Research Discussion Papers, Bank of Finland
No 25/1998:
Sustainability of Public Finances in Finland and the Four Largest Euro-area Economies
Helvi Kinnunen ()
and Pasi Kuoppamäki
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
harmonisation 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.
Keywords: public finance; sustainability; stability pact; tax competition; ageing; pensions; (follow links to similar papers)
30 pages, November 26, 1998
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