Dec. 15 (Bloomberg) -- Finland’s government must make “substantial” spending cuts and increase taxes to bring finances onto a sustainable footing, the Bank of Finland said.
“If these steps are not taken in time, we could end up in a situation where we are forced to rapidly reduce the general government deficit at a time when economic growth is weakening,” Governor Erkki Liikanen said today in an e-mailed report. “The deteriorating economic outlook puts Finland’s public finances in a different light.”
Finland’s government will cut spending by 1.16 billion euros ($1.5 billion) and raise taxes by 1.1 billion euros in next year’s budget and plans to discuss further balancing in the first half next year, according to the government program.
The northernmost euro member is seeking to balance its budget by 2015. The deficit will shrink to 1.3 percent of gross domestic product this year and 1.2 percent in 2012, compared with a shortfall of 2.8 percent last year, Bank of Finland said.
The central bank said today that AAA rated Finland must improve its central government deficit by 2.5 percentage points, moving to a surplus, to stop the debt to GDP ratio from growing. Having Europe’s fastest-aging population means measures must be “even more substantial” to ensure long-term sustainability, the central bank said.
Finland’s economy will expand slower than previously estimated, the Helsinki-based central bank said, projecting GDP growth of 0.4 percent next year, down from 2.6 percent on June 15. Growth will rebound to 1.8 percent in 2013.
“The forecast is based on the assumption that the euro area debt crisis will not get any worse and the slowdown in growth in both the euro area and the global economy will be relatively short-lived,” said Liikanen, who is also a member of the European Central Bank governing council. “This assumption contains a clear downside risk for the forecast.”
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