Abstract
This 1999 Article IV Consultation highlights that Finland’s economy has made a strong recovery from the deep recession that began in the early 1990s. Spurred by a devaluation of the markka, growth was predominantly export driven, and the external current account shifted from a deficit of more than 5 percent in the early 1990s to a surplus of the same magnitude in 1997/98. In this setting, prudent macroeconomic policies brought public finances from a deficit of 7 percent of GDP in 1993 to a surplus in 1998.
1. This statement provides information on economic and policy developments in Finland that has become available since the staff report for the 1999 Article IV consultation (SM/99/215) was issued on August 31, 1999. This information does not change the thrust of the staff appraisal.
2. The main economic developments were as follows:
Real GDP in the first half of 1999 grew by 3.4 percent over the same period a year earlier, with domestic demand rising by 3.8 percent. Industrial production in the first seven months was 5 percent higher than in 1998 and continued to be driven by the electronics industry, whereas performance in most other sectors remained sluggish. With a favorable external outlook, high consumer confidence, and upward trends in order books and business outlook indicators, staff continues to project GDP growth in 1999 slightly in excess of 3½ percent.
The unemployment rate in August continued its downward trend to 9.8 percent (s.a.), against 11 percent a year earlier, and average employment during January-August was 3½ percent higher than in the previous year.
The 12-month rate of consumer price inflation (harmonized) was 1.3 percent in August, slightly exceeding the average of 1.1 percent over the first eight months.
According to recent announcements by the Central Organization of Finnish Trade Unions, wage negotiations will be conducted on a sectoral rather than an economy-wide level.
The boom in the real estate market of certain growth centers has continued. To ease the shortage of housing, the government has decided to allow municipalities to raise the tax on vacant sites and has encouraged them to make more use of their options to purchase such land, but is not planning to eliminate the tax deductibility of mortgage interest payments.
3. The 2000 budget proposal, submitted to Parliament in early September, foresees a central government surplus (on a national accounts basis) of some ¾ percent of GDP—essentially in line with the government’s earlier projections. The current proposal includes, for the time being, no income tax cuts in 2000, in line with the government’s intention to await the outcome of wage negotiations in the fall. On this basis, it translates into a projected general government surplus of some 4¾ percent of GDP.
4. In September, the government has also updated its Stability Program, required for members of the euro area, covering projections for 2000-2003. Incorporating the impact of income tax cuts over the period 2001-2003, the general government surplus is projected to be in the range of 4¼ - 4¾ percent of GDP. On the structural front, the program emphasizes the need to enhance the operation of the labor market, including measures to increase the effective retirement age. In this context, it notes that the government has agreed with the social partners on a number of actions, including a reduction in the level of “unemployment pensions” (which are available for unemployed aged 60 and over) and a higher age limit for the individual early retirement pension.
5. The authorities have recently completed a self-evaluation report on fiscal transparency, as foreshadowed at the time of the consultation discussions.