Finland: Staff Concluding Statement of the 2019 Article IV Mission

IMF News, November 19, 2019

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Canonical URL: Finland: Staff Concluding Statement of the 2019 Article IV Mission

The new coalition government has presented an ambitious policy agenda emphasizing "more social inclusion, higher employment, a cleaner environment—and a balanced budget."
Planned one-off increases in public expenditures on education, employment, infrastructure, and climate policies will cost up to 3 billion euros—1¼ percent of GDP.
Of the 3 billion euros, 1.4 billion euros has been committed and 1.7 billion euros is as yet unallocated.
Short-run effect: the additional spending will provide useful support for demand in an otherwise slowing economy.

Growth is likely to be only around 1¼ percent this year and 1½ percent in 2020.
This contrasts with the past three years that have seen 2½ percent growth on average.

Government target: balance the public finances by 2023, with debt declining by then.
Staff assessment: balancing the budget seems unlikely.
Assuming potential growth hovers around 1¼ percent over the medium term, even just the committed spending would imply the government would have to borrow about 1 percent of GDP in 2023.
Risks to the outlook:
- The economy might not recover as well as assumed.
- Spending on “one-off” expenditures might be hard to switch off.
Government’s target scenario assumes higher employment than in staff assessment; projections are uncertain because measures are not fully defined.
Even if higher employment is achieved, the budget might balance—but not if policies used to boost employment are themselves costly.

Recommendation: the government should commit not to spend the extra 1.7bn euros until it is sure that it can balance revenues against the 1.4bn euros of one-off items.
Mid-term budget review currently sets a criterion of employing 30 out of the targeted 60 thousand more people before all spending on one-off items takes place.
Staff view: a more prudent criterion would be for half of the spending to take place at that point.
Likely need for corrective actions to meet the medium-term target: about ½ percent of GDP in net savings.
All options should be on the table.
If spending is front loaded, bringing excise taxes forward would be safer.
Potential fiscal improvement: eliminating environmentally-harmful subsidies worth 3½ billion euros each year—about one quarter of current education spending.
- Notes: such an initiative would require political consensus and time for industries to adjust.
- Context: globally raising the price of carbon is the single most effective tool for countries to reduce fossil fuel emissions; the government has set a goal for Finland to be carbon neutral by 2035.
Cost control must be part of the debate about health and social services reform.

High employment is central to sustaining the social model.
Issues indicated:
- Many Finnish women stay out of the workforce for long periods while raising children, lowering employment and lifetime earnings—warrants careful examination of incentives generated by leave and homecare benefits.
- More could be done to increase participation and employment of older workers, such as by further limiting early exit routes out of the labor force.
- Current tax and benefit schedules mean some—especially low-wage and part-time earners—pay a financial penalty to work rather than stay unemployed or out of the workforce.
Government program favors active labor market policies:
- More resources for case workers who assist those seeking jobs could help.
- Reliance on job subsidies is cautioned against: they are expensive and have had mixed effects in other countries and seem likely to disappoint.

Household debt has been increasing; excessive leverage ultimately benefits no one.
Government-appointed working group recommends limiting the ratio of household debt to income:
- Proposed Debt-To-Income (DTI) limit: 450 percent.
- Proposal includes an exemption to allow banks a share of borrowers with higher debt ratios.
- The DTI limit would cover all borrower’s debts.
Much of recent increase in household debt is driven by housing company loans.
- Concern: financing the purchase of a house through shares in a housing company masks risks to home owners and can make higher prices appear more affordable than they truly are.
- Working group recommended restrictions targeted at these loans.
- Underlying cause: the tax code creates a clear incentive for investors to favor housing company loans over conventional mortgages.

Planned electronic register of housing company shares will make it easier to assess risks of investing in housing companies.
A comprehensive credit registry would facilitate other measures to address borrower risks, such as limits on debt servicing to income, should those be needed.
Better data would help borrowers, lenders, and policy makers.

Achieving the government’s wide range of worthy goals is not impossible but will likely require compromise and caution, keeping fiscal sustainability and financial stability in mind.
The mission thanks the authorities and other counterparts for their warm hospitality and for candid and high-quality discussions.

IMF Staff Concluding Statement, November 19, 2019.