Finland

   

Economic Policies

#5
Key Findings
Despite growing sustainability concerns, Finland’s economic policies fall into the top ranks (rank 5) in international comparison. Its score in this area has declined by 0.5 points relative to 2014.

The COVID-19 pandemic triggered a sharp drop in an already weakening economy. A steep rebound in late 2020 tailed off into modest growth through 2021. The government provided support to enterprises, restructured employment regulations and expanded unemployment benefits. Previous employment rate and budget consolidation goals were pushed back.

Unemployment rates jumped above 10% several times during the pandemic, but have otherwise oscillated between 6% and 8%, relatively low levels in recent historical comparison. Previously, active labor market and other policies aimed at increasing employment rates have not had the desired effect.

Coronavirus-era deficit spending boosted government debt from abut 59% of GDP to 69%. Deficits are falling, but a structural imbalance remains. Demographic change is placing increasing pressure on social security and welfare system budgets. R&D intensity, which once topped the EU, has declined over recent years.

Economy

#8

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
Sanna Marin’s government published its program in December 2019, closely following her predecessor’s program. Before the COVID-19 crisis hit, the goal of the Marin government was “ecologically and socially sustainable economic growth, high employment and sustainable public finances.” This goal was not abandoned in 2020. However, the focus of the government shifted toward handling the COVID-19 crisis.
Before the COVID-19 crisis, the employment rate had grown for three years, with unemployment rates falling among all groups. According to the government program, the principal drivers of productivity in economies like Finland are skills and technological progress.
According a September 2021 Ministry of Finance (2021) forecast, Finland’s gross domestic product was expected to grow by 3.3% in 2021. Before the arrival of the omicron variant, recovery from the COVID-19 pandemic had progressed rapidly since spring 2021. The economic recovery was expected to continue in the autumn, especially in the sectors that were still subject to restrictions. Finland’s GDP was expected to grow by 2.9% in 2022 and by 1.4% in 2023. In the forecast, the deterioration in pandemic conditions were not expected to slow down the economic recovery.
Growth in employment accelerated significantly in the first half of the year 2021. The demand for labor was sustained by economic growth, at least in the short term. It was expected that the economic recovery would boost the number of employed persons in 2022 and 2023, especially in the service sectors.
The general government deficit was expected to shrink substantially in 2021 and 2022, as the economic recovery and rapid rise in employment was expected to boost tax revenue and reduce unemployment expenditure. However, this expected temporary economic recovery was not enough to eliminate the structural imbalance affecting Finland’s public finances.

Citations:
Ministry of Finance, Economic Survey, Autumn 2021. Publications of the Ministry of Finance 2021:51. https://julkaisut.valtioneuvosto.fi/bitstream/handle/10024/163513/VM_2021_51.pdf?sequence=6&isAllowed=y

Labor Markets

#28

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
6
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 again became a serious challenge after the global economic and financial crisis.

Like most other EU member states, Finland has not been prepared to use macroeconomic policy to reduce unemployment since around 1990. This has been the case in spite of unemployment levels that have remained relatively high over the past few decades.

Finland is known for its tradition of using active labor market policies as a tool to tackle economic crises’ adverse impacts on employment. The Finnish service repertoire for long-term unemployed persons is geared toward individualized support and tailored to the needs of individual claimants (Kangas and Kalliomaa-Puha 2015). Employment office authorities define integrated action plans jointly with the claimants. The intensity and content of the measures included in the plans vary according to individual needs. In principle, the measures include a number of components including labor market training, self-motivated studies, part-time work, preparatory work training, on the-job training, integration measures for immigrants and various kinds of rehabilitative work activities. Immigrant claimants participating in activation measures or registered as jobseekers can be required to take a Swedish or
Finnish language course. Young people below the age of 25 are obliged to apply for a slot to study in secondary education if they have not already completed this level of education.

The service repertoire for the long-term unemployed with reduced work capacity includes medical rehabilitation to restore their physical capacity, rehabilitative work experience, vocational rehabilitation to increase their chances of returning to employment and rehabilitative psychotherapy for those whose employment problems are related to mental health. Social rehabilitation aims to strengthen the social skills of the long-term unemployed. The recipient’s obligations can be enforced by sanctions. In Finland, the basic amount of subsistence support can be lowered by up to 20% for two months at a time in the case of non-compliance (up to 40% for repeated non-compliance). The severity of the sanction is partly left to the discretion of the case workers. Moreover, their discretionary powers are further limited by legal provisions based on the constitution. According to these provisions, the reduction in the benefit should not leave the recipient with less than the indispensable subsistence level of income necessary for a life of dignity, and it should not otherwise be regarded as inequitable. In the case of refusal to accept work, the offer should have been specific and explicit, and the job or labor market measure should enable him or her to secure their living for a reasonably long period of time.

Over recent decades, unemployment benefits’ replacement rates have deteriorated, and coverage has become weaker (Kantola & Kananen 2013). The aim of policy reform has been to increase the supply of labor (i.e., the number of workers and job-seekers). These policy reforms have not had the desired effect of increasing employment. Several studies have also indicated that active labor market policies are ineffective. Instead, policy reforms have created new hierarchies in the labor market, undermining solidarity both within organizations and on the labor market as a whole. The Marin government is implementing a large pilot in which the responsibility for employment services is transferred from employment offices to municipalities.

After the onset of the COVID-19 crisis, the parliament approved the government’s proposals on temporary amendments concerning layoffs, cooperation procedures, and the right of laid-off employees and entrepreneurs to unemployment security until the end of 2020. As per the temporary amendments, the period of notice required before laying someone off and the duration of cooperation negotiations regarding layoffs were shortened to five days. In addition, it became possible for employers to lay off a fixed-term employee and to terminate an employee’s contract during the trial period on financial or production-related grounds. On the other hand, the period in which an employer is obligated to re-employ an employee dismissed for financial or production-related reasons was temporarily extended to nine months. The temporary amendments apply to the private sector.
Meanwhile, since 8 April 2020, entrepreneurs have been temporarily entitled to labor market support to deal with the sudden and unforeseen decline in demand due to the coronavirus epidemic. The aim has been to ensure the livelihood of entrepreneurs (Prime Minister’s Office, 2020).

Citations:
Kangas, Olli & Kalliomaa-Puha, Laura (2015) ESPN Thematic Report on integrated support for the longterm unemployed Finland.
Kantola, Anu & Kananen, Johannes (2013): Seize the Moment: Financial Crises and the Making of the Finnish Competition State. New Political Economy 18(6): 811-826.
Ministry of Finance. Economic forecast, winter 2019. (Taloudellinen kasvu. Katsaus talvi 2019.
Valtiovarainministeriö) 2019:69. Accessed 18.12.2020.
https://julkaisut.valtioneuvosto.fi/bitstream/handle/10024/161966/VM_2019_69.pdf
Prime Minister’s Office. 2020 ” Measures that have brought security and flexibility to labor markets during coronavirus epidemic will be extended.” Accessed 18.12.2020. https://valtioneuvosto.fi/en/-
/1410877/jatkoa-toimille-joilla-on-tuotu-turvaa-ja-joustoa-tyomarkkinoille-korona-aikana

Taxes

#1

How effective is a country’s tax policy in realizing goals of revenue generation, equity, growth promotion and ecological sustainability?

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 and municipalities have the power to levy taxes. The Evangelic Lutheran Church and the Orthodox Church are allowed to collect their membership fees through regular taxation. Taxation policies are largely effective. The state taxes individual incomes at rates falling on a progressive scale between 6% (with an annual taxable income of €19,200) and 31.5% (2022). Municipal taxes range from 17% to 23.5%, depending on the municipal authority. In 2022, the average overall personal income tax rate is around 31%. 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 other Nordic countries and EU member states. Adjustments in recent years have made Finland’s taxation system less complex and more transparent. Finland performs quite well in regards to structural balance and redistributional effects, while overall taxation policies generate steady government revenue, but not enough to prevent state budget and municipal budget deficits. There has thus far been no major shift away from the taxation of labor toward environmental taxation; the environmental taxes’ share of tax revenues remains moderate. Taxes are generally high in Finland because the country has expensive healthcare and social security systems, and also operates a costly education system that does not charge tuition. In Finland, the public in general has a favorable attitude toward high levels of taxation. In a recent poll, 96% of respondents agreed that taxation is an important means of maintaining the welfare state, and 79% agreed that they willingly paid their taxes.

Citations:
https://www.veronmaksajat.fi/luvut/Tilastot/Tuloverot/Yhteisoverotus/#c7499fa8

https://www.taloustaito.fi/Vero/kenen-verotus-kevenee-kenen-kiristyy-vuonna-2021/#44efd210

https://www.kuntaliitto.fi/talous/verotus/kuntien-veroprosentit/kuntien-tulo-ja-kiinteistoveroprosentit-2022

Budgets

#12

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
In December 2019, the Ministry of Finance’s economic outlook estimated that general government finances would be in deficit for the next few years in the absence of measures to improve employment and productivity in the local and central governments (Ministry of Finance 2019). The Rinne government’s plan to balance the budget was connected with the aim to increase the labor market participation rate substantially. During its first year in office, just before the COVID-19 pandemic, the Rinne/Marin government increased spending.
Prime Minister Sanna Marin’s government program, published in December 2019, aimed to increase the employment rate to 75% and the number of people in employment by a minimum of 60,000 by the end of 2023. According to the program, “given normal global economic circumstances, Finland’s general government finances will be in balance in 2023.” As for fiscal policy, the government program emphasized scaling fiscal policy in accordance with economic conditions, meaning that general government revenue and expenditure can be adjusted automatically according to economic conditions (Prime Minister’s Office 2019). However, the COVID-19 pandemic completely changed the outlook for government finances.
In Finland, there is widespread awareness among politicians that the population age structure, with a very large cohort born immediately after the Second World War, will necessitate an increase in public spending in order to maintain the social security system and access to welfare services. However, so far, the government has taken no determined actions to cut the budget deficit, and there are currently no debt limits or other fiscal rules to prevent excessive public debt. However, the budget process is transparent. In September 2021, the Ministry of Finance (2021) estimated that the general government deficit would shrink substantially in 2021 and in 2022, as the economic recovery and rapid rise in employment were expected to boost tax revenues and reduce unemployment expenditure. The ministry also forecast that the general government finances would improve as the need for engage in COVID-19 spending dropped away. However, the ministry also emphasized that a temporary economic recovery would not eliminate the structural imbalance affecting Finland’s public finances.

Research, Innovation and Infrastructure

#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
In general, research and innovation policy in Finland focuses on basic and applied research in research institutions, supporting startups that convert scientific output into products, and seeking to fostering productivity as well as social innovations.
The Finnish higher education system is centralized. It consists of 13 universities and 22 universities of applied sciences (UAS) that operate under aegis of the Ministry of Education, Science and Culture. As for institutions promoting and coordinating the development of (social) innovations, 12 public research institutes work under related ministries. The key agency for developing technological research is the Technical Research Centre of Finland (VTT), which operates under the Ministry of Economic Affairs and Employment. It is a cooperation partner for companies, research
institutes, higher education institutions and policymakers both nationally and internationally. In terms of R&D activities, other public research institutes are more mission-oriented, with a broad range of research objectives. Their
mandate can vary from research (both basic and applied) to additional responsibilities, such as monitoring, data collection and management, and certification and inspection (Schienstock and Hämäläinen 2001).
The recognition of companies as key partners for research institutions is reflected in increased private sector cooperation in the research sector in Finland. However, successful startup companies tend to be acquired by technology giants (GAFAM), thereby eliminating the benefits of innovations at the local and national level.
Finland was previously 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 European Union’s highest R&D intensity, followed by Sweden and Denmark. However, this lead position subsequently 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. 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
Schienstock, Gerd and Hämäläinen, Timo. 2001. Transformation of the Finnish Innovation System: A
Network Approach. Sitra Series 7. Accessed 7.1. 2021.
https://media.sitra.fi/2017/02/28142146/raportti7.pdfet“Statistics Finland – Science, Technology and Information Society – Research and Development,” www.stat.fi
Data on R&D expenditure; http://ec.europa.eu/eurostat/
http://www.stat.fi/til/tkker/2019/tkker_2019_2019-02-21_tie_001_en.html
https://yle.fi/uutiset/osasto/news/education_wage_subsidies_key_in_next_years_budget/10978952

Global Financial System

#4

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 System
9
Following the collapse of financial markets in Europe in 2008 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 a report by the International Monetary Fund in December 2017, Finland’s banking system is well-capitalized. Though the report also noted that the relocation of the headquarter of the Nordea Group from Stockholm to Helsinki will more than triple the size of bank assets under supervision. 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. Following the onset of the COVID-19 pandemic, the government reduced efforts focusing on the effective regulation and supervision of the international financial market.

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?
https://www.imf.org/en/Publications/CR/Issues/2017/12/13/Finland-Selected-Issues-45467
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