Finland's new parliament and recently formed government will have a difficult start as a result of the uncertainty in the world economy. The termination of military operations in Iraq has not eliminated the risks in the international economy. On the other hand, Finland's economy is still strong.

Many expectations were created and promises about changes were given before the recently held general election. The core of the new government coalition comprises the Centre Party and social democrats, with Anneli Jäätteenmäki becoming Finland's first woman prime minister. When the Government gets down to business, it will be worth recalling that only when economic growth has been guaranteed will it be possible to focus on redeeming other more attractive election pledges.

The base of the Finnish economy is, in many people's eyes, more stable than most of the economies in Europe. The balance of payments is showing a big surplus, likewise the public sector. The level of corporate self-sufficiency is still adequate and households are only moderately in debt. However, growth prospects for the GDP have also been lowered in Finland in recent weeks. Latest estimates vary between 1.5 and 2.5 per cent. Consumer confidence has also started waning in Finland.

Companies are adopting a cautious attitude towards the near future. Recent questionnaires on the economic trend show that the situation will remain poor in the first half of this year at least. Industrial order books have not grown during the spring, and the degree of utilization capacity has fallen. Although employment in industrial companies has shown a clear drop, unemployment in the economy as a whole has not, as yet, started to increase.

More employment

The factors threatening the world economy are linked to structural problems both in the United States and Europe. In addition to external threat factors, Finland will have its own unsolved basic problems for the next few years, particularly with employment and also an ageing population and public expenditure pressures.

Employment must definitely be increased in the next few years, otherwise the base of the Finnish welfare model will start to erode. Old cures on their own will not be adequate to accomplish this; new moves will be needed.

The new government intends increasing public expenditure by over a billion euros by the end of its term of office. On the positive side, some of the increase will be directed at Finnish know-how and developing the know-how base. On the other hand, the new government intends reducing income tax in particular, although much more cautiously than its predecessor. For both structural and trade-cycle reasons one could have hoped for a much braver line over tax reductions.
The government has committed itself to keeping central government finances in balance during its term of office. Their strong position at the moment provides a good starting point for this. Finland can now afford economic stimulation through fiscal policy, unlike many of the major EU countries, where the opportunities for stimulation were wasted during the good years, when inadequate provision was made for times that are not so good.

In the final analysis what happens in an open, export-oriented country such as Finland is dependent on what happens in the world economy. One of the most important tasks of the domestic economic policy will be to support the strengths of Finnish know-how and competitiveness. In this way Finland will remain attractive as a place in which to locate and invest.