5.1 The Bank of Finland and domestic economic policy in 2019

In 2019, the Bank of Finland emphasised the importance of fiscal space and balanced cost developments.

In 2019, 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 the media and seminars.

Identification of problems and assessment of the effects of alternatives for action

The Bank of Finland’s statements relating to domestic economic policy are based on the objectives set for the Bank by law and in the EU Treaty and also on its independent status. 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.

In 2019, the Bank of Finland pointed out that the Finnish economy is still going through a period of transition in which it has to adjust to two major structural realignments.

One of the major changes concerns the ageing population. The other comprises the shocks to the economy suffered since 2007, from which the Finnish economy has not yet fully recovered. These shocks were problems in the electronics and the forest industries, Russia’s financial difficulties and the rise in the level of costs compared with Finland’s trading partners.

Governments and social partners have in recent years agreed several important solutions to address the problems created by the above-mentioned major changes. However, there is still a need for further significant adjustments.

Finland’s public finances need strengthening

Finland’s public finances are in a better condition than five years ago, which partly reflects the past fiscal consolidation measures. However, despite these measures and the favourable economic situation, the public finances remain in deficit. The general government deficit and gross debt are projected to increase. This is partly due to fiscal policy, which is forecast to become more expansionary.

In December 2019, the Bank of Finland revised downward its assessment of the long-term sustainability of Finland’s public finances. According to the new estimate, the fiscal sustainability gap is 4.7% relative to GDP.

The sustainability gap is largely explained by the ageing population, as pension expenditure and expenditure related to both health care and long-term care are increasing. On the other hand, the downward revision of the sustainability gap estimate in 2019 largely reflected an upward revision to the general government deficit forecast for the immediate years ahead.

The Bank of Finland highlighted the need to strengthen the public finances in view of the sustainability gap and the fact that the cyclical situation is not weak.

Developments in employment are of great importance

The long-term outlook for the public finances would be eased if a higher proportion than now of the working-age population were in work. The aim of raising the employment rate to 75% over the next few years is therefore well-justified. Beyond this, it would make sense to aim even higher, to reach a good Nordic level. For example, Sweden’s employment rate is around 78%.

The prerequisites for higher employment should be improved by a variety of measures all pulling in the same direction. When selecting these measures, it is important to draw on the knowledge provided by research and international experience.

Finland’s cost-competitiveness should be further improved

Finland’s cost-competitiveness has improved markedly since 2015, after having weakened for several years prior to that. From the viewpoint of the conditions for employment and output growth, it would be wise to facilitate a further slight improvement in cost-competitiveness.

The possibility of a sustainable rise in costs and prices in Finland is limited by the fact that euro area developments in this area are still sluggish compared with previous decades and the objectives of the central bank.

In 2019, the Bank of Finland stressed the importance of coordination in wage formation in Finland. Agreements in the various sectors also have an impact on costs in other sectors. Export industries that compete directly with foreign production buy production inputs extensively from the domestic market, from sectors such as wholesale trade, transport, storage, management services, data processing and marketing.

The prerequisites for higher productivity

Labour productivity growth has been weak in Finland over the past 10 years. There is no single decisively effective method to improve the situation. Developments in labour productivity are affected by a large range of different factors, including many aspects of economic policy.

When seeking to improve the prospects for productivity growth, key factors are innovation policy and the broader corporate operating environment in relation to the prospects for development and growth.

The education system is also relevant to facilitating labour productivity growth, particularly in the longer term. One of the important features of the education system is the general level of education it produces.

In Finland, the general educational level of the population was on the rise for several decades, but this trend has been reversed during the past 10–15 years. Among young adult cohorts the level of educational attainment has turned downwards, which is exceptional in international comparison and concerning from a Finnish perspective.