## IMF Concludes 2003 Article IV Consultation with Finland ## Source details **Canonical URL:** [IMF Concludes 2003 Article IV Consultation with Finland](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2003/_cr03325.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2003/_cr03325.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2003/_cr03325.pdf.json) --- ### Background and recent performance - Finland recovered from the early 1990s recession and banking crisis through private sector initiative, solid macroeconomic management, and structural reforms. - Real GDP growth averaged almost 5 percent during 1994–2000. - Inflation was 1–3 percent in that period. - During 2001–02 the pace of activity slowed but the economy performed reasonably well despite a weak external environment. - Favorable export performance reflected both traditional industries and the information and communications technologies (ICT) sector. ### Outlook and risks - Staff forecast: growth of 1.3 percent in 2003, driven mainly by private consumption. - Staff forecast: growth of 2.6 percent in 2004, supported by gradually rising investment and accelerating export growth. - Projected inflation: under 2 percent in both 2003 and 2004, reflecting output expected to stay below potential. - Downside risks: fragile external environment and continued business investment weakness. - Upside possibility: stronger ICT sector performance. ### Fiscal position and policy challenges - Fiscal discipline has slipped in recent years despite comparatively strong public finances. - General government surplus: - 2000: 7.0 percent of GDP - 2002: 4.6 percent of GDP - Staff expects about 2 percent of GDP in 2003 (based on Finance Ministry estimates for the 2003 supplementary budget). - Central government balance: expected to swing to a small deficit of 0.3 percent of GDP in 2003. - Risks for 2004 and later: government’s new expenditure ceilings are frontloaded and looser than earlier ceilings; preliminary 2004 budget plans envisage significant tax cuts that could further reduce the surplus. - One-off factors: (lagged) exceptional tax revenues related to income on stock options were an important but fading contributor to past surpluses. - Executive Directors’ views on fiscal strategy: - Many Directors saw scope to use some room from past surpluses to boost growth and employment but warned against stimulus via tax cuts and frontloaded spending increases in a small, open economy. - Several Directors recommended maintaining strong fiscal surpluses to prepare for rapid population aging. - Many Directors viewed a general government surplus of 4 percent of GDP as a useful medium-term norm to secure fiscal sustainability while allowing credible tax cuts. - Some Directors questioned the necessity of a 4 percent target, noting that a somewhat lower target would still leave Finland better positioned than most other industrial countries. - Recommendations to secure expenditure discipline: - Contain expenditure more tightly than implied by current government spending ceilings. - Use any revenues above projections to strengthen the fiscal position. - Consider introducing new user fees and raising property taxes from low levels. - Strengthen the expenditure framework by including expenditure ceilings in the regular budgetary process and switching to nominal (from real) spending ceilings to improve transparency and monitoring. ### Demographics, labor market, and structural reform - Rapid population aging and high unemployment are key policy challenges. - Unemployment: - Official (seasonally adjusted) rate: hovered above 9 percent in 2003. - Broader measures put unemployment over 16 percent. - Structural factors: high labor taxes and lack of wage differentiation have contributed to structural unemployment. - Aging effects: Finland’s population is aging faster than euro-area countries and the effective retirement age is low, depressing labor supply and potential output. - Policy recommendations to raise employment and potential growth: - Increase work incentives, including labor tax cuts. - Further pension reform: eliminate subsidized component of part-time pensions, remove disincentives to hiring older workers, tighten eligibility and enforcement for disability pensions, shorten transition periods for baby-boomers, and reform the public sector pension scheme. - Reduce the labor tax wedge and incentive traps that make work unattractive. - Promote greater wage differentiation. - Improve efficiency of re-training programs and encourage job search by tapering unemployment benefits and tightening enforcement of job acceptance requirements. - Encourage development of the private market for services and increase privatization. - Directors stressed that tax cuts would be credible and effective only if accompanied by a record of expenditure discipline. ### Financial sector and external relations - Financial system remains basically sound. - Supervisory improvements welcomed: increased independence and prompt corrective action powers of the financial supervisory authority. - Directors supported development of a regional crisis management framework across the Nordic countries and the euro area. - Some Directors saw merit in considering unifying supervisory authority across banking and insurance sectors for comprehensive oversight. - Authorities were commended for efforts to combat money laundering and the financing of terrorism. - Directors praised Finland’s ambitious overseas development assistance goals, contribution to the Africa Regional Technical Assistance Center Initiative, and support for improved market access for developing-country exports. - Directors encouraged Finland to adopt a more supportive stance within the EU in favor of trade liberalization, particularly regarding the Common Agricultural Policy. ### Selected economic indicators (2000–2003) - Real economy - GDP (change in percent): 2000: 5.6; 2001: 0.7; 2002: 1.6; 2003 1/: 1.3 - Domestic Demand (change in percent): 2000: 3.6; 2001: 0.7; 2002: 1.3; 2003 1/: 0.9 - Harmonized CPI (change in percent) 2/: 2000: 3.0; 2001: 2.7; 2002: 2.0; 2003 1/: 1.8 - Unemployment rate (in percent) 2/: 2000: 9.8; 2001: 9.1; 2002: 9.1; 2003 1/: 9.3 - Gross national saving (in percent of GDP): 2000: 28.2; 2001: 27.1; 2002: 26.9; 2003 1/: 25.8 - Gross domestic investment (in percent of GDP): 2000: 20.6; 2001: 20.0; 2002: 20.0; 2003 1/: 19.7 - Public finances (general government, in percent of GDP) - Overall balance: 2000: 7.0; 2001: 5.0; 2002: 4.6; 2003 1/: 2.0 - Primary balance 3/: 2000: 8.1; 2001: 5.6; 2002: 4.7; 2003 1/: 2.0 - Gross debt (Maastricht definition) 4/: 2000: 44.5; 2001: 43.8; 2002: 42.7; 2003 1/: 44.9 - Money and credit (end of year, percentage change) - M3 (Finnish contribution to euro area) 5/: 2000: -3.7; 2001: 4.8; 2002: 5.4; 2003 1/: 2.9 - Total domestic credit 5/: 2000: 6.4; 2001: 6.9; 2002: 7.8; 2003 1/: 9.6 - Interest rates (year average) - Three-month money market 6/: 2000: 4.5; 2001: 4.2; 2002: 3.3; 2003 1/: 2.1 - Ten-year government bonds 6/: 2000: 5.4; 2001: 5.0; 2002: 5.0; 2003 1/: 3.6 - Balance of payments (in percent of GDP) - Trade balance: 2000: 11.4; 2001: 10.5; 2002: 9.2; 2003 1/: 8.3 - Current account: 2000: 7.6; 2001: 7.1; 2002: 6.9; 2003 1/: 6.1 - Fund position (as of end-May, 2003) - Fund holding of currency (in percent of quota): 59.9 - Holdings of SDRs (in percent of allocation): 104.78 - Quota (in millions of SDRs): 1,263.80 - Exchange rate - Exchange rate regime: Euro - Present rate (August 21, 2003): US$ 1.0941 per euro - Nominal effective exchange rate (increase in percent) 7/: 2000: -5.2; 2001: 1.9; 2002: 1.3; 2003 1/: 1.5 - Real effective exchange rate (increase in percent) 8/: 2000: -4.8; 2001: 0.7; 2002: -0.8; 2003 1/: 0.8 *Public Information Notice (PIN) No. 03/124; October 17, 2003. IMF Executive Board conclusions on the 2003 Article IV consultation with Finland.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2003/_cr03325.pdf_