David Haugh
OECD
Kyongjun Kwak
OECD
Axel Purwin
OECD
OECD Economic Surveys: Finland 2025
Abstract
The Finnish economy has proved resilient in the face of weakening confidence associated with severe security, energy price and trade shocks. Growth is supported by falling inflation and declining interest rates, improving purchasing power. The pick-up is being hampered by a still weak construction sector and low confidence amidst downside risks to international trade and economic security. Strong control of expenditure is needed to keep the government’s fiscal consolidation on track and rebuild fiscal buffers to cope with new shocks and already apparent costs of a rapidly ageing population. Recent labour market reforms will pay off with higher employment as the economy recovers. Boosting human capital and innovation via higher education and high-skilled migration reforms and crowding in private investment in the green industrial transition are key to reinvigorate productivity growth.
The Finnish economy was hit hard by Russia’s invasion of Ukraine and the global energy price shock in 2022, which directly affected the country’s security, trade and the confidence of firms and households. The economy is now gradually picking up, aided by falling inflation, improving purchasing power and declining interest rates. The resilience of Finland’s economy and financial sector in the face of adversity is testimony to its strong institutions, policy frameworks, and a diversified, innovative, and flexible private sector.
However, the economy has been more exposed to Russia than its Nordic peers and has fallen behind in terms of GDP per capita growth (Figure 1.1, Panel A). Nevertheless, in 2023, the level of GDP per capita in Finland still exceeded the OECD average by 5.6%. Activity declined sharply in the second half of 2023. Although growth resumed in the first three quarters of 2024, it stalled in the fourth quarter due to weak private consumption, and real GDP contracted by 0.1% in 2024. The monthly trend indicator of output points to modest growth of 0.1% in the first quarter of 2025. With the European Central Bank (ECB) having cut policy rates since June 2024, declining interest rates have started to support private consumption and investment.
Source: OECD (2024), Economic Outlook (database); Statistics Finland.
Inflation has eased and stabilised, mainly due to lower energy prices, particularly for oil, and sluggish demand (Figure 1.1, Panel B). Inflation troughed at 0.4% year-on-year in May 2024 before rising to 2% in April 2025. The rise partly reflected the increase in the standard VAT rate by 1.5 percentage points to 25.5% in September, as well as rising wage costs. Consumer and business confidence have remained subdued, particularly in the construction sector, despite a slight improvement in business confidence (Figure 1.2). The hangover from the long property boom, which peaked in 2021, is still being felt. Pre-Covid, real estate market buoyancy was fuelled by easy monetary policy, all the more so as a high share of mortgages carry a variable interest rate. Conversely, the tightening of the ECB policy stance from 2022 had a very strong impact in Finland, with a collapse of housing investment. House prices have stabilised after earlier declines, with the real price index of old dwellings in housing companies showing limited improvement (Figure 1.2, Panel B).
The Finnish labour market has remained weak and the unemployment rate has risen substantially (Figure 1.3, Panel A), reflecting declining employment in the public and construction sectors. The cyclical downturn has helped to reduce labour shortages. Indeed, job vacancies decreased in 2023-24, reflecting the downturn of the economy, marking a movement to the right along the Beveridge Curve (Panel B). Even with the weakening of the economy and labour demand, labour shortages for high-skilled workers persist, notably in healthcare and are expected to widen as the economy recovers. Around 90% of employment where there is high demand is in high-skilled occupations, one of the highest shares in the OECD. This includes, as elsewhere in the OECD, healthcare occupations (Filippucci et al., 2025), but also electrical and civil engineering and software development and other IT occupations (European Labour Authority, 2024). Skill shortages in occupations needed for the green industrial transition are particularly acute in Finland making it difficult to seize the opportunity this transition presents (Chapter 4).
1. Real price index of old dwellings in housing companies.
Source: European Commission; Statistics Finland.
Note: In Panel A, the vacancy rate is defined as the number of job vacancies divided by the sum of occupied posts and job vacancies. In Panel B, the vacancy rate is defined as vacancies divided by the active population. Due to a methodology change in the Labour Force Survey, there is only data on active population back to 2009. For 1994-2008 data from the old LFS have been used to calculate the vacancy rate.
Source: Statistics Finland; Eurostat; OECD, Short-Term Labour Market Statistics (database).
Active labour market policies, including retraining programmes and targeted support for the long-term unemployed, are essential to mitigate these challenges. The government is reforming the current Nordic employment service model, for example, by mandating the publication of job search profiles, with the Public Employment Service responsible for implementation. It should consider further enabling private matching services to gain access to anonymous profiles as this would improve the efficiency of job matching and broaden opportunities for job seekers.
Finland’s economy is expected to grow by 0.7% in 2025 and 1.1% in 2026 (Table 1.1). The recovery will be supported by declining interest rates, easing financial conditions for both consumers and firms, with improving purchasing power for indebted households and falling borrowing costs for businesses and structural reforms to boost labour market participation and employment (Box 1.1). However, more can be done to increase employment by reducing barriers to labour market participation of women with young children (Box 1.2). Inflation is expected to remain moderate, at around 2%, as the economy strengthens and wages increase. While rising import costs may exert some upward pressure, these will be partly offset by lower energy prices.
Annual percentage changes unless specified, volume (2009/10 prices)
1. Contribution to changes in real GDP. 2. As a percentage of potential GDP. 3. As a percentage of the labour force. 4. Harmonised index of consumer prices excluding food, energy, alcohol, and tobacco. 5. As a percentage of GDP.
Source: OECD Economic Outlook Database.
Increasing labour force participation and employment have been major policy objectives in Finland for successive governments. Employment rates of older workers have been lower than in other Nordic countries (OECD, 2022a). However, significant reforms have already been carried out to boost the participation of older workers (Table 1.2). A major feature of the current government’s policy programme (Finnish Government, 2023) are reforms to labour market regulation and welfare rules to increase the incentive to move into work and especially full-time work with the objectives of raising employment by 100 000 by 2027. To achieve this objective, the reform relies on two sets of social security and taxation reforms estimated in December 2024 by the Ministry of Finance to increase employment by 89 250 (Ministry of Finance, 2024a). The largest estimated effects on employment are due to a cut in labour taxation (5 300 extra jobs) and social security reforms including freezing some index linked benefits (18 600), faster tapering in unemployment benefits (12 800), abolishing child allowances in unemployment benefits (10 000), and abolishing the adult education subsidy (10 000). These measures are flanked by reforms to further boost employment by increasing the use of local bargaining, reducing strikes and developing the conciliation system.
The current labour reforms combined with previous reforms to boost participation of older workers have boosted labour supply incentives and will raise employment. The results are unlikely to be seen in the short term due to the cyclical weakness in the economy and the final effect is uncertain. Despite robust methods and the use of the best available empirical research, the Ministry of Finance’s estimates rely on many assumptions, and it will be important for independent experts to carry out an ex-post evaluation of the reforms (Economic Policy Council, 2023). The package contains elements likely to significantly boost labour supply once the recovery is underway, such as lower marginal effective tax rates (METR) on full-time work. However, the first reform package is estimated to reduce the income of the bottom three income deciles, while raising that of the top seven deciles (Economic Policy Council, 2023). While the second package has more balanced distributional implications, to increase the popular acceptance of the reforms and therefore their permanence, the government should review the list of reforms and repeal or not introduce those with little positive employment impact, and which are unpopular, e.g., allowing employers not to pay the first day of sick leave.
Finland exhibits a high level of equality between men and women in many respects including the almost equal share of parliamentarians. However, the gap in remuneration remains one of the highest in the OECD and higher than in Nordic peers (Figure 1.4).
Gender wage gap, share of median earnings of men, 2023 or latest
Source: OECD, Benefits, Earnings and Wages (database).
The reasons for this include lower transition rates from part-time to full-time employment and weaker “job ladder effects” for women than men (Causa et al., 2021). Women tend to miss out on the pay boosting effect that changing jobs has, especially at the beginning of their careers. This is in part because, as elsewhere in the OECD, women are more likely than men to exit the labour market to rear young children but with a stronger effect on the gap because of a higher overall share of homecare in Finland than elsewhere.
Reforms to family leave introduced in August 2022, including equalising the number of leave days for both parents, should help reduce the gender wage gap by encouraging fathers to take a larger share of this leave, reducing mothers’ time away from work. Data from KELA is consistent with a positive effect showing men’s time spent on family leave up by 70% between July 2022 and July 2024, while time spent by women decreased by 9% and total time of both remained constant (Kinnunen et al., 2024). Finland provides a guaranteed daycare place and early childhood education for every child aged 9 months to 6 years, which is rare internationally. Additionally, the cost of public daycare is low and zero for low-income families. Nevertheless, although it has increased, participation in early childhood education and care is lower in Finland than in other Nordic countries (Välimäki et al., 2024). Homecare of children has been encouraged by a homecare allowance for parents to look after a child up to three years of age. This has been particularly the case for parents, mainly women, with a low level of education. The homecare allowance is higher than the allowance for hiring a private daycare provider. Some of the ensuing bias against working is removed by allowing parents to hire private daycare providers for children under three and receive the homecare allowance. The greater benefits for women, children, the economy, and society from an earlier return to work for women after childbirth argue for gradually phasing out the homecare allowance to encourage parents to put their child into a creche or other professionally-run institution, while making sure the supply of high-quality early childhood education options matches demand. This could be accompanied by active labour market policies to assist the return to work of mothers with low levels of education including through training and upskilling. Strengthening pay transparency measures could also help to address the gender wage gap (OECD, 2023a). Finland has mandatory pay gap reporting and pay auditing requirements in place but could increase compliance as only 53% of employers conducted an equal pay audit in 2020 (Attila et al., 2020).
Persistent weakness in the construction sector, low confidence and especially weaker productivity growth will also constrain the recovery. Labour productivity growth has fallen faster than in the Nordic neighbours (Figure 1.5). This reversal is partly due to the changing fortunes of Nokia, Finland’s largest computer sector company (Finnish Productivity Board, 2020), and because, compared to peer economies, the most productive firms in the Finnish economy remain too small (Finnish Productivity Board, 2021).
The negative effect on productivity growth and weaker performance relative to peers can also be partly explained by the larger negative supply shock due to the end of trade with Russia. Size and proximity would normally imply significant trade with Russia, but this declined following Russia’s illegal annexation of Crimea in 2014. Even so, in 2021, the share of trade accounted for Russia was still higher for Finland than for other Nordics, where this share was below 0.5%. Following Russian invasion of Ukraine in 2022, the share of Finland’s goods and services exports and imports fell from 4.6 and 8.1% respectively to almost zero (Table 1.3). Tourism from Russia ceased and that from Asia plummeted after Russia closed its airspace to most foreign airlines. Finnish companies have replaced cheap raw materials imported from Russia but at higher cost directly reducing value added.
Note: Capital quality measures the contribution of capital to GDP growth that comes from a change in the composition of the capital stock.
Source: OECD (2023), Compendium of Productivity Indicators.
Share of Finland’s total goods and services trade, %
Source: Statistics Finland and OECD calculations.
The recovery is fragile and risks to the outlook remain tilted to the downside. Major external and geopolitical uncertainties continue to surround Finland’s outlook. Global trade policy uncertainty, which has risen substantially since the start of 2025, could have further a chilling effect on investment and trade growth worldwide with significant effects on Finland (Bank of Finland, 2025a). Rising tariff barriers and chaotic trade policy developments risk a spiral of escalation in trade restrictions worldwide, leading to a deep contraction in world trade and abrupt slowdown in the world economy and demand from Finland’s trading partners. A further escalation of global trade tensions could weaken export performance and delay investment due to high economic uncertainty. An escalation of hybrid warfare in the form of cyber-attacks and infrastructure sabotage remains a key risk to investor confidence and trade (Table 1.4). These effects can be large even if Finland’s efforts as part of its long-time strategy of preparedness for external risks would help mitigate them. These include becoming a member of NATO in April 2023, the closure of the border with Russia in November 2023 (extended indefinitely in April 2024) and a national electronic payments system back-up. Additionally, instability in the Middle East and a slower than expected recovery in Finland’s main trading partners in Europe may pose risks to trade, foreign investment and growth, and growing trade restrictions would exert a drag on exports and business activity.
On the upside, sustained investment in innovation and green technologies attracting foreign direct investment (FDI) would help mitigate some of the downside risks and boost productivity. Indeed, expanding low-GHG-emissions exports is one of Finland’s most promising ways to increase trade, and it is a powerful way to attract FDI. However, expanding exports needs investment first and the scale of the capital required is too much for Finland to publicly fund. Working with other Nordic countries to secure more EU funding to catalyse private investments in Finland and elsewhere in the Nordic countries with similar comparative advantage in low-emissions exports can help break this impasse. This will help realise Finland’s huge green industrial potential and the European Union’s decarbonisation and competitiveness ambitions (Draghi, 2024). Additionally, Germany’s new investment package, approved in March 2025, totalling around EUR one trillion, with EUR 500 billion for infrastructure, digitalisation and climate investments and another EUR 500 billion for defence, could create new opportunities for Finnish exports, particularly in machinery, clean energy and defence-related sectors.
A range of productivity-enhancing reforms have been undertaken in recent years (Table 1.5). The EU’s Recovery and Resilience Fund has allocated EUR 1.95 billion (0.7% of GDP) to Finland for projects to boost sustainable growth in the areas of digitalisation, green transition, skills and employment. However, Finland will need to go further to make the most of the green industrial transition. Skills shortages in firms including in research are holding back firm-level innovation, technological diffusion, and productivity growth (Callagaris et al., 2023; Finnish Productivity Board, 2023). Addressing shortages requires lifting Finland’s higher education attainment rates that have stagnated since 2000 (Chapter 2) and lowering barriers to hiring highly skilled foreigners (Chapter 3). These reforms can eventually deliver a marked payback in terms of growth by increasing the quantity and quality of human capital and private investment in the economy (Table 1.6). The growth and productivity returns from the human capital related reforms (levers 1 and 2) are modest in the first ten years but more significant after 25 years as the stock of education that drives productivity growth only reacts with a lag to an increase in the flow of graduates.
Note: The investment costs to the economy of further converting the electricity system to renewables are taken account in the simulation. Both the higher education and migration policies are assumed to boost growth via human capital effects and increasing R&D and innovation. It is assumed that both new graduates and highly skilled migrants have on average five years more schooling than those without higher education. The quality of human capital is assumed to rise by the same percentage as average years of schooling. Lever 2 assumes a rise in the share of migrants that are highly skilled from 20% currently to 50%, which is around the level in France and one of the highest in the OECD. Lever 2 shows the effects of a higher share of a higher flow of migrants being high skilled but excludes the effects of higher migration numbers. For lever 3, total R&D rises to meet the government’s objective of raising R&D as percentage of GDP to 4%. Lever 3 also raises public and private investment to increase the capital stock to GDP ratio by 50 percentage points by 2050, which is around one half of currently signalled green industrial transition projects in Finland. The green investment scenario assumes private investment will increase by 2 euros for every 1 euro of public investment based on Matvejevs et al. (2022). The green investment scenario also assumes that most of the extra private capital investment is funded by FDI and therefore crowding out of other investment in Finland is limited. The effect of levers 1 and 3 are calculated relative to a baseline with low population growth (Statistics Finland 2021 projections) so can be summed as they use the same low (Statistics Finland 2021) population projections, whereas levers 2 and 4 assume high population growth (2024 Statistics Finland projections) so cannot be added with levers 1 and 3.
Source: Simulations using the OECD Long-Term Model Guillemette and Château (2023).
Raising productivity will also require maintaining an environment favourable to business including by ensuring corruption remains low. Finland enjoys low levels of corruption according to global indices and its citizens have a relatively high trust in public institutions and fellow citizens (OECD, 2024d, Figure 1.6). Anti-money laundering enforcement is effective and policy settings to control corruption are generally considered best practice among OECD countries (Figure 1.6, Panel F). The government recently tasked a steering group with updating its national anti-corruption strategy. The overarching objectives from the 2021-23 strategy of improving government agency cooperation, transparency and legislation will remain, as will the focus on structural, rather than street-level, corruption. In 2024, Finland became the first Nordic country to introduce a transparency register, which documents lobbying and lobbying consultancy activities targeted at parliament or ministries. The register is available to the public online. Guidelines for the register are developed continuously to make sure its coverage is adequate, while at the same time minimising the burden of reporting. Discussions are ongoing as to whether the register should be expanded to cover also lobbying at local government level. It will be important to carry out an ex-post evaluation of the effectiveness of the register in increasing transparency and what effects it has had on lobbying activities.
Note: Panel B shows the point estimate and the margin of error. Panel D shows sector-based subcomponents of the “Control of Corruption” indicator by the Varieties of Democracy Project. Panel E summarises the overall assessment on the exchange of information in practice from peer reviews by the Global Forum on Transparency and Exchange of Information for Tax Purposes. Peer reviews assess member jurisdictions' ability to ensure the transparency of their legal entities and arrangements and to co-operate with other tax administrations in accordance with the internationally agreed standard. The figure shows results from the ongoing second round when available, otherwise first round results are displayed. Panel F shows ratings from the FATF peer reviews of each member to assess levels of implementation of the FATF Recommendations. The ratings reflect the extent to which a country's measures are effective against 11 immediate outcomes. "Investigation and prosecution¹" refers to money laundering and "Investigation and prosecution²" to terrorist financing.
Source: Panel A: Transparency International; Panels B & C: World Bank, Worldwide Governance Indicators; Panel D: Varieties of Democracy Project, V-Dem Dataset v12; Panels E and F: OECD Secretariat’s own calculation based on the materials from the Global Forum on Transparency and Exchange of Information for Tax Purposes; OECD, Financial Action Task Force (FATF).
In response to rising inflationary pressures, primarily driven by rising energy costs, the European Central Bank (ECB) raised its policy rates by a cumulative 425 basis points, peaking in June 2024. In Finland, the impact of these rate hikes was pronounced due to the high share of variable-rate loans, rapidly increasing borrowing costs and pressuring household finances. With inflationary pressures in the euro area subsiding, the ECB started its easing cycle in June 2024. Further policy interest rate cuts are projected to alleviate financial stress and stimulate broader economic activity. However, the Finnish authorities need to remain vigilant to ensure stability due to a large stock of unsold properties and high global uncertainty and asset price volatility reflecting rapid swings in trade policy on the part of China, the United States and other large economies.
Firms rely predominantly on bank financing and capital markets financing remains underdeveloped. The main equity market is small by international standards relative to GDP. More can be done to build the equity funding ladder from private equity and venture capital through to listing on the main share market. This is especially important for financing new firms and technologies such as those required for the green transition (Chapter 4).
Against this backdrop, Finnish financial institutions remain well-capitalised, enhancing their resilience to cope with structural vulnerabilities such as high household indebtedness (Figure 1.7, Panel A). In Finland, over 90% of housing loans are linked to Euribor rates, typically for one year, and households’ interest expenditures as a share of disposable income have surged (Figure 1.7, Panel B). While Finnish households accounted for 51.7% of total loans from monetary and financial institutions (MFIs) in 2024Q3, housing corporations accounted for 16.2%, up from 14% in 2019Q3 (Figure 1.8, Panel B). Non-performing loan (NPL) ratios have increased since 2023, particularly in the construction sector, reflecting subdued commercial real estate and housing markets (Figure 1.8, Panel C). While the high share of market funding (43.6% of total liabilities) could make Finnish banks vulnerable to liquidity shocks in times of severe market stress, their strong liquidity buffers, reflected in a liquidity coverage ratio of around 174% in 2024Q2, similar to Sweden (173.4%) and Austria (173.6%), help mitigate this risk (Figure 1.8, Panel D).
1. Households include non-profit institutions serving households.
2. Households excluding non-profit institutions serving households. The interest-to-income ratio has been calculated as total interest expenditure before FISIM allocation over a four-quarter moving average of net disposable income. No adjustment has been made for interest deduction.
Source: OECD, National Accounts at a Glance (database); Statistics Finland; and Bank of Finland.
1. Return on equity. Data for the fourth quarter until 2023. Data for the second quarter for 2024.
2. Common equity tier 1 (CET1) capital relative to risk-weighted assets.
3. Tier 1 capital relative to assets.
4. A loan is non-performing when it is over 90 days past due or it is assessed that the debtor is unlikely to pay its credit obligations.
5. Deposits and debt securities relative to total liabilities. Data refer to 2023Q4.
6. Liquidity buffer over net liquidity outflows over a 30 calendar-day stress period.
Source: European Central Bank; Bank of Finland; FIN-FSA.
The Finnish Financial Supervisory Authority (FIN-FSA) has implemented several macroprudential measures to manage household leverage and further mitigate risks in the housing market. A key measure is the loan-to-value (LTV) ratio limit introduced in 2016, which capped LTV ratios at 95% for first-time homebuyers and 90% for others. This reform aimed to curb the growth of household indebtedness and improve financial stability. Empirical evidence suggests that the LTV limit reduced transitions to homeownership by 17%, particularly among lower-income households, while it also led to a modest increase in non-mortgage borrowing, such as consumer loans, as households adjusted to the stricter borrowing constraints (Eerola et al., 2022). In line with the recommendation in the previous OECD Economic Survey of Finland (OECD, 2022a), the FIN-FSA introduced a debt-service-to-income (DSTI) limit as a non-binding recommendation effective from the beginning of 2023. The DSTI limit complements the LTV cap by ensuring that no more than 60% of a household's net income is allocated to loan servicing under stressed conditions where interest rates rise to 6%.
The downturn in both residential and commercial real estate markets since mid-2022, along with weak consumer confidence, high unemployment and limited loan demand persisting into 2024 risked increasing non-performing loans. Residential construction investment contracted in the first three quarters of 2024 by around 36% from their peak at the start of 2022, and the number of new housing projects remains low. Non-residential construction also declined, albeit slightly less than residential construction. While falling interest rates are expected to support the recovery, a stock of unsold dwellings continues to weigh on the market. Additionally, the Finnish banking sector is highly interconnected, particularly with other Nordic countries, as approximately 75% of the loans issued by Finnish banks that are secured by commercial real estate are directed towards other Nordic nations, posing challenges to accurate and swift risk management. The FIN-FSA maintained macroprudential settings including the LTV limits and the countercyclical capital buffer at their standard levels and restored the systemic risk buffer requirement at the level of 1%, effective from April 2024. As the housing market is expected to gradually recover as interest rates decline and household purchasing power improves the risk of rising non-performing loans should subside. However, the FIN-FSA should continue to monitor developments closely and stand ready to adjust macroprudential policies if needed.
As digitalisation accelerates in Finland’s financial sector, cybersecurity has become an increasingly pressing issue. Institutions including banks, educational facilities, hospitals, and government agencies are frequently targeted by cyber-attacks (OECD, 2024b). Intelligence agencies across Europe have stated Russia is engaged in increasing acts of sabotage across Europe including cyber-attacks. Cyber-attacks are more common than in other countries, with enterprise survey data showing the Finnish business sector facing a higher level of cyber-attacks than even other neighbouring countries (Figure 1.9). In late 2024, Nordea, the largest bank by assets in Finland, faced recurring disruptions to their online banking services, a number of which the bank attributed to distributed denial-of-service (DDoS) attacks. With the financial sector becoming more interconnected through digital platforms, ensuring cybersecurity resilience is crucial to safeguarding financial transactions and maintaining consumer confidence. The FIN-FSA is carrying out a review to enhance cyber risk management. Comprehensive and proactive measures are needed to mitigate financial vulnerabilities that could disrupt financial services or damage public trust in the system.
Enterprises that experienced any ICT security related incidents, 2022
Note: Enterprises with 10 employees or more, excluding the financial sector. ICT-related security incidents include the unavailability of ICT services, the destruction or corruption of data, and the disclosure of confidential data.Source: Eurostat (2022), ICT Usage in Enterprises (database); OECD (2024b).
The rise of cryptocurrencies such as bitcoin has also introduced new challenges for financial stability. Although the use of cryptocurrencies remains relatively limited in Finland, their growing popularity globally has raised concerns about the risks they may pose to traditional financial systems. High price volatility, risk of speculative bubbles, Ponzi scheme like characteristics, susceptibility to fraud and the potential to bypass financial regulations are key financial stability issues. To address these challenges, the European Union's Markets in Crypto-Assets Regulation (MiCA) has been implemented, providing a clear regulatory framework for crypto assets. Finland adopted legislative amendments in line with MiCA, which became partially effective in June 2024, with full enforcement expected by the end of 2024. This regulation allows traditional financial firms to offer crypto-related services upon notifying supervisory authorities. While these measures aim to integrate cryptocurrencies within Finland’s financial system safely, FIN-FSA should remain vigilant and enhance data collection and analysis on cryptocurrency transactions, market dynamics, and associated potential risks to ensure the resilience of the financial system.
After an expected widening of the fiscal deficit in 2024, Finland’s fiscal policy is set to tighten in 2025 and 2026. This section discusses short-term strains on the budget and policy requirements. This is followed by an analysis of ageing pressures on the public budget and selected options for closing the structural shortfall in revenue to cover expenditure that has existed since the Global Financial Crisis (GFC).
1.3.1. The short-term fiscal stance is set to tighten
In the short term, Finland's fiscal outlook faces pressures from multiple fronts. In 2023, the fiscal deficit widened to 3% of GDP (Figure 1.10), and public debt on the Maastricht definition rose to 77.2% of GDP. These trends continued in 2024 and debt is expected to rise further still in 2025. The deficit is rising due to increased defence, health, and pension expenditures, higher debt servicing costs, as well as reduced unemployment insurance contributions and low revenue growth owing to economic weakness. Additionally, implementation costs associated with the transition to the new wellbeing services counties have further contributed to budget deficits, complicating efforts to meet medium-term fiscal targets. The reform established 21 wellbeing services counties in 2023, which took over the responsibility of social welfare and healthcare services from municipalities. While this reform aims to enhance service equality, reduce health disparities, and limit long-term cost growth, the transition period has seen many counties facing financial pressures, suggesting that further measures will be needed to achieve the reform’s aims.
General government, % of GDP
1. Underlying government primary balance, per cent of potential GDP.
Source: OECD Economic Outlook Database.
The government has taken steps to address the overall deficit through consolidation measures, including tax increases and spending cuts, particularly in social welfare programmes, plus structural reforms to boost employment. In September 2024, the government raised the standard VAT rate from 24% to 25.5%. These measures are necessary to curb the rising trend of public debt but are likely to place additional strain on households and businesses, particularly in the short term.
The government released Finland’s Medium-Term Plan 2025–28 in September 2024, including the planned growth rate of net primary expenditure required by the EU fiscal rules. Under this plan, gross general government debt is expected to peak in 2026 and thereafter decline towards 60% of GDP. Many of the consolidation measures are frontloaded and have already been implemented. The OECD estimates that ongoing fiscal consolidation efforts will lower the structural deficit by 0.5% of potential GDP cumulatively over 2025-26. It is important to keep up these efforts to put public debt on a sustainable downward path and create more space to cope with future shocks.
Defence spending has rapidly increased from close to 1.5% to around 2.4% of GDP (Figure 1.11), as Finland aims to strengthen and modernise its military capabilities, amidst rising security concerns following Russia’s invasion of Ukraine, particularly on Finland’s 1 340 km eastern border with Russia. Russia has reportedly engaged in harassment, including facilitating illegal migration resulting in Finland indefinitely closing the border, and sabotage of cables in the Baltic Sea (Lloyd’s List, 2024). As a member of NATO since 2023, Finland is committed to maintaining its defence spending at 2% of GDP or more and has announced in April 2025 it will increase expenditure to 3% of GDP by 2029. Expenditure is expected to remain elevated as Finland invests in its military infrastructure, equipment, and personnel, particularly in the purchase of F-35 strike fighter aircraft and training of pilots. Protecting telecommunications and energy cables in the Baltic Sea and other key infrastructure will also likely increase further defence and security spending.
Defence expenditure as a share of GDP, for NATO member states
Source: NATO, Defence Expenditure of NATO Countries (2014-2024).
The government should focus consolidation efforts on increasing spending efficiency (Table 1.7), notably within the wellbeing services counties responsible for providing health and welfare services that face significant budget deficits. Indeed, the estimated wellbeing services counties sector financial balance worsened 0.3 percentage points of GDP between the first and second half of 2024 (NAOF, 2025). Central government is funding the wellbeing counties but does not directly control their expenditure. International experience, including in Ireland and New Zealand, suggests that health expenditure slippage is one of the largest sources of budget overruns, even when health service governance is fully centralised (OECD, 2022b).
Note: Wellbeing services county reforms up until April 2024 are expected to save 0.2% of GDP by 2028 according to Ministry of Finance (2024). For Welfare Services Counties, Ministry of Finance (2024), Orpo's Government: Decisions aim to prevent public finances from spinning out of control, Ministry of Finance, Helsinki. The estimate for state aid reduction is based on OECD (2022a) Table 1.9. The estimate for the support green industry is based on simulations with the OECD Long-Term Model (-1.3) and European Commission (2025), Commission approves EUR 2.3 billion Finnish State aid scheme to foster the transition to a net-zero economy, European Commission, Brussels (-1). Reforms (iii) to (v) are included in the labour and fiscal reforms debt simulation analysis scenario in Table 1.8 and Figure 1.15. Reform (vi) is included in the green investment scenario in Table1.8 and Figure 1.15 assuming that the short-term cost is at the top of the range, i.e., 1.3 percentage points of GDP given here.
Source: OECD calculations based on the above sources.
Wellbeing services counties are seeking to enhance their financial sustainability by reducing staff numbers and raising client fees but these efforts appear to be insufficient (Box 1.3). The Ministry of Finance, appropriately given its expertise and responsibilities, has strong financial audit and control powers. It has used them to warn that all wellbeing services counties are at risk of being subject to the assessment procedure, which would allow the Ministry to take over the financial steering of affected regions. To encourage greater financial responsibility, the government plans to gradually reduce the share of actual costs covered by national-level ex-post controls, shifting more financial accountability to wellbeing service counties. From 2026 onwards, the percentage of costs reimbursed by the state will decrease in stages from 95% of 2024 costs to 90% in 2027, 80% in 2028, and ultimately 70% from 2029 onwards. The Ministry assesses whether regions can remain financially viable independently and can propose mergers with other counties.
A solution that provides for both local control and central oversight is to strengthen the central government’s financial steering of wellbeing services counties but only those at risk of insolvency. This should include automatically imposing the Ministry of Finance assessment procedure on wellbeing counties exceeding their budget limits. At the same time, Finland needs to consider helping the counties reduce reliance on central government funding and better manage their resources notably by granting them a limited ability to levy taxes. This would also have the advantage of making the counties more accountable to their voters.
To improve the efficiency of health and social services delivery, reduce regional inequality and improve accountability, Finland established 21 wellbeing services counties in 2021, transferring responsibility for organising healthcare, social welfare and rescue services from over 300 municipalities to these counties on 1 January 2023 except for the City of Helsinki, which continues to manage these services independently. Each county is self-governed by a directly elected council, enabling local decision-making within a national framework. While the counties organise and provide statutory services, they lack independent revenue-raising powers and rely primarily on central government funding, supplemented by client and service fees. Counties may receive additional central government funding if residents’ fundamental rights to healthcare, social welfare or rescue services would otherwise be compromised.
The central government allocates funding based on imputed demand, which takes into account several factors, including morbidity, age structure, socio-economic conditions, and population density, rather than the actual costs incurred by individual counties. This approach aims to balance regional disparities while containing expenditure growth. Funding for the counties, totalling EUR 26.2 billion in 2025, accounts for nearly a third of the central government budget, and is set to decline over time, with ex-post national funding adjustments occurring after a two-year delay to make up national cost overruns or savings. However, these adjustments are allocated in line with the original funding division so that a county that makes a loss will not be fully compensated and a county that underspends their budget will be rewarded. This preserves incentives to curb cost growth. To ensure financial discipline, counties must balance their budgets within a three-year timeframe, and long-term borrowing is restricted unless explicitly authorised by the central government. If a county fails to cover its accumulated deficit within three years, the Ministry of Finance may initiate an evaluation procedure.
In 2023–24, faced with a very tight labour market for health professionals and sharp wage increases, all wellbeing services counties except the City of Helsinki ran a deficit. The counties in total are expected to record a surplus in 2025. However, challenges remain: financial performance varies significantly across counties and containing costs without cutting service quality is proving difficult. Indeed, to reduce costs, previously targeted improvements in service provision such as the reduction in waiting times have been relaxed. Additionally, partly due to labour shortages, in-person general practitioner services are being reduced, especially in rural counties, and being replaced by remote services, which are often not suitable for either children or older people.
More generally, comprehensive and regular spending reviews are essential to enhance spending efficiency, as recommended by the previous OECD Economic Survey of Finland (OECD, 2022a). The Ministry of Finance conducted a spending review in 2023 to scrutinise the use of public funds and propose alternative measures to strengthen government finances. The review helped identify policy options to improve efficiency and fiscal sustainability, as reflected in the Government Programme and in the additional fiscal consolidation package announced by the government in April 2024. The government has decided to introduce a regular spending review process that incorporates comprehensive spending reviews at the end of each parliamentary term, on top of more targeted annual reviews. These efforts need to be supported with adequate resources. These reviews should include an examination of state aid to ensure that it serves to enhance productivity.
On the revenue side, while Finland raised the standard VAT rate by 1.5 percentage points in September 2024, some reduced VAT rates remain, specifically the 10% and 14% rates applied to food, restaurant services, and certain cultural goods. As the economic recovery strengthens, reassessing these reduced VAT rates will be crucial to help restore fiscal balance. Finland should gradually increase these reduced rates, while providing increased transfers to the least well-off to compensate the loss of purchasing power. For medication, means-tested and high-use discounts could help offset the effects on those on low incomes or seriously ill. The government recently took a step in that direction, increasing the reduced tax rates for some items including books, medications, taxi fares, hotel accommodations, and culture and entertainment events, effective from January 2025. Taxation of immovable property, one of the least growth distorting taxes, is also below the OECD average and could be increased.
1.3.2. Finland faces major longer-term fiscal vulnerabilities and challenges
As in many other OECD countries, the ageing of the population is one of the most significant long-term challenges to public finances in Finland via the pressures it puts on government revenue as well as pension, health, and long-term care spending. With no policy changes to support human and fixed capital development and net immigration of 18 000 a year, the working age population will begin to shrink in the 2030s and GDP will no longer grow in the 2040s and decline in the 2050s (Bank of Finland, 2025b). Indeed, absent a large increase in economic growth further consolidation will likely be needed eventually to tackle the structural gap between government expenditure and revenue that emerged between 2007 and 2009 during the GFC. Since 2008 the National Audit Office estimates expenditure (excluding interest payments) of the government debt-accumulating sectors has exceeded the revenue by an average of 2.3 percentage points of GDP (NAOF, 2024). Revenue fell during the GFC and due to geopolitical shocks, and lower trend productivity growth failed to catch up with ageing and cost-driven expenditure growth (Figure 1.12).
Source: OECD, Government at a Glance Indicators.
The cost of the climate transition is relatively low in Finland as the share of total energy supply from non-carbon-based fuels is already above 60%, one of the highest in the OECD and therefore less investment in further low carbon-based energy is required (Guillemette and Château, 2023). The main long-term fiscal challenge is ageing. Even over the next 15 years to 2040, ageing costs will continue to rise considerably due to pension (assuming the pension replacement rate is constant), health and long-term care expenditure increases (Figure 1.13), from around 15½ per cent of GDP to around 18½ per cent by 2040. Health and long-term expenditures have already been rising due to rising numbers in the over-60 cohort, when these costs start to rise quickly per capita from around the age of 60 (Kallestrup Lamb et al., 2024). In Finland the over-60 cohort started to grow faster from around 2005, when the large cohort born between 1945 and 1950 – over 600 000 (11% of the 2023 population) - started reaching the age of 60. Cost pressures will continue to rise over the next decade as this baby boomer cohort enters their eighties, when health and long-term care expenses per capita continue to rise sharply (Kallestrup Lamb et al., 2024). However, out-patient costs may stabilise as the population aged 50 to 75, when these expenses are high before tapering off, starts to decline slightly.
Annual cost, change between 2024 and 2040
Source : Guillemette and Château (2023).
Long-term care (health and social) costs is one of the main components of age-related spending and will rise even more in the longer term through to 2070 (Figure 1.14). In 2022, Finland already spent 3.8% of GDP on long-term care (LTC), of which 2% of GDP was on health expenditure on medical and nursing care delivered in nursing homes or at home, and 1.8% on social costs, such as assistance services that enable a person to live independently such as housework or shopping assistance. This is higher than in other Nordic countries, and one of the highest in the OECD. Individual health and LTC outlays rise sharply past the age of 80 (Kallestrup-Lamb, 2024). LTC health expenditure alone is projected to rise by around 2 percentage points of GDP by 2070, one of the larger increases in the OECD.
Source: OECD, Health at a Glance: Europe 2024.
Like in the other Nordics, the cost of institutional LTC health services is around four times median income, one of the highest ratios in the OECD (OECD, 2023c). Home-based care for the older people with severe needs is equally expensive in Finland (Oliveira Hashiguchi and Llena-Nozal, 2020). This argues for continuing to favour home-based LTC health care where possible and restricting institutional care to those with severe needs (e.g., acute mental or physical disabilities), for whom institutional LTC is more suitable and the cost is similar. Subject to the caveat that some collective living arrangements in Finland are classified as home-based care, encouragingly, overall LTC spending appears to have been shifting away from expensive institution-based LTC towards lower-cost home-delivered services. Between 2011 and 2021, Finland experienced the fastest fall, albeit from a high level, in the number of institutional LTC beds per capita in the OECD, and one of the most rapid rises in the OECD in the share of LTC recipients for whom services are delivered at home (OECD, 2023c). Unlike the other Nordic countries, where half or more of LTC health spending is still on institution-based care, only 15% of LTC health spending is institutional in Finland. LTC is now mostly managed by the wellbeing services counties. The authorities are continuing to reduce the share of older persons in institution-based care (Ministry of Social Affairs and Health, 2022). However, increasing home-based LTC can negatively affect labour market participation of family members and notably women. The further expansion of 24-hour care services for older persons at home including nursing care for those who need it should help to mitigate the pressure on women in carer roles.
Greater cost-sharing by households can help reduce LTC spending pressure on public finances. Means testing access to publicly funded LTC if designed well can ensure everyone who needs LTC services can access them, while increasing the contribution from those who can afford it. Finland has income-tested but not asset-tested home-based LTC benefits, and some non-means tested benefits. Out-of-pocket (OOP) expenses for institutional LTC as a share of income is below the OECD median but still around 60%. However, OOP for home-based LTC as a percentage of income is one of the lowest in the OECD. The government should prepare for future cost pressures by investigating how to increase means testing, while preserving access as much as possible and limiting the risk of pushing older people into poverty. Asset-tested support can negatively affect savings incentives and may further exacerbate the asset allocation bias towards owner-occupied housing created by the tax code. Asset testing therefore needs careful design (Oliveira-Hashiguchi and Llena-Nozal, 2020).
Between 2010 and 2019, public spending on pensions rose from 10.9% to 13.5% of GDP, one of the highest shares in the OECD and higher than in the other Nordic countries, where public spending on pensions is between 9 and 10% of GDP. Reforms have already been carried out to contain further increases in public spending. These include reducing the effect of growing life expectancy by ensuring the present value of pensions at age 62 remains constant at the 2009 level; raising the minimum retirement from 63 to 65 by 2027 and linking it to life expectancy from 2030 with the aim of keeping constant the present ratio of expected time in retirement to time spent working (OECD, 2022a) – for example for someone born in January 1975 the minimum age will be 66; and linking the “normal” (no penalty) retirement age to life expectancy, so the normal age will rise to from 65 to 69 by around 2070, above the expected OECD average of 66 (OECD, 2023c).
Reforms to raise labour market participation of older (55+) workers, including increasing rights to shorter working hours and closing the extended unemployment benefits tunnel to early retirement from 2025 will help balance overall public finances by ensuring older people contribute longer and claim retirement benefits later. Nevertheless, further reforms may be needed to ensure the sustainability of the pension system in part due to the decline in fertility rates in the 2010s that will reduce the contributing working age population before the older age population (OECD, 2022a). Reforms may also be needed because although some projections show even a small decline in pension expenditure as a percentage of GDP up until 2050 (EC, 2024), they assume that the pension replacement rate will fall significantly, which may be politically difficult to achieve.
Stabilisation and then reduction of high public debt is important for rebuilding fiscal buffers to cope with shocks and ensuring financial stability. Setting policy to achieve stabilisation against an ageing backdrop will be challenging and requires ongoing attention. This is even more the case following policy changes announced in the Government Fiscal Plan 2026-2029 announced in April 2025. The effects of these policy changes are not included in the debt sustainability analysis post 2026. The main changes with effects post 2026 include a cut to income and corporate tax rates, as well as an increase in defence spending by EUR 3.6 billion by 2029 to meet the new 3% of GDP target for defence expenditure. Without taking account of the growth-enhancing effects of the tax cuts, the size and timing of which are uncertain, these new measures are estimated to reduce the fiscal balance by 1.7 percentage points of GDP by 2029. As a result, additional consolidation efforts of up to 1.7 percentage points of GDP will be required in each scenario to achieve the same debt outcomes as described below.
The baseline scenario in line with the Statistics Finland’s 2021 population projection is that net immigration (15 400 average between 2010 and 2019) and population growth fall back to the trend and the aforementioned Government structural reform programme (Box 1.1) will increase employment. Simulations using the OECD long-term model (Guillemette and Château, 2023) show that if the reforms increase employment by around 100 000 as estimated by the Ministry of Finance, albeit gradually, the fiscal balance would improve substantially (Table 1.9), with a public debt ratio of 151% of GDP by 2050 (baseline scenario) instead of around 185% with no reforms (no reforms scenario) (Figure 1.15). However, the employment reforms alone would be not enough to stabilise public debt in the longer term.
Impact on the general government primary balance relative to the baseline scenario, in percentage point of GDP
Note: The long-term effect on public finances is measured by the change in the cyclically adjusted primary balance between 2025 and 2050 compared to a baseline of employment reforms and low population growth. The baseline includes the effects of structural reforms to increase employment by 100 000 gradually as these reforms have been enacted. The green investment scenario assumes private investment will increase by 2 euros for every 1 euro of public investment based on Matvejevs et al. (2022) and that the extra private investment is mainly funded by FDI minimising crowding-out effects on other investment. Employment is gradually rising to be 100 000 higher by 2040 and the measures are described in Box 1.1. The short-term budget balance effect is the sum of VAT reform (0.3 % of GDP), immovable property tax reform (0.3%) and long-term care means-testing (0.4%). The short-term effects of the tax and welfare reforms in the structural reforms to boost employment are already incorporated in the baseline. Low population growth corresponds to the Statistics Finland 2021 projections that net immigration of 15 000 per annum from 2022. Medium population corresponds to the Statistics Finland 2024 population projection with an assumption of net immigration of 25 000 instead of 40 000 per annum. High population growth to the corresponds Statistics Finland 2024 projections which assumes net immigration of 40 000 per annum. The change in the fiscal position in this scenario does not account for the extra fiscal costs (e.g., infrastructure spending) required to absorb higher immigration. Migrants are assumed to have the same employment rate as the national average. The labour and fiscal reforms scenario described here and shown in Figure 1.15 includes reforms (iii) to (v) described in Table 1.7. The green investment scenario described here and shown in Figure 1.15 contains reform (vi) described in table 1.7. These scenarios do not include the post 2026 effects of fiscal policy changes set out in the General Government Fiscal Plan 2026-2029 and increased defence spending to 3% of GDP announced in April 2025 that are estimated to reduce the fiscal balance by around 1.7% of GDP by 2029. The estimate of 1.7% does not take into account the impact on the fiscal balance of changes to GDP growth arising from the taxation cuts.
Source: Simulations using the OECD Long-Term Model of Guillemette and Château (2023).
If in addition to the employment reforms the government soon implements further VAT reforms beyond those taken up until January 2025 and other reforms equivalent to around 1% of GDP (2.7% of GDP following the April 2025 fiscal plan changes) (labour and fiscal reform scenario), the immediate improvement in the fiscal balance from the fiscal reforms combined with the longer term effects of the labour reforms would be enough to contain the rise in the debt-to-GDP ratio to 118% of GDP by 2050. However, all else equal, debt would still continue to rise slowly, so further reforms may be eventually needed. The additional reform requirements are uncertain and depend inter alia on population growth and on the actual fiscal traction of structural reforms. For example, if structural reforms and accompanying public investments (green investment scenario) to crowd in green private investment were successful this would entail short-term costs but could eventually be largely self-financing or even slightly fiscally positive, reducing the need to carry out extra reforms. The simulations assume that one euro of public investment would crowd in two euros of private investment (Matvejevs at al., 2022) but such estimates are uncertain. However, the crowding-in effect can be expected to be larger in Finland than in some other countries on account of strong institutions (Matvejevs et al., 2022) and because Finland is a small economy with an open capital market and high attractiveness for FDI.
To put public debt on a downward path would require in addition to the employment reforms, fiscal consolidation measures of around 3.5% of GDP (5.2% of GDP following the April 2025 Fiscal Plan measures) by 2031. In this scenario (debt reduction scenario) the debt-to-GDP ratio would start to fall in 2032, reaching 85% of GDP by 2050. The future debt path has become less predictable due to increased uncertainty about future population growth. As elsewhere in the OECD, net inwards migration swelled in recent years (Chapter 3). As a result, Statistics Finland released new population projections in September 2024 assuming net inward migration of 40 000 annually from 2026 instead of 15 000 as in the previous 2021 projection. The implications for public planning and policy are profound. Instead of the population holding roughly constant at 5.5 million between 2025 and 2050, it would rise by around 0.5 million to 6.1 million and importantly for public finances have a higher share of working age people.
General government debt, percentage of GDP
Note: The baseline scenario assumes employment gradually rises to be 100 000 higher by 2040 in response to a package of government structural reforms (see Box 1.1 for details) and uses the Statistics Finland’s 2021 population projections. The high population scenario uses Statistics Finland’s 2024 population projections. The medium population scenario assumes that net inwards migration is 25 000 per annum. In the absence of recent high migration and population growth, further reforms beyond the employment reforms will likely be needed to increase the fiscal balance to stabilise the public debt to GDP ratio. The labour and fiscal reforms scenario assumes low population growth (the 2021 population projections of Statistics Finland) as well as VAT, property tax and long-term care reforms (see Table 1.5). These scenarios do not include the post 2026 effects of fiscal policy changes announced in the General Government Fiscal Plan 2026-2029 and increased defence spending to 3% of GDP announced in April 2025 that are estimated to reduce the fiscal balance by around 1.7% of GDP by 2029. The estimate of 1.7% does not take account of the impact on the fiscal balance of changes to GDP growth arising from the taxation cuts.
Source: Statistics Finland; Guillemette and Château (2023).
Simulations (high population scenario) suggest all else equal that if net inward migration and population followed the higher (2024) projection of Statistics Finland, the employment reforms would be sufficient to stabilise public debt at around 110% of GDP from 2035 onwards. However, it is not clear that recent higher net immigration trends will continue. Higher inflows occurred in the wake of the Covid-19 pandemic, when advanced countries experienced generalised labour shortages that helped spark a worldwide wave of migration (OECD, 2024a), but this effect now appears to be fading. In addition, net migration is hard to predict because the migration flows of Finnish citizens are not regulated. In the face of this uncertainty, prudence calls for determining fiscal policy requirements assuming net inwards migration will fall back to the more modest levels. Simulations (medium population scenario) with population growing in line with a more prudent assumption of net inwards migration of around 25 000, as assumed by the Ministry of Finance (Ministry of Finance, 2024b), suggest that with the employment reforms alone public debt would rise slower than in the baseline but the policy approach should be the same: to monitor progress in reducing the deficit and take more action as the economy strengthens if necessary to stabilise debt.
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