Fiscal & Growth Policy

Report
FI
15.04.25

The Detrimental Impact of Finland’s Fiscal Consolidation

What if Finland’s plan to cut debt ends up increasing it?

Executive Summary

Finland’s consolidation plan may be self-defeating. The Orpo government has launched one of the EU’s largest fiscal tightening efforts relative to GDP — a €9 billion package aimed at stabilising debt and restoring confidence. But new simulations suggest that in Finland’s current macroeconomic conditions, such adjustment could weaken growth, reduce revenues, and push the debt ratio up rather than down.

Fiscal tightening follows political and European pressure. Ahead of the 2023 elections, rising debt and demographic pressures framed public finances as Finland’s central challenge. The new EU fiscal rules reinforced this narrative, pushing governments to show credible debt-reduction paths. While Helsinki negotiated a lighter target — 0.43 % of GDP annually instead of the 0.76 % first proposed by the European Commission — the package remains among the most stringent in Europe given Finland’s sluggish growth.

The macroeconomic context is already fragile. GDP contracted by 0.2 % in 2024, unemployment rose to 9.3 % by mid-2025, and the deficit widened to 4.4 % of GDP. Public debt reached 82 % despite early consolidation steps. In this environment, sharp fiscal tightening risks triggering further contraction, particularly given Finland’s export dependence and limited monetary offset within the euro area.

UTAK’s 2025 simulations suggest fiscal tightening may backfire. Using both the Bruegel Debt Sustainability Analysis (DSA) model and the European Commission’s framework, the report tested the €9 billion package. When realistic fiscal multipliers (1.4 rather than 0.75) and longer-lasting spillovers are applied, the results show GDP stagnating and the debt ratio drifting toward or above 100 % of GDP. Under such conditions, fiscal consolidation undermines the very objective it pursues.

Policy recommendations

  1. Reform EU and national fiscal frameworks to prevent pro-cyclical tightening during low-growth periods.

  2. Replace front-loaded consolidation with gradual, counter-cyclical adjustment paths.

  3. Implement a €4 billion public investment plan in transport, housing, education,

  4. Redesign fiscal rules to balance debt sustainability with growth and job creation.

  5. Integrate realistic multipliers and spillover effects into EU and national debt sustainability analysis (DSA).