Otto Kyyrönen from SOSTE, the Finnish Federation for Social Affairs and Health, argues that the European Union’s new fiscal rules rely on unrealistic assumptions that risk deepening economic, social, and health inequalities, illustrated by the case of Finland. Kyyrönen proposes that adopting a wellbeing economy framework could help align fiscal policy with broader EU goals.
The European Union’s fiscal rules, designed to keep national budgets under control, were introduced in the 1992 Maastricht Treaty to safeguard financial stability. They set strict limits on government borrowing and spending: budget deficits must stay below 3% of a country’s gross domestic product (GDP), its total economic output, and public debt should not exceed 60%. Although the original thresholds were arbitrary, they were intended to prevent overly loose fiscal policy by curbing government spending.
When the COVID-19 pandemic hit, the Commission suspended these rules in 2020, granting Member States more flexibility to respond to emergency spending. This pause prompted a rethink, prompting the European Commission to reform the EU’s fiscal framework. The revised fiscal rules came into effect in April 2024, and since then, the Commission has recommended that many members states introduce fiscal consolidation measures, steps such as cutting public spending or raising taxes, to bring their budgets back into line.
Europe’s fiscal rules are changing, but for whose benefit?
The Commission initially urged Finland to make annual budget adjustments, cuts or tax rises designed to meet debt and deficit targets, worth 0.76% of GDP each year from 2025 to 2031, adding up to a total of €15 billion. This recommendation is in line with the new fiscal rules which require Member States to present medium-term plans that ensure both debt sustainability and adherence to deficit targets.
In response, the Finnish government, citing structural reforms, requested a reduction in the target to 0.43% of GDP per year (around €9 billion), which the Commission approved.
In practice, Finland’s consolidation strategy has focused largely on cutting social security benefits and restricting access to health and social care services. According to estimates from the Ministry of Social Affairs and Health, the reforms for 2024–2025 are expected to push 100,000 people below the poverty line. Despite this, the government is now preparing additional cuts to social security.
At the same time, the Finnish government is placing pressure on the country’s wellbeing services counties, autonomous public bodies responsible for organising health, social, and emergency services, to eliminate their €2.7 billion deficit accumulated in 2023–2024. These counties are also required to reduce annual expenditure by a further €1.1 billion by 2028. In practice, this has led to the closure of health centres and hospitals, significant increases in patient charges in health and social care (by 22.5% in primary care and 45% in specialist care this year), and a reduction of 11,000 round-the-clock care places for older people by 2030, among other measures.
Consolidation won’t deliver what policymakers hope
To add insult to injury, the EU’s new fiscal rules are also suffering from a major flaw linked to the Debt Sustainability Analysis (DSA)—the economic model the Commission uses to determine each Member State’s recommended fiscal stance. Research has shown that the DSA relies on questionable assumptions, particularly regarding the so-called fiscal multiplier, which distort its policy implications. The fiscal multiplier measures how changes in fiscal policy, such as shifts in public spending or taxation, affect economic output. For example, if the multiplier is 1.5, a 1% reduction in public spending relative to GDP would be expected to lower output by 1.5 percentage points.
Yet, the DSA relies on an assumed fiscal multiplier of just 0.75, which fades linearly over three years, and it completely overlooks international spillover effects. These assumptions are difficult to justify. Empirical studies have found considerably higher multipliers with more longer-lasting impact, and the Commission itself often assumes fiscal effects last at least five years.
What’s more, when one country tightens its budgets, it reduces imports, which in turn hurts exports and GDP in its trading partners—an important spillover the DSA fails to account for. This means the model underestimates the negative impact of fiscal consolidation on both GDP growth and, by extension, public debt-to-GDP ratios.
A recent Finnish research report used the DSA framework to simulate the effects of the €9 billion consolidation package on GDP and public debt, applying more realistic assumptions about the fiscal multiplier and international spillovers. The report focused on the 2025–2031 period because, after that, the Commission is expected to assign a new consolidation package if the country’s public debt does not develop as anticipated.
Figure 1 depicts the Commission’s scenario, built on default, and arguably unrealistic, assumptions that are optimistic at best. Under this outlook, Finland’s real GDP dips only slightly, while public debt begins to decline—an outcome that aligns with the Commission’s expectations.
Figure 2, by contrast, shows a more grounded alternative. This simulation uses a fiscal multiplier of 1.4, with effects that last for over ten years, and takes into account international spillovers. The result is stark. Under these assumptions, GDP stagnates through 2031 and public debt rises to 100% of GDP. These parameters are not speculative and are well-supported. Research finds Finland’s fiscal multiplier near 1.4, and the country’s economy remains vulnerable to hysteresis — whereby short-term shocks lead to long-term economic damage.
Figure 3 compares this scenario with the Commission’s own forecast of how the Finnish economy might have developed without any consolidation. By 2031, public debt is 8 percentage points higher and GDP 6.6 percentage points (or €16 billion) lower than in the no-consolidation case. In other words, the Finnish economy would have fared significantly better without the austerity measures.
Less austerity, more humanity: rethinking the rules that shape Europe’s future
Finland’s experience illustrates the serious consequences that the Commission’s rigid and unrealistic fiscal framework can have in terms of both economic performance and social and health equity. Harsh and poorly timed fiscal consolidation hampers growth, and, paradoxically, has the potential to push public debt-to-GDP ratios higher.
At the same time, austerity measures fall disproportionately on low-income households, reducing incomes and limiting access to essential services. The consequences are tangible, as it leads to poorer health outcomes, wider social disparities, and ultimately weaker economic performance. Good health, after all, is not just a social good, it is a driver of long-term economic growth.
The wellbeing economy framework offers the European Commission a meaningful path forward to address some of the structural problems within the EU’s fiscal policy. At its heart, the wellbeing economy recognises the interconnectedness of economic, social, and ecological systems, and encourages policy decisions that strengthen at least one of these dimensions without harming the others. It’s a sharp break from the old orthodoxy that saw growth as the goal. Instead, this approach asks what the economy is for, and answers with things like better lives, fairer societies, and a liveable planet. For the Commission, that could mean fiscal rules that enable investment in care, education, and climate action, not rules that stifle ambition in the name of deficit targets. It’s a shift from managing the economy for numbers, to managing it for people.
In this spirit, the EU’s fiscal rules and the European Semester — its annual cycle of economic and fiscal policy coordination — should incorporate indicators beyond GDP, deficit levels, and public debt-to-GDP ratios. Doing so would help resolve the clear contradiction between the Commission’s current consolidation recommendations and the objectives of the European Pillar of Social Rights, which aims to reduce the number of people at risk of poverty or social exclusion by 15 million across the EU and by 100,000 in Finland by 2030.
Otto Kyyrönen
Otto Kyyrönen works as Chief Economist at SOSTE Finnish Federation for Social Affairs and Health. He has studied economics at the Sorbonne University in Paris and the Berlin School of Economics and Law. Kyyrönen's research interests include Finland’s public finances, income distribution, and growth models. He has written research reports for various organisations in Finland.