3.1 The Bank of Finland and domestic economic policy

In 2018, the Bank of Finland emphasised the importance of fiscal sustainability, employment and the conditions for productivity growth.

In 2018, the Bank of Finland analysed developments in both the domestic and the global economy and participated in economic policy discourse in Finland. Bank of Finland analyses were widely presented on the Bank’s website. Representatives of the Bank were consulted on several occasions by Parliament and also presented their assessments in other domestic fora, including seminars and the media.

The Bank of Finland’s statements relating to domestic economic policy are based on the Bank’s regulatory and democratically determined objectives and independence. The primary objective is price stability, while secondary objectives include balanced economic growth and the stability of the financial system. The sustainability of the public finances and stable evolution of domestic costs are key to the attainment of the Bank’s objectives.

The Bank’s statements are based on expert knowledge and relate mainly to the identification of problems and assessment of the potential effects of the alternatives for action. In the area of economic policy, setting the ultimate goals and decision-making is the task of elected representatives.

Public finances still need strengthening

In 2018, economic policy decisions were taken in a situation in which the Finnish economy had grown for about three years, following a protracted period of weak economic developments.

The Bank of Finland pointed out that the euro area’s accommodative monetary policy continued to support economic growth in Finland. Lending rates remained low and the euro area economy, important to Finland’s exports, was continuing to grow

The condition of Finland’s public finances has improved. The general government deficit and debt have decreased relative to GDP. This has reflected both fiscal consolidation measures and the improvement in overall economic developments.

However, population ageing is expected to weaken the fiscal balance over the next decade, and fiscal sustainability over the long-term has not been secured. According to the Bank of Finland’s December 2018 assessment, the sustainability gap in Finland’s public finances is about 3% relative to GDP.

The management of public debt would be less problematical if the outlook for long-term economic growth corresponded to economic developments in recent decades. According to the long-term assessment published by the Bank of Finland in June 2018, however, economic growth will remain more sluggish than prior to the global financial crisis. Statistics Finland’s population projection published in November 2018 contributed to weakening the long-term growth outlook still further.

While the fiscal balance had been strengthened in previous years, in 2018 fiscal policy is assessed to have relaxed. In 2019, the fiscal stance is forecast to remain broadly unchanged.

The Bank of Finland pointed out that a more determined strengthening of the public finances would be justified, considering the sustainability gap and the favourable cyclical conditions.

Sustainable rise in employment rate important

The employment rate is very important to the long-term outlook for the public finances. As the Finnish economy has recovered in recent years, so, too, has the employment situation improved. This has partly reflected improvements in the competitiveness of Finnish labour and production in response to the Competitiveness Pact and moderate wage settlements. The Bank of Finland stressed that it is important to take a variety of measures to further improve the conditions for a sustainable rise in the employment rate.

Labour productivity is a key contributory factor to long-term economic growth. Developments in Finland’s labour productivity were very weak for several years, both historically and compared with other advanced economies. With the economic recovery, labour productivity has improved, too. However, in 2018, labour productivity growth appears to have weakened again slightly.

Over the long term, productivity growth is largely driven by innovations and the adoption of new technologies. The Bank of Finland emphasised that education, research and product development are key factors for innovation. The conditions for labour productivity growth can also be strengthened with policies that improve the allocation of economic resources. Such measures include promoting competition and maintaining healthy labour markets.

Household debt grew further in 2018, and total household expenditure was still higher than income. In managing the risks associated with the accumulation of household debt, the Bank of Finland stressed the importance of macroprudential policy and housing policy.