HELSINKI: Finland's Prime Minister Jyrki Katainen is expected to tone down ambitious budget reforms aimed at maintaining the country's precious triple-A credit rating to appease coalition partners who are opposed to drastic cuts.
The government started weeks of budget negotiations on Tuesday and analysts and lawmakers say he will likely scale back the 5 billion euros in cuts that finance minister officials recommend for the next few years.
Katainen has little choice but to cooperate as the six-party coalition only has a slim majority in parliament meaning the support of every party is needed for legislation, including any European bailout plans.
A surge in popularity of the anti-euro Finns Party in general elections a year ago forced Katainen's National Coalition Party to join hands with more left-leaning parties. Together, they hold 124 of 200 seats in parliament.
Fears of recession make it tough for Katainen to argue for bold steps such as a hike in value-added taxes, analysts said.
"The talks are going to be difficult, politically," said Pasi Kuoppamaki, chief economist at Sampo Bank.
"We probably won't see very big steps in the first year. Fiscal sustainability is important because of Finland's ageing population, but austerity isn't the most urgent issue and it's also not the right time to hurt domestic demand," he said.
TRIPLE-A TIME BOMB
The small Nordic economy has one of the strongest balance sheets in Europe, with public debt forecast at 49 percent of GDP at end-2011. Yet economists say one of the fastest-ageing populations in Europe make it a ticking time bomb.
Slow growth forecasts and troubles at flagship tech company Nokia leave few doubts that Finland's generous welfare system will need to change.
Katainen has been calling for a mix of tax hikes and savings in government spending, starting with cuts in defense spending.
"The government program is very clear on the needs for austerity," he said ahead of a meeting with other leaders to discuss a three-year government strategy including budget cuts.
One of the main sticking points is likely to be value-added taxes, currently 23 percent compared to 25 percent in Denmark, Norway and Sweden. Analysts say a hike, if any, is likely to exclude some goods due to political opposition.
Other cuts will be easier to agree on. The coalition is likely to decide on gradual cuts in military spending, with most members already supportive of such a move.
"These are, of course, difficult decisions for us all. But they have to be made in order to preserve the welfare nation," Katainen said.
While S&P spared Finland from its mass downgrade on the euro zone in January, it still has a negative outlook, which means a cut is possible any time this year or next.
Jutta Urpilainen, finance minister and head of the Social Democratic Party said her party would push back on some of the proposed tax hikes and spending cuts.
"The threat of recession is still real. The macroeconomic outlook for the whole continent is weak," she said.
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