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Finland’s robust economy faces challenge of aging population

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
March 2005
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Finland’s economy has made impressive strides in recent years, but will face the challenge of population aging earlier than any other country in the European Union, the IMF said in its annual economic assessment. Aided by strong productivity gains, a stable macroeconomic policy framework, low inflation, and sizable fiscal surpluses, the economy weathered the recent global slowdown relatively well, and an improved domestic and external climate is set to strengthen growth. However, structural unemployment remains high, and employment stagnant.

The IMF’s Executive Board praised Finland’s economic performance but encouraged the authorities to set in motion a virtuous circle of stronger employment, growth, and public finances to address effectively the challenge of an aging population. Comprehensive reforms would reduce the degree of fiscal adjustment needed to ensure long-term fiscal sustainability. Finland’s fiscal position has rapidly eroded in recent years, and although it is expected to remain in surplus over the medium term, the long-term prospects are less comforting. Aging-related fiscal pressures are expected to be strong, given the country’s comprehensive public welfare system. The Board recommended that the income tax cuts planned for 2005-07 be offset by a reduction in public spending, preferably by improving the efficiency of social and welfare services.

Finland20012002200320042005
Projections
(percent change)
GDP1.12.32.03.12.9
Domestic demand1.71.32.12.42.5
(percent of labor force)
Unemployment rate9.19.19.08.88.3
(percent of GDP)
General government balance5.24.32.12.11.9
Data: IMF staff report.

The Board welcomed the significant pension reform being phased in, and called for policy initiatives to raise the employment rate, especially at both ends of the age spectrum, where labor utilization is relatively low. It also encouraged the authorities to strengthen competition in product markets, attract more foreign direct investment, step up public enterprise privatization, and reduce farm subsidies.

For more information, see Public Information Notices No. 05/9 (Afghanistan), No. 05/14 (Finland), and No. 05/21 (El Salvador) on the IMF’s website (www.imf.org).

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