Safety Belt or Handbrake?

Executive Summary

Finland’s national debt brake is stricter than the EU fiscal framework. In December 2025 the Finnish Parliament adopted legislation establishing a national debt brake. It requires the ratio of general government gross debt to GDP to fall by an average of 0.75 percentage points a year until it drops below 40% of GDP, and it caps the general government deficit at 2.5% of GDP. Both targets are more stringent than those of the European Union’s fiscal framework, which sets a 60% debt threshold and a 3.0% deficit limit.

We estimate the macroeconomic effects of Finland’s new fiscal rules. This report assesses what the fiscal adjustment requirements arising from the debt brake and the EU rules imply for the Finnish economy. It also evaluates which combinations of policy measures the next government could pursue to meet the debt and deficit targets over 2032–2039. The simulations are based on the European Commission’s debt sustainability analysis model, further developed here to incorporate potential hysteresis effects.

The Ministry of Finance’s assumptions imply an adjustment of €9.7 billion. Under the Ministry’s own assumptions, achieving the required debt-reduction path would take a nominal fiscal adjustment of €9.7 billion during the next parliamentary term, reaching its full annual level in 2031. That would bring the debt-to-GDP ratio down by an average of 0.75 percentage points a year over 2032–2039. The estimate sits at the midpoint of the €8–11 billion range proposed by the parliamentary fiscal policy working group in February 2026.fiscal policy working group.

Public expenditure cuts could fail to reduce the debt ratio. The Ministry’s estimates carry considerable risks, because its calculations systematically understate the adverse economic effects of public expenditure cuts. They disregard the state of the economic cycle, apply a fiscal multiplier of 0.5 that is too low for current Finnish conditions, and leave out potential hysteresis effects. Estimates in the research literature put the multiplier for Finland between 1.15 and 1.69. When more realistic assumptions grounded in that literature are applied, a reduction in public expenditure of €9.7 billion could weaken economic growth to such an extent that the debt ratio fails to enter a declining trajectory.

Key Recommendations

1. A smaller revenue-led adjustment could achieve the required debt reduction. The calculations of the report suggest that the debt ratio could be reduced in line with fiscal rules through tax increases. A nominal increase in taxation of €8.4 billion during the next parliamentary term would be sufficient to achieve the targeted annual reduction of 0.75 percentage points in the debt ratio over 2032–2039.
2. Combining taxation and investment could support both debt reduction and growth. An alternative strategy would combine tax increases with higher public investment. Increasing taxes by €8.1 billion alongside a €5.1 billion rise in annual public investment would likewise place the debt ratio on the required downward path. Assuming the presence of positive hysteresis effects, such investment would raise GDP by €21.9 billion (7.5%) by 2039, thereby enhancing living standards.
3. Fiscal adjustment models should better reflect real economic conditions. Looking ahead, the Ministry of Finance should recalibrate its fiscal adjustment models. Key parameters should more accurately reflect the chosen fiscal measures, prevailing cyclical conditions, and the composition of aggregate demand. Without such refinements, fiscal policy recommendations risk undermining economic growth and weakening Finland’s public finances.