A Brief Presentation of the Economic Development in Finland Director for Performance Audit Hannu Rajamäki National Audit Office of Finland Vilnius 10 June 2011

2 “The officials in the Finnish Ministry of Finance are constantly worried about Finland running into debt. Using their graphs and calculations, they know exactly how to make citizens quake with fear at the terrible consequences of becoming too heavily indebted. Listening to their gloomy predictions, you might imagine that the out-of-control debt spiral has been a particularly difficult problem in Finland for a long time. But it is not quite like that – at least not yet. In reality, Finland is a country that has constantly avoided becoming too heavily indebted. …” Dr. Sixten Korkman, CEO, the Research Institute of the Finnish Economy, 2011

3 Recent economic development in Finland

crisis in Finland - Finnish financial sector was insulated from the crisis - Banking sector was in good condition - Household debt increased but less than in many other countries - Long-term housing price development relatively moderate (however, EU Commission warns about relative overpricing of real estate) - In contrast the global recession hit real economy hard - Worldwide collapse in trade - Composition of Finnish exports (capital goods, ICT) - Exports declined by 20,5 % in In 2009 GDP declined by 8 % - Biggest drop since 1918

5 GDP growth and level SOURCE: Statistics Finland, forecasts Ministry of Finance ---

6 Export led drop, indexed (2000=100) SOURCE: Statistics Finland

7 Fiscal stimulus in Finland - In response to the severe economic crisis the government implemented a vast array of fiscal stimulus measures - According to the Ministry of Finance the stimulus measures amount to 1,8 % of GDP in 2009 and 1,6 % in 2010 (in 2011 the expected effect of those measures will be 0,5 %) - Stimulus among the highest in the euro area as a share of economic activity - Stimulus measures include both tax cuts and increased spending

8 Estimated stimulus measures in 2009

9 Effects of fiscal stimulus - Effects of various stimulus measures remains to be analyzed - In general, it seems that fiscal stimulus has been appropriate - Has supported employment and domestic demand - Due to sharp decline in GDP and significant fiscal stimulus public fiscal stance has weakened considerably - Fiscal consolidation is a key challenge in the coming years

10 Unemployment rate and employment rate SOURCE: Statistics Finland, forecasts Ministry of Finance * *

11 Financial stability map for Finland dec 2009 Macroeconomy Banks’ sustainability Housing prices Indebtedness Risk premia dec 2010 may 2011 Source: Bank of Finland

12 Fiscal stance, % of GDP SOURCE: Statistics Finland, forecasts Ministry of Finance

13 Slaloming in a crowded funding environment - the year 2010 a year of rebounding economic activity but shadowed by serious public debt crisis in Europe - the 2009 recession was one of the deepest ever in Finnish economic history - Finland’s strong public finances deteroriated sharply in in 2010 Finnish general government debt to 3,2 % GDP  first steps were taken towards stabilisation of public finances  in 2011 the policy of fiscal austerity will continue; general government finances are improving (deficit about 1,3 % GDP) - public debt will continue to rise: the figure will top EUR 100 billion in 2012 (52 % GDP) - in spite of recent development in the government deficit and an increase in public debt the sovereign credit ratings on the Republic of Finland are stable (long-term / AAA / Standard & Poor’s) - elections in April --- new parliament; new government ???

14 Central Government Debt of Finland, years 1995 – 2010 € billions %

15 Finland: Interest spreads to Germany months: 4/ 2010 – 4/ year 10 year

16 NAOF:s audit activities Annual financial audits: - Ministry of Finance - State Treasury - Annual audit of State’s Financial Statement - Fiscal Policy, sustainability - budget deficit, borrowing and lending operations - reports on central government lending - Annual follow-up of the Central Government’s Debt Management Strategy and Operations - annual update of debt management strategy - risk management reports (monthly) - discussion with MoF / Money Market dep. - discussions with State Treasury, Director of Finance and Deputy Director of Finance, Manager of Risk Management - Performance Audits - none no audit plans for 2011 (except European Financial Stability Facility / System)