Introduction to Finland’s Fiscal Challenges
Finland, traditionally one of the most fiscally disciplined countries in the European Union, has received a wake-up call from Brussels. The European Commission, the bloc’s executive arm, has ordered Helsinki to come up with a credible plan to resolve the country’s budget deficit, which has exceeded the EU limit of 3% of gross domestic product (GDP). The commission said Finland’s deficit is expected to reach 4.5% of GDP in 2025, while the country’s debt burden will reach 90% of GDP next year, an increase of almost half since 2019.
Causes of the Deficit
The Nordic country, whose annual economic output is 300 billion euros, has now been officially placed under the EU’s excessive deficit procedure. This could lead to financial sanctions, including heavy fines, the suspension of EU funds, and stricter financial supervision by Brussels. Since the global financial crisis of 2008/09, Finland has struggled with fiscal discipline. The collapse of cell phone maker Nokia, once the engine of growth, left the economy without a clear driver. This challenge has been exacerbated in recent years by high social costs, a huge increase in defense spending, and the economic shock caused by the severance of energy and trade ties with neighbor Russia due to the war in Ukraine.
Impact of the War in Ukraine
In 2021, before Russian tanks rolled into Ukraine, bilateral trade between Moscow and Helsinki reached 12.71 billion euros and accounted for 4.3% of the Finnish economy. In the first three quarters of this year, trading was down almost 93%. The collapse was exacerbated by Finland’s decision to close its eastern border at the end of 2023, citing security concerns and Moscow’s weaponized migration tactics. The move brought cross-border shopping and tourism to a halt almost overnight and hit Finnish border regions particularly hard. According to the Bank of Finland, the country’s central bank, more than 2,000 Finnish companies exported to Russia in 2019. By the end of 2023, this number had fallen to around 100.
Defense Spending and Energy Crisis
Facing the Kremlin’s own threats, from disinformation campaigns to airspace violations, Finland has dramatically increased its defense spending from €5.1 billion in 2022 to over €6.2 billion in 2024, now exceeding 2.3% of GDP. The NATO member has committed to raising military spending to 3% by 2029, which would make it one of the top-spending countries in Europe. The energy crisis has driven up Finland’s oil costs, with the Nordic country able to diversify from Russian energy sources relatively quickly – albeit at much higher prices. According to the state agency Statistics Finland, the switch caused Finland’s oil import costs to rise by 109% to over 6 billion euros in 2022 alone.
Austerity Measures and Fiscal Discipline
Despite the challenges, the Finnish government has adopted one of the EU’s toughest budget plans for 2025, combining drastic spending cuts with tax increases. A new so-called debt brake mechanism obliges all political parties to reduce their deficits in the long term. But some policymakers warn that more austerity measures and tax increases will be needed in the next legislative session. Economic growth alone will not be enough to restore fiscal balance, with rough estimates indicating adjustments of around 3% of GDP or 9 to 10 billion euros required in the next 5 to 10 years.
Challenges to Growth and Fiscal Balance
With 80% of Finland’s GDP coming from domestic sectors such as household consumption, public services, construction, retail, and government employment, economists warn that strict fiscal rules could stifle the very growth the country needs. Around a third of the workforce relies on government funding, and constant budget consolidation makes them fearful of cuts. This uncertainty has weighed heavily on consumer confidence and prevented domestic consumption from recovering despite wage growth and lower interest rates. If strict austerity measures and strict fiscal rules are imposed now, there is a risk that the country will not return to the growth path.
