A lot of people don’t understand Government Debt because the numbers are too big. They think someone smarter should work it all out and the whole thing is not their problem. This mentality is irresponsible. Government debt is the people’s debt and it will affect everyone, especially future generations.
Just like with personal debt, when Government debt gets too high, it can lead to difficulty paying bills and inevitably bankruptcy. Greece, Lebanon, Sri Lanka, Pakistan, Argentina and a bunch of other countries are modern examples of this. Recovery can take generations and cause unnecessary pain and suffering.
Government Debt is Usually Bad Debt
Debt can be a tool for generating economic growth. When governments invest in things like infrastructure it can have a multiplier effect on the economy. The key measure of good debt is that it pays dividends to the future over and above what it initially cost.
Bad debt is when the government needs to borrow to pay current obligations. This debt once generated has little to no future benefit. Just like credit card debt it can easily get out of control and leave the borrower with limited ability to pay it back.
When tax revenue is insufficient to cover Government costs, taxes should be raised or services cut. Neither of these is popular with voters so politicians take the easy option of borrowing more money.
Finland is incurring a lot of new debt and it is not for good investments. In 2023 the country will borrow €10.4 billion dollars to cover a 12.4% shortfall in tax revenue. If this was a one-off thing it wouldn’t be so bad but the government has only balanced a budget a couple of times in the last 17 years.
This has accumulated a debt of €145 billion equates to €25,985 per person or a debt of €103,940 for an average family of 4.
Debt won’t be paid off by Growth
Economic theory tells us that if debt growth is less than GDP (Gross Domestic Product) then debt will get comparatively smaller over time. This is true but not in the case of Finland where debt is growing 2.5% faster than GDP.
Growth can come from many sources but in developed economies like Finland, it most noticeably comes from population growth – either babies or migrants.
Even with the COVID baby boom Finland still saw 7,700 more deaths than births. The population growth in 2021 came from the 22,300 migrants that moved to the country.
The big problem for Finland is that the country struggles to attract highly skilled migrants who prefer countries that are easier to integrate into.
The lower-skilled migrants who do come to Finland put a lot more cost on society to integrate. Their low salaries and eligibility for support erode potential tax revenue. Larger cultural differences from the poorer countries they come from lead to friction in society and pushback that manifests in election results of parties opposed to immigration.
As time goes on we will need to get used to the idea of a declining population. Projection put us on a fully negative trajectory for population growth by 2030 even with current migration numbers staying unchanged. Along with this trajectory will be increased pension and healthcare costs from Finland’s aging population.
The €10.4 Billion Hole in Finland’s Budget
Balancing a budget is a basic life skill for everyone, including Governments. Running the €10.4 billion budget overspending puts an additional €7,500 of public debt on a family of 4 in a single year.
On top of that, a family of 4 will be paying €2000 a year in interest repayments on the €145 billion already borrowed (1.8% interest). The €2.7 billion in interest is more than it costs to run the entire Ministry of the Interior.
Come next year the €2000 in interest repayments will double to €4000 or more putting even more stress on the economy.
If the government increases taxes to fix the problem we will see a reduction in household spending. They would need to increase VAT rates and Income taxes to stand any chance of generating an additional €10.4 billion. More money in the government’s hands means less in the hands of consumers so expect fewer euros circulating and an impact on private sector investment and jobs.
Smaller Government is healthy
If the Finnish welfare state can’t balance its budget with the already high taxes it levies, something is fundamentally wrong. Government inefficiency is inherent because monopolies have few incentives to reduce waste.
Scarcity is a catalyst for better prioritization. Reduce funding and the creativity of individuals to find efficiency will be released. This often leads to fundamentally redesigning services that deliver the same result with a fraction of the effort.
The Maisa health app in Finland is a good example of this. Nowadays requests are triaged by a nurse and doctors prescribe medication based on photos without the need for a face-to-face visit. Lead time has shortened to hours from days.
Continual funding overspending also has a tendency of expanding Government. This leads to the government getting involved in a whole bunch of stuff they shouldn’t be involved in. Odds are you have some ideas on what you want to spend your money on and big government takes more choices out of your hands.
A way forward
Greater awareness among the general public on the negative effects of Public debt is needed to make it less politically easy to increase borrowing. Balancing the budget should become the norm for all parties in government.
Government departments need to get a 5-6% annual reduction in their budgets over multiple years to bring things back to balance. A 12.5% gap is not that hard to close with a bit of effort from everyone. Less money also usually leads to more focus on the things that really matter.
Long term, the elephant in the room that needs to be dealt with, is Social security and Healthcare funding. Finland’s aging population is putting pressure on both. As it stands today, the national pension fund is a Ponzi scheme, but it doesn’t need to be that way. There is no reason working adults shouldn’t be able to fund their own retirement. Australia for example has had success implementing a superannuation scheme along with tax incentives that reward people for saving for retirement. This takes some pressure off public funds.
Soaring Healthcare costs are going to be a bit harder to fix. A good starting point has been excise taxes on Tobacco, Sugar and Alcohol that penalise unhealthy living. Systemically though, more is needed to reduce costs and improve output in the healthcare sector. The Maisa case mentioned previously is a step in the right direction.
Finally, more transparency (and scrutiny) is needed on public service providers. Lack of competition and complacency leads to ballooning budgets and inefficiency unless there is a culture of continuous improvement and accountability. Key Performance Indicators agreed upon through community consultation and more open dialogue around identified issues and actions are needed for better governance.