More austerity, reforms ahead for Finland, PM Stubb says

Reuters News
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Posted: Sep 16, 2014 10:40 AM

By Jussi Rosendahl

HELSINKI (Reuters) - Finland's weak economy mean its government may have to cut spending further over the next few years to stop national debt levels exceeding EU limits, Prime Minister Alexander Stubb told Reuters.

The small Nordic economy, whose strong exports and government finances were once hailed as a model for the euro zone, is now in its third year of recession. Shrinking revenue and output is bringing it close to the European Union debt ceiling of 60 percent of gross domestic product (GDP).

Stubb said in an interview that there was not much his coalition could do to help the economy, especially with general elections only seven months away. He took the helm of a five-party government in June after Jyrki Katainen stood down early.

Finland has yet to return to 2008 GDP levels after its exports dwindled due to the euro zone crisis, problems at its mobile phone and paper industries and the crisis over Ukraine.

"We just have to concentrate on the programs that have already been agreed... we will execute them as far as we can with this government, and then we need to start building a new rescue strategy for Finland," he said, speaking in his office at the government palace over a cup of tea on Monday.

He said the country seems to be going through a lost decade of growth.

"It is a long and rocky path, and I will not promise that the situation would essentially improve in the next months or years.

"We must be mentally prepared that structural reforms will continue, and there might also be new budget adjustments."

The quarrelsome coalition which originally included six parties has since 2011 agreed on spending cuts and tax hikes worth more than 7 billion euros ($9 billion) by 2018, intended to curb debt growth and protect the nation's triple-A credit ratings.

However, government gross debt is still set to breach 60 percent of GDP next year. Many economists have urged the government to step up structural reforms, such as raising the retirement age, but those plans have proceeded slowly, prompting Standard & Poor's to cut its ratings outlook.

Only 7 of the 19 original ministers in the government still hold their seats after several resignations and changes by the parties, and that number will probably shrink further after the Greens party said on Monday it would walk out over a government plan to back a Finnish-Russian nuclear plant project.

Stubb, projecting characteristic optimism, said he wasn't too worried because the government would keep a parliamentary majority, albeit meager.

"This is an executive government," he said, citing his brief term in the role and the fact that many future fiscal policy measures have already been agreed.

"We have had difficulties at times, but we have still come up with necessary decisions."

On the reform side, the government has laid out preliminary plans to restructure pensions, health care and local government budgets.

BANKER WARNING

Stubb's right-leaning National Coalition party leads recent opinion polls with opposition party Centre, but as both only have around 21 percent of support, the next government is likely to be another coalition of parties with varying views.

Bjorn Wahlroos, the board chairman at Nordic region's largest bank Nordea, holding company Sampo and paper maker UPM-Kymmene, described Finland's situation as "catastrophic" in a newspaper last week, saying it was even worse than during the bank crisis of the early 1990s.

He called for politicians to slash corporate and income tax, collective labor agreements and unemployment benefits in order to boost competitiveness and encourage investments.

Asked about these proposals, Stubb, whose Social Democrat finance minister Antti Rinne is a former union boss, said they may make sense but are "politically impossible".

"I am worried about the (long-term fiscal) sustainability gap and structural deficit, the high level of public revenue to GDP, and our very high tax ratio. These are structural problems which the state can address," he said, adding he hoped trade unions and employers would soon strike a deal on a long-term 2 billion euro pension reform.

Government revenue as a share of GDP rose to 56.3 percent this year, the highest in the EU. Finland's tax to GDP ratio is expected to edge up to 45.8 percent this year.

Stubb's cheerful communication style and vivid Twitter account, with more than 140,000 followers, has prompted local debate about whether this undermines his status.

"I think it is just part of modern, open society," said Stubb, who is 46. "It is important that prime minister is present wherever the debate is live... Twitter is an interesting, challenging and a fine way to communicate, it is direct democracy. The more discussion, the better."

(1 US dollar = 0.7718 euro)

(Editing by Ruth Pitchford)