OECD Economic Outlook, Volume 2018 Issue 1

Finland

Robust output growth is projected on the back of a rebound in exports and continued strength in domestic demand. Private consumption will keep growing steadily in 2018, thanks to a rise in earnings and employment. Inflation is expected to rise as spare capacity shrinks.

The economic recovery and past consolidation measures have stabilised the public finances. Nevertheless, rising ageing‑related costs and tax cuts to alleviate the impact of the Competitiveness Pact on household income prevent the budget deficit from shrinking further. Increasing employment by enhancing work incentives and increasing efficiency in public services is essential to boost growth and maintain the government debt‑to‑GDP ratio on a downward trend.

Exports are underpinning growth

The economy is growing strongly, as expanding foreign demand and competitiveness gains boost exports. The current account balance returned to surplus in 2017 for the first time since 2011. Higher demand and low interest rates contribute to strong investment. Private consumption is healthy, thanks to employment gains and low inflation. Consumer confidence has increased steadily for over two years, and business confidence is well above its long‑term average in all major sectors. Employment is expanding, unemployment has fallen and discouraged workers have returned to the labour market.

Structural reforms are key for sustainable public finances

The budget deficit has shrunk and general government debt has stabilised on the back of the pick‑up in output growth and consolidation efforts. Nevertheless, tax cuts to compensate wage moderation agreed in the Competitiveness Pact and rising ageing‑related costs prevent the budget deficit from shrinking further. As ageing will continue to put pressure on public finances by narrowing the tax base and increasing social costs, future growth and well‑being will require enhancing the efficiency of public services, in particular in health and long‑term care, as well as boosting employment. A pension reform entered into force in 2017 and a health care and social services reform is underway, with the new system due to start operating in 2020.

Finland

Source: OECD Economic Outlook 103 database; and OECD Labour Market Statistics.

Statlink

Raising employment is crucial to address long‑term fiscal challenges. The employment rate is still lower than in any other Nordic country and structural unemployment remains relatively high. To increase work incentives, the earnings‑related unemployment insurance benefit duration has been shortened in 2017 and a revised labour activation model, with heavier financial sanctions, entered into force in the beginning of 2018. However, further reforms to boost employment are needed, as high tax rates upon return to work and complex benefit rules still undermine work incentives. A real‑time income register, expected to be in place in 2020, should be used to streamline the administration of benefits and thereby remove bureaucratic disincentives to employment.

Finland. Demand, output and prices

Statlink

Robust economic growth will continue

GDP growth is projected to remain strong in 2018 and 2019. Export buoyancy, driven by growth in export markets and improving competitiveness, is set to diminish somewhat as spare capacity shrinks. Private consumption will keep growing steadily in 2018, thanks to rising incomes and improved employment, but will weaken somewhat in 2019, as rising inflation weighs on household real income. Growth in non‑residential investment will slow in 2018 after the completion of several large projects. Housing construction is expected to continue growing in 2018 and 2019. Even though recent measures to enhance work incentives will lift labour supply, unemployment will decline. The main downside risk to the outlook is a slowdown in demand, notably from abroad. On the upside, private consumption and investment could prove stronger than projected given high consumer and business confidence.