A new economic report has challenged Finland’s fiscal strategy, warning that planned spending cuts tied to the debt brake rule risk weakening growth and failing to reduce public debt.
The study by the Centre for New Economic Thinking (UTAK) states that adjustment measures worth close to €10 billion in the next government term would not stabilise debt levels and would reduce output over the long term.
The report, authored by Otto Kyyrönen, estimates that fiscal tightening of €9.7 billion between 2027 and 2031 would lower Finland’s gross domestic product by up to €20 billion over time. The analysis draws on the European Commission’s debt sustainability model, with adjustments to reflect broader economic effects.
Kyyrönen said the planned measures would not achieve their main goal. “Net adjustments of around €10 billion will not reduce the debt ratio based on our calculations,” he stated in the report.
The findings challenge assumptions used by the Ministry of Finance, which has focused on spending cuts as the main tool for fiscal consolidation. UTAK argues that the ministry underestimates the long-term impact of cuts, particularly during weak economic conditions.
According to the report, reductions in public spending risk triggering a cycle in which slower growth undermines debt reduction efforts. Lower demand and reduced investment would weaken the economy, leading to further adjustment needs in future government terms.
UTAK estimates that the fiscal multiplier used by the ministry stands at 0.5, while its own analysis places the figure closer to 1.4. A higher multiplier implies stronger negative effects from cuts, especially when economic growth remains subdued.
Finland’s debt brake, due to take effect in 2031, requires the debt-to-GDP ratio to decline by an average of 0.75 percentage points each year. Current projections place public debt at 88.5 per cent of GDP, with a long-term target of 40 per cent.
The report proposes an alternative approach centred on tax increases and targeted investment. It states that tax measures have smaller negative effects on growth compared with spending cuts.
Kyyrönen suggests that tax increases of around €8 billion, combined with €5 billion in public investment or equivalent private sector support, would meet fiscal targets while supporting economic activity.
Proposed tax measures include higher corporate tax rates and tighter dividend taxation for unlisted companies. The report also refers to potential increases in capital and environmental taxes, citing previous research.
Investment priorities outlined in the report include transport infrastructure, housing, higher education, venture capital, and industrial policy linked to the green transition. These measures aim to support employment and demand during a period of weak growth.
The findings come as political parties prepare for the next government term, with fiscal policy expected to dominate negotiations. The current administration has relied on spending cuts and tax reductions, including a planned reduction in corporate tax from 20 per cent to 18 per cent.
The report warns that without a shift in policy, Finland risks entering a repeated cycle of austerity. “There is a risk of a vicious circle,” Kyyrönen said, referring to future adjustment pressures under European Union fiscal rules.
HT