As interest rates rise, Finland’s debt maintenance costs also rise. However, the Finnish economy will also be affected if Russia cuts gas supplies to Europe, warns a pension company chief.
The Finnish state currently carries about 137 billion euros in debt and this figure is likely to increase. Public debt has risen rapidly in recent years and rose even more vigorously at the start of this year.
The Ministry of Finance is starting this week to prepare the government’s budget for next year.
Like many countries, Finland’s debt has increased significantly during the Covid crisis. Then, when Russia attacked Ukraine, the state borrowed more funds for defense purposes.
The Ministry of Finance estimated last spring that it would end up spending around 700 million euros on interest charges alone. However, due to rising rates, it looks like the state will be spending around €1.2 billion on it this year.
However, among pundits and business leaders, opinions differ as to the biggest economic threat Finland faces.
Aki Kangasharjueconomist and CEO of the Finnish Economics Research Institute (Etla) think tank, said Finland has had a misconception about low interest rates for too long.
“Above all, this [situation] proves that it was ridiculous populism to claim just a year ago that we had entered a new era where debt no longer matters,” he said.
“We will have to start saving”
Jenni Paakkonensenior financial adviser at the Ministry of Finance, acknowledged that interest rates have fluctuated more than usual lately.
“For policymakers, the most important takeaway is that the era of zero interest rates is over and debt has a cost again,” Pääkkönen said, adding that Finland’s rising debt is expected to be curbed to prevent interest charges from being too high. devouring public funds.
Kangasharju of Etla noted that Prime Minister Sanna MarinThe (SDP) government has taken on nearly €10 billion in debt for future investment, saying the spending was meant to be temporary but has become permanent.
“It’s good that more teachers have been hired in vocational schools, but we can’t give so much extra money to each ministerial branch because we’re going to have to start saving at some point,” Kangasharju said. .
However, the head of the think tank added that he did not want to declare an absolute emergency under this government or the next.
“But if the spending levels of the past few years continue for a few more government administrations, then a debt crisis situation will certainly be possible,” he said.
LNG shutdown would impact Finland
Meanwhile, Restaurant MurtoCEO and chairman of pension insurance company Varma, said he doesn’t think rising interest rates pose a major threat because as rates rise so does inflation, which contributes to eating away at this debt.
Furthermore, he said an interest rate hike would have less impact than if Europe’s liquefied natural gas (LNG) supply were cut off.
Unlike other EU countries, Finland does not depend on Russian LNG. However, if the gas cuts cause Central European countries to fall into recession, the repercussions will soon be felt in the Finnish economy.
“If the gas supply is completely cut off and the economies of Germany and Italy are in recession, this will inevitably affect Finland as well,” he explained.
The Finnish economy has gone through a unique period in recent years. When interest rates were below zero, the state sometimes even received money to borrow money.
“The interest rate the state is paying for its debt is still exceptionally low. It’s especially low considering our rate of inflation,” Murto said.
Another threat posed to Finland’s economy is the country’s aging population, and in the future there will be fewer and fewer public funds available to pay off the national debt, according to Murto.
“It’s a structural problem that looks a bit like Italy, which has a similar demographic structure. It will be difficult to get rid of this debt,” he explained.
This situation is known as the sustainability gap, where public coffers are increasingly financed by debt, while spending amounts increase as the population ages.
Etla’s Kangasharju said he thought the “do nothing now, we’ll deal with it later” attitude was strange, adding that Finland should settle its debt now, before a crisis hits.