Measures Will Slim Down One of the Most Robust Social Safety Nets in the World
HELSINKI—Finland on Friday unveiled a wide-ranging plan aimed at repairing a growing gap in public finances and boosting growth, as the Nordic nation has seen rising debt and a stagnant economy dent its reputation as one of the euro zone's fiscal powerhouses.
Finland remains the only country to maintain a triple-A credit rating and stable outlook among the 17 euro-zone members, but its influence has waned as public finances deteriorate. On Friday, Standard & Poor's Ratings Services lowered the credit rating of the Netherlands one notch to AA+, one of Finland's peers in the "core" of the euro zone.
In a new 28-page plan, Finland Prime Minister Jyrki Katainen's government proposed a broad slate of changes that will slim down one of the most robust social safety nets in the world. Proposed changes include closing down some secondary-level schools, transferring elderly people from nursing facilities to home care, and both compelling and incentivizing the unemployed to seek jobs.
The measures are being proposed as Finland's population ages and its pool of high-paying jobs dwindles. The decline of bedrock industries, including paper, and the fall of NokiaCorp. NOK1V.HE -0.67% from its once-dominant position in the mobile communications technology have crimped an economy long dependent on exports, manufacturing and the telecommunications industry.
Finland, the eight-largest economy among the 17 members of the common currency, is a relatively small player in the global economy (its output in 2012 was 7% of the annual national output of Germany). Still, the once-strong economy and strict adherence to the EU's fiscal rules enabled it to play an outsized role in shaping the policy response to the European debt crisis.
During a news conference Friday afternoon, Mr. Katainen, appointed in 2011, said he hopes his country "can retain our status" as AAA, but said decisions are ultimately up to rating companies. "Our job is to defend Finland."
Up until recently, Finland was known for extremely low debt levels. But a confluence of headwinds has created a structural funding of gap that the government estimates will hit 4.7% relative to Finland's national output by 2017 if no action is taken.
Curbing local government services, boosting the supply of labor and improving productivity in publicly funded services are measures aimed at closing this gap, but Mr. Katainen said he is prepared to do more. "If these measures don't suffice, then we'll implement new measures."
Loss of competitiveness weighs heavily on Finland's export-driven economy. The government has calculated that Finland, with a population of 5.4 million, has lost 100,000 jobs in its traditional manufacturing industries over the past 10 years. Nokia alone cut roughly 10,000 Finnish positions over the past five years.
To attract new investment in Finland, the government decided to lower Finland's corporate tax rate to 20% from 24.5% starting in 2014. The government has started to implement other measures to attract foreign companies to Finland.
Google Inc., GOOG -0.33% for instance, is plowing $1.1 billion into a new data center it built in a closed paper mill in a small Finnish city located on the shores of the Baltic Sea.
But an overall decline in output and flat tax revenue have led to a sharp rise in public debt. Finland's ratio of public debt to GDP has risen to 58.4% from a low of 33.9% at the start of the financial crisis in 2008.
That trend has held back Finnish government's efforts to reduce its budget deficit and earlier in November the European Commission said there is risk of Finland's 2014 budget will breach EU fiscal rules, putting it to the same category as weaker European countries that Finland once distanced itself from, such as Spain and Italy.
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