A new government for Finland: reforms and austerity

Finland will be ruled by a conservative three party government. The new government will be formed by the Centre Party (liberal), the Finns (populist, previously called True Finns) and National Coalition (conservative). Juha Sipilä - the next Prime Minister - led the three party negotiations to a successful conclusion today.

The government strategy is reform oriented and fiscal policy will be tightened significantly. The government aims to adjust public finances by a total of EUR10bn, through a combination of short- and long-term measures. Expenditure cuts and structural reforms are expected to save EUR6bn before 2021. Social and healthcare reform (SOTE reform) and productivity improvements are expected to save EUR3bn. The rest comes mainly from cutting municipal tasks and better employment.

In analysts' view, the handicap for conservative governments of the past has been opposition from the labour unions. Progress in reforms could be plagued by labour disputes, especially if the opposition parties (Social Democrats, Left Alliance, Green League, Swedish People and Christian Democrats) are left out of major decisions concerning social and health care and labour market reforms. 

The new government inherits a weak economy and growing debt. Failure to carry out reforms could consign Finland to a slow growth path and lead to a downgrade of sovereign ratings, says Danske Bank. The announced reforms and expenditure cuts are likely to be enough to satisfy rating agencies at this point but a successful implementation is crucial. Debt growth should be halted by 2021. The announced measures do not change our forecast for 2015-16. The outlook for the Finnish economy is weak: only 0.5% GDP growth is expected in 2015, adds Danske Bank.