Cutting back public expenses: is Ville Niinistö right, and Stubb, Rinne, Sipilä and Soini wrong?

???????????????????????????????????????????????????????????????????During a recent meeting in January, National Coalition Party leader Alexander Stubb, Social Democratic Party leader Antti Rinne, Center Party leader Juha Sipilä and Finns Party leader Timo Soini arrived to a consensus on the need to cut back public expenses. Stubb indicated that the cuts should be around 5 to 6 billions euros, Sipilä around 2 billions euros, Rinne and Soini did not indicate any level for these cuts. But Soini does not want the cuts to affect people with a monthly income under 1000 euros

On the 31/01/2015, Ville Niinistö, leader of the Greens Party, presented the themes for his campaign, which are going to be the environment, employment, poverty and education. And he clearly stated that the Greens do not want public expenses’ cuts.

Who is going to suffer?

My first reaction to Stubbs’ 5 billions cut was to look at Finland’s budget to see where he could cut, or in other words who is going to suffer . Finland’s central government’s expenditures amount to less than 60 billions a year, so I understand that Stubb wants to cut it by 1%. But all the proponents of “cutting” are in fact not explaining what are the cuts, and what they will mean for the population.

Stubb and others have already announced that they will not lower education’s and defence’ s expenses, a relief for the teachers, the pupils, and the soldiers. The biggest part of the budget is “Social expenditures”, which will be quite difficult to lower, as the social problems are on the increase due to the high level of unemployment: so keeping social expenses under control will be already tough, and the beneficiaries are going to suffer anyway. But who is going to suffer: patients, as health expenditures are a main part of the remaining? Or  police? It is a difficult sell for any government.  And none of the courageous leaders who want cuts to balance the budget are saying which one they want…

A dangerous idea in Finland’s situation

OECD, in its last survey of Finland, did not recommend any cut in public expenses. Its recommendations were to implement a further pension reform, complemented by measures to lengthen working lives, requiring better integration of older workers through fighting age discrimination and promoting lifelong training, the need to promote the voluntary merger of municipalities, or the scaling back of their public service delivery responsibilities, where possible, and further measures to boost innovation and green growth, notably through education and research spending and the phasing out of environmentally harmful subsidies.

The European Union, in a Council recommendations  on Finland adopted on the 8th of July, was adding to  the list the need to curve the increase of the debt to stay under 60 % in 2015, and to implement ” a growth-friendly fiscal policy“.

Finland wanted as usual to be the good pupil in the class, but the government just focused on certain topics: the pension reform was decided, the government tried to push for the municipal reform, with a more limited success, lowered the taxes for the companies at the level of 800 millions euros in an effort to implement the “growth-friendly fiscal policy” requested by the EU, and cut in the education budget and in the subsidies for local authorities.

But it did not work. Finland’s GDP went down again. The pension reform does not have any impact yet. The municipal reform will not be effective in the short term, if it really takes place. And the 800 millions euros reduction in corporate taxes has had no impact on growth, according to the Federation of Finnish entreprises .

In fact, Finland’ growth is in a worse situation than in other European countries. In line with other EU countries, Finland is the victim of the global crisis. One of its main customer, Russia, is in a deeper crisis due to the sinking price of energy and the sanctions: the result is that Finland in a large number of sectors cannot sell any more to Russia, and there is no compensation from the EU or the US, who were pushing for these measures. Even the developing tourism industry is now in danger.

The reason why neither the OECD nor the EU recommended to lower the public expenses is that it is just stupid: in a depression, a decrease of the public expenses is just increasing the depression, as it has been seen in Spain, Greece, and Ireland, with a dramatic cost in terms of unemployment and poverty. And very little chances to recover without extreme measures, as the lower growth provoked by a lower budget leads to a lower tax income, which creates a further imbalance in the state budget…

Same budget, different structure

At the same time, it would be quite difficult for Finland to apply Roosevelt’s New Deal, by increasing public spendings to improve the growth: Finland is very integrated in the European markets, and a push for growth in only one country would benefit others, so there should be the same policy in all countries for it to be effective. In addition, Finland has made commitment towards Europe to limit its debt and deficit, and has apparently no intention to ask for some flexibility. And being in the eurozone, Finland is not able to perform a devaluation, as it was done twice in the 90s.

So Finland should not decrease its budget, but cannot not increase it.

However, there is an intelligent way to boost growth without changing the level of public expenses: as stated by the OECD, it should be thought how to have growth-friendly taxes and public expenses, and cut back on the unproductive public expenditures. There is quite a literature on this topic, and a number of countries such as Sweden and Canada have already advanced in this direction, in ways that could be applied in Finland: reform of the public administration, development of green taxation, increase of public funding for private research, business-friendly administration (in particular for small businesses), support for the green economy… The interesting fact is that you find a number of them in the Greens party programme (research, education, green economy), but they cannot work without some ideas that you can find in other party’s manifesto, such as the actions in favour of small businesses.

This is not an easy task, and it needs to have a strong political lead. For this reason, and considering Finland’s situation, I would disagree with Alexander Stubb, who considers that large alliances prevent the government from making strong reforms : in a crisis situation, there is a need for the parties to work together and find consensus on the reforms, as it was in the 90s, or the country may get paralysed. It just needs a strong leadership. It is an interesting challenge for M. Sipilä, when he will lead the next Finnish government, if the polls are right…



Categories: Economy, Elections

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