Economic Survey of Finland 2012

Overview of the Economic Survey of Finland

The global outlook is weakening, slowing growth in Finland. The Finnish economy has still not recovered from the sharp 2008-09 recession and GDP remains about 3% below its mid-2008 level. Policymakers should cushion the downturn by strengthening active labour market policies.

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While the budget deficit is small, current fiscal plans are not ambitious enough to deal with future fiscal challenges related to an ageing population. Raising the retirement ages, improving incentives to work for older individuals and further tightening early-retirement schemes would increase labour supply and could lower fiscal costs sufficiently to address these long-term challenges. Without major retirement reforms, significant further fiscal consolidation would soon be needed to deal with the costs of ageing.

Recent macroeconomic developments

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After a long period of strong growth, Finland’s productivity performance has weakened recently, reflecting a weak performance in information and communication technologies but also in the public sector.  Structural reforms aiming at increasing productivity therefore need to move up the agenda. Current support for businesses and private sector R&D do not seem to be effective and should be scaled back further and streamlined together with business taxation. Government R&D spending should mainly focus on funding research in academic environments and should be distributed in such a way as to reward academic quality.

Stronger competition, especially among shielded private and public service sectors, could contribute to higher productivity. Less restrictive zoning and planning regulation for retail trade would boost productivity through stronger competition and larger scale economies. Exposing low-productivity government dominated sectors to competition would also raise productivity. In addition, thorough reforms of the municipal system are needed to shore up sustainability and efficiency, and announced plans for mergers should therefore be pushed through.

Productivity in the health sector has been falling and Finland underperforms the most efficient OECD countries on some indicators of the population’s health status. Ageing will put further pressures on public health spending, underlining the need for significant and lasting efficiency gains. The planned reform to restructure municipalities and public services offers opportunities to reduce inefficiencies related to the excessive fragmentation of health care provision.

Health inequalities between socio-economic groups and regions are high by OECD standards. Apart from addressing the fragmentation of the health care system, increasing user choice and competition in health service provision would also improve efficiency and equity. Reinforcing the role of cost-effective primary care, home care and prevention would contain the increase in the need for costly specialised care and long-term care services.

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