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Sustainability of public finances in Finland and the four largest Euro-area Economies

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  • Kinnunen, Helvi
  • Kuoppamäki, Pasi

Abstract

The paper analyses the sustainability of fiscal policy in the four largest countries of the EMU area and Finland with the aim of assessing whether current fiscal policies are compatible with the Stability and Growth Pact in the medium term.The sensitivity of the deficit and debt ratios to changes in the real interest rate and economic growth is also assessed.Moreover, since population ageing will cause an extra burden on public finances, the fiscal pressure of rising pension costs in the longer term is also investigated. The baseline calculations for the medium term suggest that fiscal policy is sustainable in all countries except perhaps France. However, highly indebted countries such as Italy are clearly more sensitive to changes in interest rates.The results indicate that there is little or no room for active fiscal policy.The room for manoeuvre is even more limited if one takes into account that tax rates most likely need to be lowered in many countries, especially in Finland and Italy, due to tax harmonization and tax competition. Moreover, population ageing will impose pressures on public finances in the long run.Only Finland and Italy seem to be in a position to cope with increasing pension expenditures over the long run.

Suggested Citation

  • Kinnunen, Helvi & Kuoppamäki, Pasi, 1998. "Sustainability of public finances in Finland and the four largest Euro-area Economies," Research Discussion Papers 25/1998, Bank of Finland.
  • Handle: RePEc:bof:bofrdp:1998_025
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    File URL: https://helda.helsinki.fi/bof/bitstream/123456789/7878/1/87675.pdf
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    References listed on IDEAS

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    1. Michael Artis & Massimiliano Marcellino, "undated". "Fiscal Solvency and Fiscal Forecasting in Europe," Working Papers 142, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    2. Kinnunen, Helvi & Tujula, Mika, 1997. "Finanssipolitiikan liikkumavara, eläkkeiden rahoitus ja EMU," Research Discussion Papers 9/1997, Bank of Finland.
    3. Peter Brandner & Leopold Diebalek & Helene Schuberth, 1998. "Structural Budget Deficits and Sustainability of Fiscal Positions in the European Union," Working Papers 26, Oesterreichische Nationalbank (Austrian Central Bank).
    4. Michael Artis & Bernhard Winkler, 1998. "The Stability Pact: Safeguarding the Credibility of the European Central Bank," National Institute Economic Review, National Institute of Economic and Social Research, vol. 163(1), pages 87-98, January.
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    Cited by:

    1. Ignazio Visco & Barry Eichengreen & Gilles Mourre & Declan Costello & Giuseppe Carone & Nuria Diez Guardia & Bartosz Przywara & Aino Salomäki & Vincenzo Galasso & Mark Weth & Sebastian Schich & Etienn, 2007. "Money, Finance and Demography: The Consequences of Ageing," SUERF Colloquium Volumes, SUERF - The European Money and Finance Forum, number 1 edited by Morten Balling & Ernest Gnan & Frank Lierman.

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