March 14, 2012 / 3:03 PM / 5 years ago

Finland PM says won't hurt growth with budget reforms

HELSINKI (Reuters) - Finland's Prime Minister Jyrki Katainen said on Wednesday the government would avoid hurting the economy with drastic budget cuts over a single year, instead phasing in fiscal reforms over several years.

The government has been locked in negotiations over fiscal reforms for the past few weeks and is due to announce a future budget framework by the end of the month, seeking to protect Finland's triple-A credit rating.

Finance ministry officials recommend 5 billion euros ($6.6 billion) in cuts over the three years from 2013 but Katainen said nothing had yet been decided, and analysts and lawmakers say he is unlikely to insist on fully meeting such a target.

"It is true that spending cuts and tax hikes will curb growth in the short term," he said in a speech. "That is why the government will time the actions for the next three years so they do not interfere with growth that right now is weak."

Katainen's conservative party supports drastic reforms but has made no specific commitments, wary of hurting the economy. It is also under pressure from left-leaning coalition partners to scale down any cuts or major welfare changes.

The small Nordic economy has one of the strongest balance sheets in Europe, with public debt forecast at 49 percent of gross domestic product (GDP) at end-2011. Yet economists say weak economic growth and a fast-ageing population make it a fiscal time bomb.

While ratings agency Standard & Poor's left Finland as one of just four AAA-rated euro countries when it downgraded others in the bloc in January, it still has a negative outlook on the country, meaning a cut is possible this year or next.

The popularity of the eurosceptic Finns Party in last year's elections forced Katainen's National Coalition party to form a government of six parties, including the Social Democrats.

"Considering the wide political range of the government, it is difficult to see that 5 billion euros (in cuts) would be the end result. It seems it was more like a starting point of the negotiations," said Handelsbanken economist Tuulia Asplund.

She also said tax revenues may not be declining as much as some economists had estimated a few months ago when the euro area debt crisis was at its worst - meaning the government may have a slightly easier time balancing its budget.

Sticking points in government talks include value-added taxes. VAT is currently 23 percent compared to 25 percent in Denmark, Norway and Sweden.

Katainen said he was still committed to curbing debt.

"The pace of state debt growth is alarmingly fast and it will not stop without determined decisions," he said.

($1 = 0.7628 euros)

Writing by Ritsuko Ando; Editing by Ruth Pitchford

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