Finland: April general elections could mark shift in fiscal and labor market policy
According to the latest opinion polls, Prime Minister Juha Sipila’s Centre Party, which currently heads the three-party coalition government, is set to lose its grip on power after the general elections on 14 April, and a shift towards the left of the political spectrum is increasingly foreseeable. While this could have an adverse effect on Finland’s fiscal consolidation, which has made significant strides in recent years, it could also boost economic growth in the short-term thanks to a more expansionary fiscal stance. That said, despite a likely rise in support for left-wing parties, forming a stable government after the elections could be difficult given the fractured parliamentary arithmetic; this could limit the scope for the new government to roll back recent fiscal consolidation measures and labor market reforms.
News in recent weeks was dominated by the resignation of Finland’s prime minister on 8 March, which pulled the plug on the current government. However, Sipila and his government were immediately re-appointed in a caretaker capacity by President Niinisto until a new government is formed after the general elections. The prime minster cited the failure to pass major healthcare reform as the reason for his resignation, although some political analysts believe it was an effort to refresh his party’s flagging image before the elections.
The current coalition government, which came into power on 29 May, 2015, has pursued a tight fiscal policy in order to strengthen the country’s public finances. The Bank of Finland estimates that the government will have implemented spending cuts of approximately EUR 4 billion by the end of its four-year mandate. More conservative spending and increased tax revenues helped reduce the fiscal deficit from 2.8% of GDP in 2015 to what the government forecasts as a 0.8% shortfall in 2018. The government has also made labor market reforms, such as tightening unemployment benefit requirements, in a bid to boost competitiveness.
Prominent left-leaning opposition parties such as the Social Democratic Party, the Green Party and the Left Alliance have all made steady strides in the polls in recent months on the back of opposition to fiscal and labor market policies. In contrast, current coalition parties the Centre Party, the National Coalition and Blue Reform have fared less well. All in all, these political developments suggest a tangible shift to the left, which would likely result in the relaxation of fiscal consolidation and the uplifting of government spending at a time when the economy is forecast to be slowing, and could also potentially lead to the unwinding of labor market reforms. Bert Colijn, an economist at ING, leans towards this viewpoint, noting: “A centre-left government could be a possibility, although it would not be straightforward to construct.”