Article

Finland’s Continued Economic Success Rests on Strengthened Fiscal Position

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
March 2006
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In recent years, Finland’s economy has performed favorably. Growth, which has outpaced that in the euro area, is expected to surpass 3 percent in 2006; the external current account has remained in surplus; and inflation has remained below the euro area average, thanks to strong productivity growth and wage moderation, increased domestic competition, and low nonfuel import prices. Public finances are in surplus but have weakened because of personal income tax cuts and growing local government expenditures. This weakening, along with the imminent rise in old-age dependency, is clouding the long-term outlook for growth and fiscal sustainability, the IMF said in its annual review.

The IMF Executive Board commended the authorities for Finland’s strong economic performance and stressed the need to strengthen the fiscal position and continue to implement reforms to cope with the challenges of an aging population. While welcoming recent tax cuts, Directors called for further spending restraint. They also welcomed the authorities’ efforts to reorganize the provision and financing of public services and suggested measures to limit demand, including more effective implementation of user charges. Directors also welcomed pension reforms being phased in and called for further measures to enhance long-term sustainability.

Finland
200320042005120061
GDP (percent change)2.43.61.93.5
Harmonized consumer price
index (percent change)21.30.10.91.5
Overall general government balance
(percent of GDP)2.31.91.81.8
Total domestic credit (percent change)37.78.814.5
Current account balance (percent of GDP)4.04.02.83.2

IMF staff estimates and projections, unless otherwise indicated.

Consistent with Eurostat methodology.

For 2005, 12-month increase to October.

Data: Finnish authorities; IMF International Financial Statistics, and staff estimates.

IMF staff estimates and projections, unless otherwise indicated.

Consistent with Eurostat methodology.

For 2005, 12-month increase to October.

Data: Finnish authorities; IMF International Financial Statistics, and staff estimates.

Employment growth picked up in 2005 after three slow years, but continued efforts will be needed to address growing job mismatches and risks of labor shortages in some sectors. To allow the wage structure to reflect productivity differentials more fully and promote low-skilled labor, Directors pointed to the need for a more flexible centralized wage-bargaining mechanism. Directors also called for further progress on product market liberalization.

Although Finland’s financial system is sound and well supervised, Directors emphasized the need for continued vigilance in light of recent rapid credit growth and heightened competition among lenders, especially in the mortgage sector.

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