Finland

   

Economic Policies

#6
Key Findings
Despite lingering economic concerns, Finland’s economic policies place it in the top group (rank 6) internationally. Its score in this area has declined by 0.3 points relative to 2014.

The country is emerging from a period of weak or even negative growth that has been attributable to declining export competitiveness, weakened investment and subdued domestic consumption. However, growth levels remain moderate, and government efforts to restore vibrancy, increase competitiveness and reduce debt have topped the agenda.

Unemployment rates have declined to moderately high levels of around 7.5%, but efforts to address long-term and youth unemployment have been less successful. A unemployment-benefit reform has cut eligibility durations and increased work conditionalities. Income taxes are strongly progressive, and municipal tax rates high. Corporate taxes have been cut, and complexity reduced.

Budget deficits are moderate, but the government has been unable to halt the growth in public debt. R&D spending, which once topped the EU, has declined.

Economy

#12

How successful has economic policy been in providing a reliable economic framework and in fostering international competitiveness?

10
 9

Economic policy fully succeeds in providing a coherent set-up of different institutional spheres and regimes, thus stabilizing the economic environment. It largely contributes to the objectives of fostering a country’s competitive capabilities and attractiveness as an economic location.
 8
 7
 6


Economic policy largely provides a reliable economic environment and supports the objectives of fostering a country’s competitive capabilities and attractiveness as an economic location.
 5
 4
 3


Economic policy somewhat contributes to providing a reliable economic environment and helps to a certain degree in fostering a country’s competitive capabilities and attractiveness as an economic location.
 2
 1

Economic policy mainly acts in discretionary ways essentially destabilizing the economic environment. There is little coordination in the set-up of economic policy institutions. Economic policy generally fails in fostering a country’s competitive capabilities and attractiveness as an economic location.
Economic Policy
8
Over the past years, the Finnish economy has experienced a slowdown. In fact, the economy has contracted for several years now. Even as the other Nordic countries have emerged from recession, Finland has faced negative growth due to a decline in export competitiveness, weakened investment and subdued private consumption. The impact of the recession on public finances has been so strong that a full recovery will not be achieved for some time. Fiscal policy has been a particular concern, as public debt has been growing and will probably continue to grow until 2019. Government spending accounts for over half of GDP, among the highest ratios in the EU.

Government efforts to restore economic growth, increase competitiveness and reduce public debt have continued to be at the top of the policy agenda. With the aim of restoring fiscal sustainability, the government has placed a priority on greater budgetary prudence and balancing the budget as well as sought to raise the minimum statutory retirement age, while improving incentives for people to continue working into later life. While the Finnish economy continues to perform fairly well in several measures of economic freedom, the country’s overall performance has been in decline. Finland’s economy was ranked 19th worldwide in the Heritage Foundation’s 2015 Index of Economic Freedom, slipping several places from its 2012 rank of 16th; in 2016 and 2017, Finland was ranked in a mediocre 24th place. This decline can again be attributed to deteriorations in fiscal freedom, business freedom and the management of government spending. Still, recent economic forecasts concerning the annual GDP growth rate and several other economic indicators engender optimism. According to the Economic Survey of the Ministry of Finance in September 2017, the economy is projected to grow at 2.1% in 2018. As such, the rate of economic growth in 2017 will clearly outperform that of 2016, after which the projected growth rate will slow to around 2%. The GDP growth forecast for 2017 is 2.9%, but robust economic growth notwithstanding, due to falling private consumption, GDP growth is projected to slow to 2.1% in 2018. In 2019, GDP is forecast to grow by 1.8%.

Citations:
“OECD Economic Survey of Finland 2016”, http://www.oecd.org/eco/surveys/economic-survey-finland.htm;
“The Heritage Foundation 2016 Index of Economic Freedom”, http://www.heritage.org/index/ranking;
“The Heritage Foundation 2017 Index of Economic Freedom”, heritage.org/index/country/Finland;
Ministry of Finance, “Finland’s Economic Growth will Remain Subdued”, http://vm.fi/en/article/-/asset_publisher/suomen-talouskasvu-jaa-vaisuksi-ennustaa-valtiovarainministerio;
vm.fi/en/article/-/asset_publisher/suomen-talous-on-nopeassa kasvuvaiheessa;

Labor Markets

#21

How effectively does labor market policy address unemployment?

10
 9

Successful strategies ensure unemployment is not a serious threat.
 8
 7
 6


Labor market policies have been more or less successful.
 5
 4
 3


Strategies against unemployment have shown little or no significant success.
 2
 1

Labor market policies have been unsuccessful and rather effected a rise in unemployment.
Labor Market Policy
7
A deep depression in the Finnish economy in the 1990s resulted in a rapid and dramatic increase in unemployment rates. While the employment situation gradually recovered from this 1990s recession, unemployment has again become a serious challenge in recent years, aggravated by the European economic crisis. Little by little, however, positive signs are now discernible. Polls of employers suggest the strongest hiring intentions in five years. The unemployment rate was 7.5% in July 2017, down from 7.8% in July 2016. The number of unemployed jobseekers in July 2017 was 49,400 less than a year earlier and an increase in staffing levels is anticipated for the fourth quarter of 2017. However, recent achievements in stemming long-term unemployment, youth unemployment and low-skilled unemployment are not entirely satisfactory, with the high level of youth unemployment a particular cause for concern. In the area of active labor-market policies, recent government strategies have included efforts to improve employment subsidies and labor-market training, and youth unemployment has been specially targeted. While Finland maintains a system of minimum wages and collective agreements, more attention is needed regarding worker-dismissal protection. Globalization has become a threat to labor-market strategies, as companies have sought to reduce their costs by moving production abroad. In many sectors, the amount of temporary work contracts has been increasing. Importantly, the Sipilä government has initiated a reform of the unemployment benefit system, with first amendments coming into force 1 January 2017. The first part of the reform cuts the duration of earnings-related unemployment benefits from a maximum of 500 to 400 days, sets stricter conditionalities for the unemployed in accepting job offers and seeks to personalize employment services by interviewing job-seekers regularly. The reform marks a shift from passive to more active labor-market policies.

Citations:
Heikki Räisänen et al., “Labor Market Reforms and Performance in Denmark, Germany, Sweden and Finland”, Publications of the Ministry of Employment and the Economy, Nr 19/2012;
“Finnish Unemployment Rate. Forecast 2016-2020”, www.tradingeconomics.com;
Statistics Finland 2017, www.stat.fi;
“Työttömyysturvalakiin muutoksia - työttömyysturvan kesto lyhenee”; http://stm.fi/artikkeli/-/asset_publisher/tyottomyysturvalakiin-muutoksia-tyottomyysturvan-kesto-lyhenee.

Taxes

#2

To what extent does taxation policy realize goals of equity, competitiveness and the generation of sufficient public revenues?

10
 9

Taxation policy fully achieves the objectives.
 8
 7
 6


Taxation policy largely achieves the objectives.
 5
 4
 3


Taxation policy partially achieves the objectives.
 2
 1

Taxation policy does not achieve the objectives at all.
Tax Policy
9
In Finland, the state, municipalities, the Evangelic Lutheran Church and the Orthodox Church have the power to levy taxes. Taxation policies are largely effective. The state taxes individual incomes at rates falling on a progressive scale between 6.5% and 31.75% (2016). Municipal taxes range from 16.25% to 21.75%, depending on the municipal authority. In 2015, the average overall personal income-tax rate was 51.50%; it averaged 52.96% from 1995 until 2016. Generally speaking, demands for vertical equity are largely satisfied. However, this is less true for horizontal equity. The corporate income-tax rate was lowered in January 2014 from 24.5% to 20%, which is less, on average, than in the other Nordic and EU countries. Adjustments in recent years have made Finland’s taxation system less complex and more transparent. Finland performs well in regards to structural-balance and redistributional effects and overall taxation policies generate sufficient government revenue. There has thus far been no major shift away from the taxation of labor towards environmental taxation; the environmental taxes’ share of tax revenues remains moderate. Taxes are generally high in Finland because the country has expensive health care and social-security systems, and also operates an efficient but costly education system. In comparison to most other countries, Finland enjoys a situation in which the public understands that taxation is necessary in order to secure the overall social welfare. In polls in recent years, 96% of respondents agreed that taxation is an important means of maintaining the welfare state, and 75% agreed that they had received sufficient benefits from their tax payments.

Citations:
Tim Begany, “Countries with the Highest Taxes”, http://www.investopedia.com/;
http://www.tradingeconomics.com/finland/personal-income-tax;
“Tax Rates Finland”, www.nordisketax.net;
vm.fi/en/taxation;
www.investinfinland.fi/…Taxation/92709b8f-7464-4a39-b722.

Budgets

#19

To what extent does budgetary policy realize the goal of fiscal sustainability?

10
 9

Budgetary policy is fiscally sustainable.
 8
 7
 6


Budgetary policy achieves most standards of fiscal sustainability.
 5
 4
 3


Budgetary policy achieves some standards of fiscal sustainability.
 2
 1

Budgetary policy is fiscally unsustainable.
Budgetary Policy
8
The government agenda of the current Sipilä government builds on its predecessors’ initiatives, structural policy programs and public-finance adjustment policies. Consequently, the government’s economic policy program has aimed at strengthening the economy’s growth potential, raising the employment rate, bolstering household spending power and improving international competitiveness. Accordingly, the government is committed to an active fiscal policy that supports economic growth and employment, aims at a reduction of the central government’s debt-to-GDP ratio, and tries to strike a balance between long-run fiscal sustainability and the short-term need to support domestic demand. However, the unfavorable economic environment has impeded the government’s goals and ambitions. The debt crisis in Europe slowed economic growth, and the government’s initial ambition to halt the growth in public debt by 2015 was not fulfilled. The Ministry of Finance’s budget proposal for 2017 draws on decisions made in the general government fiscal plan of April 2016; according to estimates from then, there was little significant improvement in the economic situation. The 2017 draft budget total of €55.2 billion exceeded the 2016 budget by €800 million. The draft budget for 2018 amounts to €55.4 billion in total, with a deficit of €3.4 billion, which is noticeable less than originally budgeted for 2017. The European Commission’s 2016 Stability Programme for Finland pointed to a risk of some deviation from adjustments targeting the medium-term objective of structural balance and the Commission’s spring 2016 forecast confirmed these fears. Still, it must be noted that the forecasted GDP growth in 2017 is 2.9%, which is clearly a better figure than the one calculated for 2016.

Citations:
European Commission, “Assessment of the 2016 Stability Programme for Finland”, http://ec.europa.eu/economy_finance/economic_governance/sgp/pdf/20_scps/2016/26_fi_scp_en.pdf;
Valtioneuvosto.fi/en/artikkeli/-/asset_publisher/10623/valtiovarainministerion-talousarvioehdotus-vuodelle-2018-on-julkaistu.

Research and Innovation

#7

To what extent does research and innovation policy support technological innovations that foster the creation and introduction of new products?

10
 9

Research and innovation policy effectively supports innovations that foster the creation of new products and enhance productivity.
 8
 7
 6


Research and innovation policy largely supports innovations that foster the creation of new products and enhance productivity.
 5
 4
 3


Research and innovation policy partly supports innovations that foster the creation of new products and enhance productivity.
 2
 1

Research and innovation policy has largely failed to support innovations that foster the creation of new products and enhance productivity.
R&I Policy
7
Finland was earlier among the forerunners in research and development (R&D) spending as well as in the number of researchers and patent applications. Indeed, in 2014, Finland had the EU’s highest R&D intensity, followed by Sweden and Denmark. However, this lead position has declined in the wake of weakening economic prospects. The innovation system’s low level of internationalization is a particular weakness. Moreover, the focus of R&D has been on applied research, with basic research at universities and other institutes benefiting little. Undermining commitments laid out in the government program, the Sipilä government has repeatedly carried out dramatic cuts in government spending for education and higher learning. In the long run, given the obvious dependence of applied research on basic-research developments, the heavy bias in favor of applied research and the continuing neglect of the financial needs of schools and higher learning institutions will carry negative consequences for product development and productivity. Furthermore, the system of technology transfer from universities to the private sector is comparatively weak, and academic entrepreneurship is not well developed.

Citations:
“Research and Innovation Policy Guidelines for 2010-2015”. The Research and Innovation Council of Finland, 2010. http://www.minedu.fi/export/sites/default/OPM/Tiede/tutkimus-_ja_innovaationeuvosto/julkaisut/liitteet/Review2011-2015.pdf
“Statistics Finland - Science, Technology and Information Society - Research and Development”, www.stat.fi
Data on R&D expenditure; http://ec.europa.eu/eurostat/

Global Financial System

#3

To what extent does the government actively contribute to the effective regulation and supervision of the international financial architecture?

10
 9

The government (pro-)actively promotes the regulation and supervision of financial markets. It demonstrates initiative and responsibility in such endeavors and often acts as an international agenda-setter.
 8
 7
 6


The government contributes to improving the regulation and supervision of financial markets. In some cases, it demonstrates initiative and responsibility in such endeavors.
 5
 4
 3


The government rarely contributes to improving the regulation and supervision of financial markets. It seldom demonstrates initiative or responsibility in such endeavors.
 2
 1

The government does not contribute to improving the regulation and supervision of financial markets.
Stabilizing Global Financial Markets
9
Following the collapse of financial markets in Europe and the increased vulnerability of financial markets globally, political leaders in Finland have urged the passage of stronger regulations and more coordinated market supervision. In terms of attitudes and action, Finland has presented itself as an agenda-setter, providing support to countries seeking to advance self-regulation and combat excessive market risk-taking. Finland has also pursued measures to secure its own finances. According to an assessment by the International Monetary Fund in December 2016 of the stability of the Finnish financial system, Finland’s banking system has remained well-capitalized and profitable, a three year recession notwithstanding. Also, while low interest rates have squeezed net interest income, banks have increased income from trading and insurance. Importantly, Denmark, Finland, Norway and Sweden all have sound financial systems that have withstood the impact of the European financial crisis. In 2013, the Finnish government approved the Europe 2020 National Program, which contains measures and national targets for achieving the goals of the Europe 2020 strategy. The program includes proposals to create an effective national macroprudential supervision system. With some 200 employees, the Financial Supervisory Authority is tasked with overseeing Finland’s financial and insurance sector. The Financial Markets Department of the Ministry of Finance creates the rules for financial markets and the framework in which markets may operate; the department is also responsible for ensuring that the Ministry of Finance’s international activities remain effective.

Citations:
“Finanssimarkkinoiden makrotaloudellisten vaikutusten sääntely ja valvonta”, Työryhmän muistio 32/2012, Ministry of Finance, Publications 2012;
imf./org/en/Publications/CR/issues/2016/12/31/Finland-Financial-System-Assessment-44437;
www.Springer.com/cda/content…/978146/14955352-c1.pdf?
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