HELSINKI: Like much of Europe, Finland is cutting spending and raising taxes to rein in its public deficit. But one of the region’s most vocal advocates of belt-tightening might do better to ignore its own advice.

While its economy flatlines as one-time growth engine Nokia sputters and its forestry firms chase a shrinking European market, Finland’s small debt pile gives it more leeway than most of its euro zone partners to ease up on the austerity.

Many economists believe the next few years offer the government a precious opportunity to do just that and steer its finances toward long-term stability — though a change of tack by Prime Minister Jyrki Katainen seems unlikely any time soon.

“We have a chance to take advantage of our rather solid finances, and do it in a way that would not endanger our credit rating,” said Timo Tyrvainen, chief economist for Aktia bank.

He and others say that instead of short-term austerity, Finland should tackle more fundamental economic imbalances by reforming its labor laws and raising the retirement age, helping the welfare system cope with the rising costs associated with a rapidly aging population.

Anxious to protect the country’s top-ranking AAA credit rating and to serve as a model for European partners they have not shirked in criticizing for fiscal slippage, the six parties in government last year agreed an austerity-focused economic plan.

They programmer tax hikes and spending cuts up to 2016 to trim the budget by 2.7 billion euros.

But for some, that strategy sits uncomfortably with an economic growth rate widely expected to dip under 1 percent in 2012 and reach little more than 2 percent in coming years.

“If growth is being smothered, the public finances won’t stabilize either,” Tyrvainen said.

For others, the situation carries unwelcome echoes of the gradual decline of the country’s signature company, which many would argue has been slow to adapt its products to a changing world.

Nokia was once the undisputed leader of the global handset market, but it has ceded ground at an alarming rate over the past few years to Samsung and Apple.

In June, it announced 10,000 job losses worldwide, including 3,700 in Finland, bringing total cuts to around one in every three workers since Stephen Elop became chief executive in 2010.

“We’ve lost competitiveness and productivity,” said economist Timo Hirvonen from OP-Pohjola.

“The economy is a bit in the same situation as Nokia right now, looking for new growth, searching for a kick-start. And we’ve been lulled into believing the economy would remain solid.”

At first glance Finland’s economy looks relatively untroubled. Central government debt stood at 42 percent of GDP at the end of 2011, the budget deficit at 0.9 percent and unemployment, while rising, at around 8 percent — all well below the euro zone average.

That offers reassurance to the likes of senior finance ministry official Mika Kuismanen, who sees no immediate need to tweak economic policy.

“(The government parties) ...are not in a great need to review this package until next spring. At that time they will examine whether the following two years’ (growth) are seen weaker than expected,” he said.

But signs of systemic weakness are emerging already, indicating the small Nordic economy on the edge of western Europe is far from immune to the region’s debt crisis.

In recent weeks, a clutch of major Finnish companies have announced job cuts, including engineering firms Metso and Cargotec, forestry group Stora Enso and OP-Pohjola bank.

Weak exports tipped the current account into a deficit last year and it is expected to stay that way until 2015, while consumer and industry confidence both weakened in October.



“I’m not necessarily proposing stimulus as such, but I am asking, is it necessary to hike taxation? Increasing income tax will slow down consumption,” said Nordea senior analyst Pasi Sorjonen.

Slowing economic activity makes it harder to make ends meet, especially as Finland’s post-war babyboomers begin to retire en masse without enough locally born or immigrant workers to replace them.

“A wise thing to do would be to raise the retirement age. That action would fill in the long-term public finance gap,” said Juhana Vartiainen, the director at the state-run Institute for Economic Research.

As Finland’s population ages, the share of working-age Finns is expected to fall from today’s 65 percent to 58 percent by 2030. Excluding students and the unemployed, the percentage of Finns actually working by then will fall to around 40 percent.

Economists and finance ministry officials say it would make sense to raise the minimum retirement age to 65 from 63.

But Katainen’s conservative National Coalition party has avoided pushing for such a step, which would face strong opposition from its left-leaning coalition partners and labor unions.

Some also say the country’s wage system, in which workers in almost every sector get the same pay hikes, has driven labor costs too high. Exporters are now at a disadvantage to rivals in Sweden, said Pasi Holm, managing director at the Pellervo Economic Research think tank.

“Our government hasn’t really grasped of the idea of spurring growth,” he said.