A new government for Finland: reforms and austerity

Finland will be ruled by a conservative three party government. The new government will be formed by the Centre Party (liberal), the Finns (populist, previously called True Finns) and National Coalition (conservative). Juha Sipilä – the next Prime Minister – led the three party negotiations to a successful conclusion today.

The government strategy is reform oriented and fiscal policy will be tightened significantly. The government aims to adjust public finances by a total of EUR10bn, through a combination of short- and long-term measures. Expenditure cuts and structural reforms are expected to save EUR6bn before 2021. Social and healthcare reform (SOTE reform) and productivity improvements are expected to save EUR3bn. The rest comes mainly from cutting municipal tasks and better employment.

An income tax cut contingent on a low-wage agreement and labour market reforms is proposed. This would protect domestic demand and promote cost competitiveness. Unit labour costs should fall by 5% at least. The general tax burden will not change much though, because commodity taxation will probably be raised. An investment package worth EUR1.6bn will be aimed at infrastructure maintenance and growth over a threeyear horizon. Growth will also be enhanced by cutting red tape for business.

The new Prime Minister Juha Sipilä from the Centre Party has an entrepreneurial background and comes from outside old political circles, which has been positive for his popularity. Given the rural roots of the Centre Party, we believe that public investments will flow more evenly to the whole country and to boost the ‘bio economy’, rather than focusing solely on growth centres. The Finns Party has least experience in government and is most opposed to EU integration. Surprisingly, Chairman Timo Soini will be the next foreign minister. The National Coalition was the main party in the previous government and serves as a champion for EU co-operation and urban development. Chairman Alexander Stubb will be the next Finance Minister.

In our view, the handicap for conservative governments of the past has been opposition from the labour unions. Progress in reforms could be plagued by labour disputes, especially if the opposition parties (Social Democrats, Left Alliance, Green League, Swedish People and Christian Democrats) are left out of major decisions concerning social and health care and labour market reforms.

The new government inherits a weak economy and growing debt. Failure to carry out reforms could consign Finland to a slow growth path and lead to a downgrade of sovereign ratings, in our view. The announced reforms and expenditure cuts are likely to be enough to satisfy rating agencies at this point but a successful implementation is crucial. Debt growth should be halted by 2021. The announced measures do not change our forecast for 2015-16. The outlook for the Finnish economy is weak: we expect only 0.5% GDP growth in 2015. Austerity is set to limit domestic demand in the short run but the structural measures should boost confidence and growth over the longer run.