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The following is the Executive summary of the OECD assessment and recommendations, taken from the Economic Survey of Finland, published on 7 April 2010.
The worldwide recession hit Finland harder than most other OECD countries. Export volumes fell by almost a third from their mid–2008 peak, reflecting the dominance of income–sensitive capital goods and exceptional exposure to hard hit markets such as Russia. The well supervised and prudent financial sector has weathered the crisis well, although there was some inevitable slowing in credit growth. A significant fiscal stimulus and monetary loosening by the ECB have cushioned the downturn. Recovery has been slow, potentially dampened by deteriorating competitiveness due to an appreciating exchange rate, large industry–level bargained wage increases and slowing productivity growth. Centrally co–ordinated wage deals with more room for local flexibility could deliver more competitive wage outcomes, while in the longer term potential output would be boosted by reforms to higher education. Fiscal consolidation should start once the recovery takes hold.
The crisis has worsened the fiscal outlook, calling for a clear consolidation strategy supported by a stronger fiscal framework. The decline in potential output due to the crisis and the permanent nature of many of the stimulus measures have further undermined long–term fiscal sustainability that was already set to weaken by rapid ageing. The fiscal framework, including a central government expenditure ceiling and multiple targets, was severely tested in the recession and has been partially suspended. To restore sustainability Finland should show the same resolve as after the 1990s crisis. A fiscal consolidation plan should be announced as soon as possible and include measures to increase the duration of working lives, contain expenditures and raise taxes on consumption and property. The plan should be supported by improving the fiscal framework by linking it to sustainability and could be accompanied by an independent fiscal council to tighten monitoring. Fast–growing municipal expenditures need to be restrained and municipalities should be encouraged to rely more on property taxes and less on income taxes. The municipalities’ declining productivity can be enhanced by more ambitious mergers and structural reforms among local governments.
While employment has held up relatively well so far, rigidities in the labour market could complicate recovery and worsen the already low participation of older and younger workers. Swift action is needed to avoid a large rise in long–term unemployment and inactivity, as occurred in the previous recession. Activation measures should kick in earlier during unemployment spells, sufficient resources for the Public Employment Service (PES) should be provided, and profiling of job seekers should be used more extensively. Furthermore, the generous unemployment benefit system needs to be trimmed by both tapering and reducing replacement rates. To increase employment among older workers, the 2005 pension reform needs to be complemented by further reforms to improve incentives to work longer, including abolishing the so–called “unemployment pipeline”, making disability pensions subject to stricter medical criteria and raising the minimum retirement age to 65.
Increasing inequalities challenge Finland’s social model and may be aggravated by the crisis. Although income inequality remains low by OECD standards, it has increased substantially in recent years in spite of decreasing unemployment until recently. The incomes of high earners have increased disproportionately since the early 1990s. Several factors have contributed to this development, among which some elements of the dual tax system. This tax regime should be reviewed. Rising inequality also has a regional component, with wealth and opportunities being increasingly concentrated in the Helsinki region along with economic activity. Measures to improve regional mobility would help to address the uneven performance of regional labour markets.
How to obtain this publication
The Policy Brief (pdf format) can be downloaded in English. It contains the OECD assessment and recommendations.
The complete edition of the Economic Survey of Finland is available from:
For further information please contact the Finland Desk at the OECD Economics Department at email@example.com.
The OECD Secretariat's report was prepared by Henrik Braconier, and Petar Vujanovic under the supervision of Piritta Sorsa. Research assistance was provided by Isabelle Duong.