By Ritsuko Ando and Jussi Rosendahl
HELSINKI (Reuters) - Finnish government leaders, faced with a prolonged recession and political fallout from unpopular austerity measures, appear likely to reduce previously announced spending cuts at budget talks that begin this month.
Data on Monday showed Finland's gross domestic product shrank 1.4 percent in 2013 as the economy took another turn for the worse late in the year, driven by falling private consumption and weak investment.
Last year was the second in a row with negative growth, and the latest set of data led economists to review their growth estimates. Danske Bank said they had tipped growth of 1.1 percent for 2014, but GDP data were likely to force this estimate down, wrong footing the government again.
Prime Minister Jyrki Katainen has led efforts to preserve Finland's prized triple-A credit rating, and in the early days of the euro zone crisis the small Nordic economy was widely billed as a model of fiscal discipline.
But the economy has been mired in a trade deficit for three years due to the decline of erstwhile tech flagship Nokia and weakness in traditional industries like shipping and forestry.
Public-sector deficit rose to 2.0 percent of GDP while the general gross debt increased to 56.9 percent, closer to the EU limit of 60 percent.
Economists said the slowdown was likely to encourage policymakers to temper their austerity drive as they discuss medium-term spending plans over the next few weeks.
"I guess they want to tread softly and not put too much of a strain on businesses," said Juhana Brotherus, economist at Danske Bank in Helsinki.
One major issue is how to implement further spending cuts, projected to be around 3 billion euros. The proposed central government budget for 2014 was around 54 billion euros.
In the October-December period of last year, public spending was the only item contributing to growth, while exports, private consumption and investments all fell.
Any budget cuts could delay the return to growth or even pitch Finland into its third recession since the beginning of the global financial crisis in 2007.
Advisers have suggested the cuts be phased over three years from 2015 instead of imposed in one go, to ease pressure on taxpayers smarting from a prolonged downturn in Europe.
Katainen told a party conference on Saturday that slashing the 3 billion euros would be painful for the economy and basically smother all growth next year if implemented at once.
Brotherus said it made sense for Katainen and others to accept the more modest approach considering the risk of a deeper recession. "Finland is able to borrow extremely cheaply at the moment. Credit ratings agencies haven't rung alarm bells. So if we don't have that pressure, and we have the flexibility, I think there is quite a large consensus behind the gradual approach," he said.
POLITICAL FALLOUT
Katainen's government also faces the risk of being ousted with voters, frustrated with austerity measures and job cuts in both the public and private sectors, looking inclined to seek a change at next year's general election.
Polls show support for the top two governing parties sliding with the opposition Centre Party, a conservative group commanding strong appeal among rural communities, now ahead.
Katainen's National Coalition party is now neck-to-neck for second place with the opposition eurosceptic Finns Party, while the Social Democrats have slid from second to fourth place and are likely to be bounced out of power.
Bjorn Wahlroos, chairman of the Nordic region's biggest bank, Nordea, said he was concerned that a prolonged downturn in Finland could energise parties opposed to the euro.
He said higher taxes were no answer and that the government should instead focus on labour market reforms.
"What I'm most worried about is ... that ultimately we will create an atmosphere directed against the achievements in Europe, that we will support the populist movement and offer new energy to the enemies of the great process of Europe," he recently said at a university fundraiser in Helsinki.
The Finns party has in recent years grown in popularity by capitalising on anger over eurozone bailouts.
(Editing by Mark Heinrich)
