6.1 The Bank of Finland and domestic economic policy in 2020

In 2020, the Bank of Finland’s statements on domestic economic policy were largely related to the economic impacts of the COVID-19 pandemic. The Bank emphasised the need both to react strongly and rapidly to the acute crisis and to strengthen the longer-term outlook for the economy and the public finances.

In 2020, as in previous years, the Bank of Finland analysed developments in both the domestic and the global economy and participated in economic policy debate in Finland.

Statements focus on the identification of problems and assessment 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 of Finland’s statements are based on expert knowledge. They focus on the identification of problems and assessment of the potential effects of alternatives for action.

However, setting the ultimate economic policy goals and decision-making in this area is the task of elected representatives.

In 2020, the Bank of Finland set up a macro-economy crisis group

In March 2020, the Board of the Bank of Finland set up an internal working group in the Bank to organise preparatory work on the macroeconomic impacts of the COVID-19 crisis and related economic policy measures.

The working group was established to operate within the framework of the Bank of Finland’s domestic economic policy process.

The macro-economy crisis group was tasked with ensuring that the Bank of Finland Board has up-to-date information on the macroeconomic situation and outlook during the pandemic, particularly with respect to the Finnish economy.

In addition, the crisis group was given responsibility to prepare assessments of the necessary economic policy measures to deal with the pandemic crisis, with particular emphasis on domestic policy measures.

Households and businesses need assisted through worst of the crisis

When the COVID-19 pandemic spread in Europe in spring 2020, the Bank of Finland stressed that protecting the health of the public must take precedence. Measures to combat the pandemic are also pivotal for the economy.

The role of economic policy is to assist households and businesses through the worst of the crisis. This is the way to mitigate both immediate problems and longer-term consequences.

A wave of corporate bankruptcies and mass unemployment would be particularly detrimental to the longer-term economic outlook.

As the COVID-19 pandemic spread, public authorities supported companies and households in many ways in different countries, including Finland. Central banks and banking and macroprudential supervisors ensured the availability of finance. The ECB’s strongly accommodative monetary policy supported the Finnish economy, too, and the financial system was able to operate without major problems.

In addition to measures within the single monetary policy in the euro area, the Bank of Finland strengthened the functioning of the Finnish financial market through national measures. The Bank purchased domestic commercial papers as part of its own investment activities and relaxed collateral requirements for access to central bank funding.

During 2020, many Finns lost their jobs either temporarily or permanently, and many companies faced major difficulties.

Without swift and extensive economic policy measures, the economic damage caused by the pandemic would have been considerably greater.

In spring 2020, the Bank of Finland pointed out that government support and the management of the public finances should be tailored according to the different phases of the COVID-19 crisis.

During the acute phase of the crisis, growth in public debt was a consequence of necessary expenditure. The Bank of Finland noted that fiscal support for the economy would also be needed after the acute phase of the crisis.

Strong public finances advantageous during a crisis

The Bank of Finland highlighted that, as normality returns, it will be more important than ever to build up general government buffers.

The pandemic serves as a reminder that healthy public finances provide an irreplaceable shield when we hit hard times.

The crisis should not be used to introduce permanent increases in public expenditure that will further exacerbate an already substantial sustainability gap.

Although the Finnish economy is likely to survive the COVID-19 crisis better than most of the other advanced economies, after the crisis Finland’s longer-term problems will still be the same as before, if even more difficult.

In December 2020, the Bank of Finland further raised its estimate of the long-term fiscal sustainability gap. According to the new assessment, the sustainability gap was 5½% relative to GDP.

The COVID-19 pandemic increased the need for reforms

The Bank of Finland stressed that the coronavirus crisis further increased the need for structural reforms that improve employment, the outlook for the public finances and conditions for labour productivity growth.

Regarding productivity growth, there is a major role for research and development expenditure and other non-residential investments. Government can enhance the environment in which innovation can take place, and in which innovations made elsewhere can be adopted for use. In the overall picture of innovation policy, the development of competences is of major significance.

The Bank of Finland emphasised the importance of common European solutions to address the COVID-19 crisis and to strengthen Europe’s future prospects.

From a Finnish perspective it is of paramount importance that the economy of Finland’s most important export customers, i.e. the European Union, is on a stable foundation.

The EU recovery instrument and other common solutions enhance the opportunities to support economic growth and the longer-term outlook in Europe.

Achievement of climate goals and acceleration of the digital economy will require substantial investments and reforms; their implementation can be fostered through common solutions.

Functioning of the labour market is of key importance during the crisis

The Bank of Finland highlighted the role of the labour market in the economic ramifications of the coronavirus crisis.

In the early stages of the crisis, the social partners embraced responsibility in an important way by supporting expedient furlough schemes. A large number of bankruptcies and many redundancies were likely avoided as a result.

The Bank of Finland underlined the need to monitor changes in labour costs relative to other countries and in relation to labour productivity. The related forecasts and assessments were subject to a high degree of uncertainty during the coronavirus crisis.

From the perspective of post-crisis employment developments, it is important that cost-competitiveness does not materially deteriorate.