8

Finnish government net debt is negative

by Roope Uusitalo

Photos by Lauri Rotko

Finnish general government has gross debt that currently exceeds 60 per cent of the GDP. However, the government also has large amounts of financial assets, mainly in the pension funds. As a result, the Finnish general government net debt is negative and measured by net assets the Finnish government is one of the wealthiest in the world.

Finnish general government gross debt has exceeded 60 per cent of the GDP since 2015. Public debt is projected to increase to 66 per cent of GDP by 2018, hence clearly breaking the debt limits of the EU Stability and Growth Pact.

However, in Finland monitoring the growth of general government gross debt is far from the full story. The Finnish government also holds substantial amounts of financial assets. Subtracting the financial assets from the gross debt reveals that net debt is negative in Finland. According to the most recent data from the IMF Fiscal monitor, the government financial assets exceed the government debt by an amount that corresponds to about 50 per cent of GDP. In fact, measured by the net asset position, the Finnish government is the second wealthiest government among the advanced nations. Only in Norway is the net asset position stronger than in Finland.

Zoom General government net debt graph

Large amounts of assets

In Finland the general government financial assets are mostly in pension funds. The pension insurance system is operated by private insurance companies, but all the rules regarding pension benefits are stipulated in legislation and pension contributions are confirmed by the Ministry of Social Affairs. The insured carry no risk: should the pension expenditures increase in an unexpected way, the contributions adjust. Including pension funds in the public sector is not unique; a similar classification is used also in many other EU countries. What is exceptional in Finland is that the public pension system is partially pre-funded and has unusually large amounts of assets.

Having simultaneously debt and substantial assets creates an interesting question on which debt measure should be used in assessing sustainability of government finances. Gross debt is surely a poor measure and a measure that could be easily manipulated. One reason is that internal debts between the different sectors of government are not counted as debt when calculating gross general government debt. Hence, an easy way of reducing government gross debt would be to require the pension funds to allocate a larger share of their assets to domestic government bonds. Naturally, such an investment policy would make little sense for the pension insurance companies.

Measuring net assets is a clear improvement, even if only financial assets were counted. Surely a government that has simultaneously large amounts of assets and debts is in a stronger position than a government with only a large debt. In principle one could develop even better debt measures. If pension funds are counted as assets, one should also count pension liabilities as debt. In Finland these are reported on the balance sheets of pension insurance companies. Making the figures internationally comparable might be difficult, though.

Roope Uusitalo

Roope Uusitalo

Roope Uusitalo is a professor of Economics at Jyväskylä University School of Business and Economics. He is currently also Chairman of the Finnish Economic Policy Council. His research interests include economics of education, labour economics and public economics and he is currently heading a research group on education skills and the future of work.

Sustainability calculations

Fortunately, better measures of fiscal sustainability than gross or net debt already exist. Sustainability calculations are projections of public sector revenues and expenditures into the distant future. These calculations take into account both the revenue from current assets and the burden of servicing the current debt. The gap between the present value of the future expenditures and the present value of the future revenues, i.e. the sustainability gap, is a more comprehensive measure of financial health than either debt measure.

Sustainability calculations also reveal that wealthy countries have their own problems. For most countries a low interest rate is good news as it decreases the burden of servicing the debt. For a country with positive net assets the opposite happens. The sustainability gap grows with a decrease in interest rate.