OECD Economic Surveys: Finland 2018

Executive summary

Abstract

• The economy has gained momentum as exports have surged

• Reforming taxation could boost growth

• Redesigning social welfare is necessary to lift employment while protecting the vulnerable

The economy has gained momentum as exports have surged

After a long period of lacklustre economic performance, a strong rebound in exports is boosting the economy. Despite slow income growth, private consumption remains healthy and both business and residential investment are buoyant. Competitiveness is being restored through ambitious and comprehensive structural reforms and an agreement between social partners on wage moderation. Employment is expanding, but the fall in the unemployment rate is slowed by the return of people who had given up job search to the labour market. The government deficit is shrinking and public debt is stabilising.

Output and exports are growing strongly1

1. OECD estimates for 2017 exports.

Source: OECD National Accounts.

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Reforming taxation could boost growth

Government revenue as a share of output, which is high by OECD standards, contributes to high-quality public services and low and relatively stable income inequality. However, rising age‐related costs and the increased mobility of tax bases related to globalisation create long-term fiscal challenges. Preserving the quality of welfare provision requires that the tax and benefit system supports growth, competitiveness and employment, while maintaining its ability to contain income inequality. International cooperation to fight tax evasion can protect corporate tax revenue. A budget-neutral shift from labour taxes towards indirect, property and environmentally-related taxes can alleviate the burden on employment and foster greener growth.

Income redistribution lowers inequality

1. 2016 or latest. Redistribution is the difference between the Gini coefficients before and after taxes and transfers.

Source: OECD National Accounts; and Income Distribution and Poverty Database.

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Redesigning social welfare is necessary to lift employment while protecting the vulnerable

Finland’s employment rate is markedly lower than in the other Nordic countries. The combination of different working-age benefits, childcare costs and income taxation creates complexity, reduces work incentives and holds back employment. Coordinating the tapering of various working-age benefits against earnings could drastically improve work incentives and transparency, while preserving the current level of social protection, and is hence a more promising route for future reform than a basic income. Furthermore, specific measures could lift work incentives for parents and older workers. Combined with the new income registry linking benefit payments to real-time incomes from 2020, such reforms would make for a truly efficient and inclusive benefit system, adapted to evolving work patterns.

Work does not always pay1

1. Incidence of average effective tax rates at or above 80% for individuals going from unemployment to full-time work, calculated on the basis of six household types and five income levels.

Source: Pareliussen et al. (2018).

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MAIN FINDINGS	KEY RECOMMENDATIONS
Fiscal sustainability
The pick-up in output growth and measures to contain government spending are stabilising public debt. However, as age-related spending increases, lifting the employment rate and enhancing the efficiency of public services is necessary to ensure long-term fiscal sustainability.	Timely strengthening of budget buffers is needed.
Financial stability
Household debt is fairly high relative to income. Housing prices have remained subdued so far, but could be pushed up by the pick-up in economic growth.	Contain growth in household debt through macro-prudential tools, such as a loan-to-income cap, a debt service-to-income ratio or higher risk weights on mortgages.
Tax reform to support growth
The tax mix has become more growth-friendly over recent years, with an increasing share of revenue from indirect, property and environmentally-related taxes. Nevertheless, the tax wedge on labour remains high. Reduced value added tax (VAT) rates lower tax revenue significantly.	Further reduce the tax burden on labour. Increase minimum- and maximum- rates on recurrent taxes on immovable property, and better align the tax base with market valuations. Increase environmentally-related taxes. Broaden the consumption tax base and phase out reduced VAT rates. Continue to phase out mortgage interest deductibility.
Finland has high energy taxation, but also many environmentally harmful subsidies.	Phase out environmentally harmful subsidies.
Benefit reform for employment and equal opportunity
The combination of different working-age benefits, childcare costs, personal income taxation and social security contributions creates complexity, reduces work incentives and holds back employment.	Harmonise working-age benefits and coordinate their tapering against earnings.
Benefit complexity and administrative procedures create uncertainty about the amount and timing of cash receipts when circumstances change. This reduces the attractiveness of work, notably part-time and temporary assignments, for risk-adverse, often cash-strapped, individuals.	Upon completion, use the income registry to adjust benefits to income in real-time. Use the income registry to provide better tools for clients to evaluate the financial consequences of their work decisions.
The homecare allowance and the childcare fee structure reduce the attractiveness of work for parents, notably second earners in couples with children aged one to six.	Restructure the homecare allowance to foster participation in childcare and incentivise employment. Calculate childcare fees on individual incomes.
Unemployed aged above 61 are entitled to longer periods on unemployment insurance benefits, effectively providing a bridge to retirement.	Increase the age threshold for extended unemployment benefits at least in line with the statutory pension age.