In 2022, the Bank of Finland expressed its views on various matters including particularly the impact of the energy crisis on the Finnish economy and the assessment of related policy measures. As in previous years, the Bank of Finland also analysed the state of the economy, long-term economic growth prospects and issues in public finances, and took part in the domestic debate on economic policy.

The views expressed by the Bank of Finland on matters of domestic economic policy are based on the objectives set for the Bank by law and in the EU Treaties and also on its independent status.

The Bank of Finland’s primary objective is price stability. The secondary objectives include supporting sustainable economic growth and promoting financial stability. The Bank of Finland provides topical, independent and research-based analysis and expertise for use by decision-makers and in Finnish society in general.

The views expressed by the Bank of Finland focus on identifying problems and challenges and assessing the effects of different policy alternatives. The Bank’s views are presented in, for example, speeches by its Board members and comments and statements given in material published by the Bank.

Ukraine war and energy crisis dominated economic outlook in Europe and Finland in 2022 and fuelled uncertainty

The rise in energy prices has had a substantial impact on the euro countries’ economies, because a significant proportion of the energy they consume is imported.

Overall, Finland is less dependent on imports of Russian energy than many other countries in the euro area. Finland’s consumption of natural gas is also below the euro area average. Energy prices have therefore had less of an impact on inflation in Finland than elsewhere in the euro area. Moreover, expectations in the Nordic market regarding rising electricity prices have been more moderate than in the major euro area economies.

It remains a concern, however, that the long-term direction of Europe’s energy policy is unresolved. The current situation differs widely among the countries of Europe in terms of their energy production and potential future solutions.

The support measures taken in Finland to tackle the energy crisis have been moderate by international comparison. The risk, however, is that these measures will raise the wholesale price of electricity and prove costly to the public finances, and without a commensurate benefit to households. If the support is too generous or is poorly targeted, it will impede the adjustment in demand and keep prices high in the longer term, in turn hampering the efforts of central banks to stabilise inflation at 2% over the medium term.

The Bank of Finland emphasised that the support measures should be targeted at those households which are suffering the most and should be implemented in such a way that they do not adversely affect incentives for saving energy or investments aimed at reducing energy consumption.

Strengthening the public finances will help prepare for growth in age-related expenditure

Economic policy in the past few years has been imbued with uncertainty as it has responded to the crises brought by the COVID-19 pandemic and Russia’s war in Ukraine.

The swift and robust monetary and fiscal policy measures taken helped avoid a wave of bankruptcies while also supporting the favourable trend in employment and preventing a substantial contraction in household incomes.

On the other hand, this has also meant that Finland’s general government debt ratio has grown significantly. Even before the pandemic, there was a significant structural problem in Finland’s public finances. The Bank of Finland’s latest estimate of the sustainability gap, published in December 2022, is approximately EUR 13 billion or 4% of gross domestic product (GDP).

The upward pressures on Finland’s public debt stem from the imbalance between public revenue and expenditure. This imbalance will become more marked in the immediate years ahead due to growth in health and social services spending and public debt service payments.

After the crises it will be important to build confidence in fiscal sustainability. The public finances must be strengthened to ensure the financing of increasing levels of age-related and other essential expenditure. Safeguarding key services will require prioritisation, and a comprehensive knowledge base will be needed to support the necessary decision-making.

The aim should be longer term debt sustainability, and to achieve this a coherent economic adjustment programme should be drawn up. This will enable economic policy to support a stable and predictable operating environment and will allow the avoidance of sudden tightening later on.

Besides cutting expenditure and raising taxes, the economic adjustment programme should include reforms to improve the productivity of public services and the conditions for long-term economic growth.

Ensuring conditions for long-term economic growth

Labour productivity growth in Finland has been slower during the 2010s than in the other Nordic countries. The emphasis in investment has been on the building stock rather than on investing in areas that enhance labour productivity growth.

At the same time, the working-age population has begun to contract. A further significant factor in productivity growth is that the rise in young people’s educational attainment has halted, and those born in the late 1970s remain for the time being the most highly educated generation.

All of these factors together are eroding the longer term growth outlook for the Finnish economy. In expressing its position on these matters, the Bank of Finland has emphasised that efforts must be made to alter the ongoing trend. This can be done by investing in education and training, in labour market development and in research and innovation.

Current levels of investment in boosting work-based immigration and promoting the integration of immigrants should be increased. Particular attention should be given to improving the opportunities for those foreign students who are taking higher education degrees in Finland to stay on and use their expertise to the benefit of Finnish society.

Economic policy governance should be developed to better support long-term management of general government finances

Finland’s general government finances have been in deficit now for almost 15 years. In 2022, the Bank of Finland, in expressing its position, emphasised that Finland should return to the use of central government spending limits that will lead public finances closer to balance. For this it is vital to build a strong political commitment to fiscal sustainability and to the resolute implementation of the reforms this calls for.

The Bank of Finland also stressed that decisions on the reform of the EU’s economic governance framework should be taken without undue delay. This way the fiscal rules could more strongly support the long-term management of the public finances and allow room for expansionary fiscal policies during economic recessions.

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Energy crisis and high inflation darkened Finnish economic forecasts in 2022