For nine years, the happiest country in the world is now facing big cuts. Finland's public debt has reached 90,3 percent of GDP, while military and energy costs are rising. Before the elections, the question is no longer whether there will be savings, but who will pay the bill: healthcare, social protection or pensions?
Concerns are growing in Finland, the country that was valid for nine years in a row the happiest in the world. Finns are facing a very cold winter, and with it, the strictest budget in recent years focused on savings.
Ahead of the April elections, the debate is no longer about how much will be cut, but about which services, social benefits and pensions will suffer the biggest cuts.
Finland's debt and deficit indicators are the worst since the 1990s, when the Nordic country was plunged into a severe economic crisis by bank failures and the collapse of the Soviet Union, an important export partner.
Last month, Finland's statistics office confirmed that public debt reached 90,3 percent of gross domestic product (GDP) in the second quarter. Before the pandemic, that indicator was only about 65 percent.
And here the cause lies in the east. Finland increased its defense spending after joining NATO. The Finns took that step a year after the Russian invasion of Ukraine.
In addition, Helsinki, which previously received about a third of its energy from Moscow, faced significantly higher costs when it switched to other suppliers.
But the Finnish government has been spending more than it has been taking in since the global financial crisis of 2008/09, partly because of an aging population and sluggish economic growth. Last month, the state financial administration forecast that the budget deficit in 2026 will amount to 4,2 percent of GDP.
Brussels is pressuring Helsinki to reduce new borrowing as European Union rules require member states to respect a deficit limit of three percent of GDP. That's why the EU Council initiated the procedure in January and set Finland a deadline of the end of 2028 to return to within the framework of a maximum deficit of three percent.
Prime Minister Peter Orp's government, which took office in June 2023, set a goal of saving around nine billion euros in the current mandate. But whoever wins the next election will have to implement deeper cuts, economists warn.
"Currently, the estimated amounts are between eight and eleven billion euros," Jarko Kivisto, advisor in the monetary policy and research department of the Central Bank of Finland, tells DW.
Already at the beginning of the year, all political parties, with one exception, agreed to support a fiscal rule that commits the future government to limiting the country's budget deficit to two to 2,5 percent of gross domestic product by 2031.
Orp's conservative National Coalition is currently the only party that promises additional savings of nine billion euros if it wins a second mandate. Along with further cuts in healthcare, care and social protection, Orpo also plans measures in the area of pension insurance, but without reducing pensions.
While the Social Democrats want to spread the burden of reforms across spending cuts and tax increases, Orpo is trying to achieve the goal without raising taxes. This would mean more cuts to public services.
However, Kivisto warns: "The deficit is so large that a package of measures would be needed that includes both tax increases and spending cuts."
Although the at-risk-of-poverty rate in Finland is below the EU average, the unemployment rate is higher than in any other member state. In August, according to Eurostat, just over ten percent of Finns were unemployed. Youth unemployment reached 23,3 percent, compared to the EU average of 15,4 percent.
Given that households are already spending less because they have less, Lauri Holapa, director of the Finnish Center for New Economic Analysis, warns that a new round of austerity would be a heavy blow to the domestic economy.
"More than a quarter of employees work in the public sector. If those workers are threatened with layoffs, the savings rate will rise and private consumption will fall again," Holapa told DW.
A series of burdens, from the pandemic, to higher interest rates, to the consequences of two wars, made it difficult to bring the budget closer to positive zero. The draft budget for 2027 still predicts a gap of 12,4 billion euros.
Even before the war in Ukraine, Finland undertook to buy 64 F-35A fighter jets from the USA for around 8,4 billion euros.
During the war, which has been going on for more than four years, the Nordic country has increased its military spending from $4,5 billion to more than $8 billion annually, according to data from the Stockholm International Peace Research Institute (SIPRI).
In April, the government announced that it would further increase defense spending to 3,2 percent of gross domestic product, bringing it closer to NATO's goal of 3,5 percent.
With oil prices stuck at almost $100 a barrel because of the conflict in Iran, the government has so far resisted pressure to increase fuel subsidies. And this despite the fact that in the first months of the attack on Iran, Finland recorded a 50 percent increase in energy import costs.
Although the transition to renewable energy sources and the start-up of the Olkiluoto 3 nuclear reactor three years ago eased the severe energy crisis, the central bank warned during the summer that permanently high oil and gas prices next year would result in "weaker economic growth and higher inflation."
The remaining bright spot is thriving exports, benefiting from strong order inflows in the metal industry and shipbuilding. Holapa compares this dynamic to the "boom of Nokia", when the former leader in the mobile phone market significantly contributed to Finland's economic growth.
"There is a possibility that the export sector can pull us out of this recession," he tells DW, provided that demand from the rest of Europe remains strong.
Market reaction to Finland's debt problems has so far been subdued. The rating agencies maintained a stable outlook for the country, with the exception of the S&P agency, which changed its outlook to "negative" in April, but without lowering the rating itself.
Investors still consider Finnish government debt one of the safest investments in Europe.
However, this is only true until the next shock comes in the form of a more sustained rise in oil prices, a new escalation caused by Russia or a debt crisis in the Eurozone with a focus in France.
Next March, Finland could be declared the happiest country in the world for the tenth time in a row. It's hard to predict how long the smile will last when the election bill for decades of borrowing arrives a month later.
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