Economic Survey of Finland 2006: Ensuring fiscal sustainability in the face of imminent ageing

 

Contents | Executive Summary | How to obtain this publication |  Additional information

The following OECD assessment and recommendations summarise Chapter 2 of the Economic Survey of Finland 2006 published on 4 May 2006.

Contents                                                                                                                           

The general government surplus was around 2½ per cent of GDP in 2005. It is easily the largest in the euro area, although this is entirely accounted for by the pension funds, whereas the combined central government and municipalities financial balances are roughly in balance. The combined balance of central government and the municipalities should remain in surplus on a cyclically adjusted basis for the rest of this decade. This would imply a general government surplus of 3-3½ per cent of GDP. Maintaining such a large general government surplus, while desirable to prepare for the fiscal pressure from imminent population ageing, will be difficult given the government’s promise of tax cuts on earned income and strong spending pressures at the municipal level. With the recovery firming, there is no need for additional fiscal stimulus from a macroeconomic perspective, and further tax cuts on labour should be matched by spending restraint or revenue-neutral changes to the structure of taxation. Moreover, given past actions, the room for tax cuts seems exhausted.

Recent fiscal developments

1. Including employment pension funds.
2. The fiscal stance is measured by the change in the cyclically-adjusted government balance, positive values indicate an expansionary fiscal stance. The components - tax cuts and spending increases – are all measured on a cyclically-adjusted basis.
Source: Statistics Finland and OECD, Economic Outlook database.

With rapid ageing, it is essential to re-balance public and private provision to cope with rising service demand. If not managed well, current spending pressures may force municipalities to continue raising their income taxes thereby neutralising the income tax cuts by the central government. Cost-efficiency of health care and social services is of strategic importance due to the prospective increase in the demand for them. There is scope to raise the efficiency of health care provision, which is largely a municipal competence, as evidenced by the wide variation in the cost of hospital services. The government has launched an ambitious programme for reforming the structure of local government with the aim of increasing the cost efficiency of municipal services. It is important that this programme is carried out vigorously. Reducing or eliminating the municipal share of corporate tax revenues would also improve the overall control of aggregate public finances by reducing cyclical fluctuations in municipal revenues which have tended to ratchet up municipal spending. Introducing tertiary education fees for all students while developing the loan system (perhaps with income-contingent repayments) would not only be more equitable but also more efficient. Higher tuition fees would make students’ demands for education attentive to the quality and subjects being offered, with subsequent effects on their supply.

Productivity in public administration and services
Index 1995 = 100

1. Includes also administrative functions and services such as the police which are localised across the country, but are part of the central government sector. Measured figures cover about 70% of the central government sector.
2. Provided by municipalities.
3. Average levels of productivity weighted with expenditure. Different years do not necessarily include same units.
Source: Statistics Finland and Räty, T. et al. (2005), “Productivity and its Drivers in Finnish Primary Care 1988-2003”, VATT Research Reports, 118.

How to obtain this publication                                                                                      

The Policy Brief (pdf format) can also be downloaded. It contains the OECD assessment and recommendations, but not all of the charts included on the above pages.

The complete edition of the Economic Survey of Finland 2006 is available from:

 

Additional information                                                                                                  

For further information please contact the Finland Desk at the OECD Economics Department at webmaster@oecd.org. The OECD Secretariat's report was prepared by Dave Turner, Asa Johansson and Laura Vartia under the supervision of Peter Hoeller.

 

 

 

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