Finland's Economic Policy Council published their annual report in January 29, 2020. In the report, the Council evaluates the government’s fiscal policy and its employment-promoting policies. As in the previous reports, in addition to fiscal policy, the Council concentrates on fiscal sustainability and on the connections between social security and employment. Martin Ellison, professor of Economics at the University of Oxford and a member of Economic Policy Council, presented an overview of the report in the report launch seminar in Helsinki. For more information, please see: https://www.talouspolitiikanarviointineuvosto.fi/en/home/

1. Economic Policy Council Report
January 2020
Professor Martin Ellison
University of Oxford

2. Recent economic developments

3. GDP growth gathered pace in 2019
-3
-2
-1
0
1
2
3
4
5
Inventories Private consumption Net exports
Public expenditures Private investments GDP growth
%, Quarterly annual growth and growth contributions
Sources: Statistics Finland and EPC.

4. GDP growth forecast to slow in 2020 and beyond
2019 2020 2021 2022 2023 2024
Bank of Finland 17 Dec 1.3 0.9 1.1 1.3
Ministry of Finance 18 Dec 1.6 1.0 1.1 1.2 1.0 0.9
OECD 8 Nov 1.3 1.0 0.9
European Commission 7 Nov 1.4 1.1 1.0
IMF 7 Oct 1.2 1.5 1.5 1.4 1.3
PT 17 Sep 1.3 1.1
ETLA 16 Sep 1.1 0.9 1.1
PTT 12 Sep 1.3 1.2

5. Employment ↑ and unemployment ↓
0
100
200
300
400
500
600
2000
2100
2200
2300
2400
2500
2600
1989 1992 1995 1998 2001 2004 2007 2010 2013 2016 2019
1000Persons
1000persons
Employed, Trend (LHS) Unemployed, Trend (RHS)
Sources: Statistics Finland: Labour Force Survey and EPC

6. Labour force participation ↑
68
70
72
74
76
78
80
%ofpopulation
Labour force participation rate, 15-64-year old, trend
Sources: Statistics Finland, trend by EPC

7. GDP ≈ potential GDP
-6
-4
-2
0
2
4
6
2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021
%ofpotentialoutput
Euro area Germany
Finland Sweden
Source: AMECO database

8. Council views on recent economic developments
• High growth rates not expected to continue
• Growth falls to about 1% in 2020 and afterwards
• Labour force participation high
• Unemployment at long-run level
• Finnish output gap ≈> 0
• Economic cycle cooling in EU

9. Fiscal policy

10. General government finances in deficit
0
20
40
60
80
100
120
140
160
180
2000 2005 2010 2015 2020
EURbillion
General government
revenue and expenditure
Revenue
Expenditure
0
20
40
60
80
100
120
140
160
180
2000 2005 2010 2015 202
EURbillion
General government de
Nominal debt
Debt-to-GDP ratio (RHS
Sources: Statistics Finland and Ministry of Finance Winter Forecasts 2019

11. Central government structural deficit too high
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
%toGDP
Percentagepoints
Change in the structural balance
Structural balance (RHS)
MTO (RHS)
Source: Ministry of Finance Autumn Forecasts 2019

12. Finland and the EC
• Structural deficit in 2020-23 ≈ -1.3% to -1.4%
• Higher than Medium-Term Budgetary Objective (MTO) of -0.5%
• Government spending in 2020 ↑ faster than reference rate
• Debt/GDP likely to exceed 60% limit in Stability and Growth Pact
• EC will require Finland to take preventative measures if
economic developments follow forecasts

13. Discretionary fiscal measures
• €1.4 billion permanent ↑ in spending by 2023
• €0.8 billion ↑ in net taxes by 2023
• Gap funded by ↑ in tax revenue from ↑ in employment
• Spending front-loaded to start in 2020
• Tax revenue ↑ gradually towards 2023
• Up to €3 billion future-oriented investments in 2020-22
• Funded by selling up to €1.5 billion of financial assets
• Spending “assessed” if measures to ↑ employment not in
place by August 2020

14. Discretionary measures worsen the deficit
-3 500
-3 000
-2 500
-2 000
-1 500
-1 000
-500
0
500
1 000
1 500
2020 2021 2022 2023
EURmillion Reductions in spending Net tax increases
Reserve for non decided 'investments' Budgetary reserves
'Future-oriented investments' Permanent expenditure
Decided measures Full use of budgetary reserves
Source: Ministry of Finance Autumn Forecasts 2019

15. ↑ in employment?
• Employment target of 75% ≈ 60,000 new jobs by 2023
• Unemployment target of 4.8% for 2023
• 4/5 from unemployment ↓ and 1/5 from participation ↑
• Difficult to reduce unemployment below natural rate
• Vacancies already very high
• Mismatch more sectoral than regional
• What are policies to ↑ employment?

16. ↑ in tax revenue from ↑ in employment?
• Depends on quality and type of jobs created
• Part vs full time
• Private vs public sector
• Difficult to be certain of fiscal implications
• Hard to know how many new job measures will created, so
difficult to know if spending should be “assessed” in August 2020
• Government has made realistic assumptions

17. Future-oriented investments
• Miscellaneous collection of 85 separate items for 2020
• Many not real investments, e.g. €42 million in 2020 to less
favoured areas to ‘ensure that agricultural production
continues in Finland’
• Many really require permanent funding, e.g. €235 million in
2020-22 for extra students/counsellors in vocational education
• Why fund by selling government assets?

18. Council views on fiscal policy
• Fiscal policy too loose
• Finland will breach EC rules 2020-23
• Need a plan how to balance government budget
• Deficit ↑ when output gap ≈ 0 inappropriate and reduces
future fiscal space
• Future-oriented investments poorly designed
• Very difficult to condition on employment measures

19. Fiscal sustainability

20. Debt/GDP will be 60% but ↑ in 2023
00 2005 2010 2015 2020
General government
revenue and expenditure
Revenue
Expenditure
0
10
20
30
40
50
60
70
80
90
0
20
40
60
80
100
120
140
160
180
2000 2005 2010 2015 2020
%ofGDP
EURbillion
General government debt
Nominal debt
Debt-to-GDP ratio (RHS)
Sources: Statistics Finland and Ministry of Finance Winter Forecasts 2019

21. Downside fiscal risks are pervasive
• Will employment target be achieved?
• Will ↑ in employment lead to ↑ in tax revenue?
• Will future-oriented investments be temporary?
• Interest rate and exchange rate risk
• Risk from central government guarantees (24% of GDP in 2018)

22. Debt/GDP ↑ after 2023
Sources: EPC calculations based on the sustainability assessment by Ministry of Finance August 2019
0
10
20
30
40
50
60
70
80
90
2023 2025 2027 2029 2031 2033 2035
Debt-to-GDPratio,%
Baseline projection
Debt-to-GDP ratio 60 % in 2035
Debt-to-GDP ratio 50 % in 2035
2.8 % of GDP
2 % of GDP
Required
consolidation

23. Sustainability gap
• ≈ 5% of GDP
• Finland is an ageing country
• ↑ fertility not enough
• ↑ employment helps
• Provided tax revenue ↑ and used wisely
• Selling government financial assets does not help

24. Council views on fiscal sustainability
• Finland has a big long-run sustainability problem
• Medium-term plan needed to permanently lower budget deficit
• Debt/GDP to 2023 increasing even if policies successful
• Downside fiscal risks pervasive
• Need to put public finances on sustainable path after 2023

25. Press release 2020
• Fiscal policy is too loose
• Employment target is useful but blunt instrument
• Large sustainability problem in medium-term
• Proper plan for fiscal sustainability needed
• Composition and financing of public spending needs to improve
LOOSE FISCAL POLICY LACKS A
PROPER PLAN FOR SUSTAINABILITY

26. Same old … same old …
FISCAL POLICY TOO LOOSE IN THE
CURRENT ECONOMIC SITUATION
LOOSE FISCAL POLICY LACKS A
PROPER PLAN FOR SUSTAINABILITY
2020
2018