this step a year after Russia's comprehensive invasion of Ukraine. Moreover, Helsinki, which previously received about a third of its energy needs from Moscow, faced much higher costs when switching to other suppliers.
But since the global financial crisis of 2008/2009, the Finnish government has been spending more money than it is earning, due, among other things, to an aging population and slow economic growth. Last month, the government's Finance Department predicted that the budget deficit in 2026 would reach 4.2 percent of GDP.
The European Union criticizes the deficit
Brussels is putting pressure on Helsinki to reduce new debt, because EU rules require member states to adhere to a maximum deficit of 3 percent of GDP. Therefore, in January, the European Council began formal procedures, giving Finland until the end of 2028 to achieve the desired goal.
The government headed by Prime Minister Petteri Orbo, which took office in June 2023, has set a goal of saving about nine billion euros during the current legislative session. But economists warn that the winner of the next election will have to implement broader cuts. "Current estimates are between eight and eleven billion euros," Jarkko Kivisto, a consultant in the Monetary Policy and Research Department at the Bank of Finland, told DW.
At the beginning of the year, all but one political party agreed to support a “debt brake,” under which the next government would commit to reducing the country’s budget deficit to between 2 and 2.5 percent of GDP by 2031.
The Prime Minister refuses to increase taxes
Orbo's conservative Kokoomus party is so far the only party considering further spending cuts worth €9 billion if he wins a second term. In addition to making further cuts in the areas of health, care and social services, Orbo also plans to take measures related to the pension system without reducing current payments.
While the Social Democrats seek to distribute the burden of reform between spending cuts and tax increases, Orbo seeks to achieve his goal without raising taxes. This means that public services will bear the brunt. However, Jarkko Kivisto pointed out that: “The deficit is so large that it will be necessary to take a package of measures that includes both increasing taxes and reducing spending.”
Although the rate of exposure to poverty in Finland is lower than the average in the European Union, its unemployment rate is higher than in any other member state of the Union. In August, the unemployment rate in Finland, according to the European Union's statistics body (Eurostat), reached 10.3 percent, which is slightly higher than the 10 percent rate recorded in Spain. Youth unemployment reached 23.3 percent, compared to the European Union average of 15.4 percent.
With household consumption spending already falling, Lauri Ulapa, director of the Finnish Center for New Economic Analysis, warned that a new round of austerity measures would deal a severe blow to the local economy. "More than a quarter of the population works in the public sector, so if these workers face layoffs, the saving rate will rise and private spending will fall again," Olaba told DW.
A series of pressures from the Covid pandemic to rising interest rates to the fallout from two wars have complicated efforts to narrow the growing gap between revenues and borrowing. The draft budget for 2027 still projects a fiscal deficit of 12.4 billion euros.
Finland strengthens its defense capabilities
Before the outbreak of war in Ukraine, Finland had committed to purchasing 64 F-35A fighter aircraft from the United States for approximately 8.4 billion euros. During the war waged by Russia against Ukraine, which has continued for more than four years, this Scandinavian country increased its military expenditures from 4.5 billion to more than eight billion US dollars annually. This appears from data issued by the Stockholm Peace Research Institute (SIPRI).
In April, the government announced its intention to raise defense spending to 3.2 percent of GDP, bringing it closer to NATO's target of 3.5 percent.
With oil prices still at around $100 per barrel as a result of the war in Iran, the government has so far resisted pressure to increase fuel subsidies. This comes despite the fact that the Central Bank of Finland recorded a 50 percent rise in the costs of energy imports during the first months of the conflict with Iran.
Although the shift to renewable energies and the start of operation of the Olkiluto 3 nuclear reactor in 2023 have alleviated the severity of the energy crisis, the Central Bank warned in the summer that the continued rise in oil and gas prices would lead next year to “lower economic growth and higher inflation.”
Another bright spot is Finland's thriving export sector, which benefits from strong demand in the metals and shipbuilding industries. Ulappa compared this dynamic to Nokia's "boom years" when the former mobile phone market leader was the main driver of Finnish economic growth. "There is a possibility that the export sector can pull us out of this recession" provided demand from the rest of Europe remains strong, he told DW.
Markets are being patient
Despite the many obstacles to reducing the budget deficit, market reactions to the Finnish debt crisis have been conservative so far. The rating agencies kept the country's future outlook at "stable", with the exception of S&P, which in April set the future outlook at "negative" without lowering the rating itself.
On October 6, the spread in the interest rate that the Finnish government must pay on ten-year bonds was 38 basis points. For comparison: this value reached 128 basis points for France and 107 basis points for Italy. In other words: Investors still rate Finnish government debt as one of the safest investments in Europe.
But this only applies as long as the next shock is not a prolonged rise in oil prices, a new escalation by Russia, or a eurozone debt crisis centered in France.
Next March, Finland may be crowned the happiest country in the world for the tenth year in a row. As for how long this happiness will last after receiving the bill for decades of borrowing a month later, that remains subject to speculation.
Prepared in Arabic by: M.A.M./Edited by: Salah Sharara
