{
  "title": "Finland: Concluding Statement of the 2021 Article IV Mission",
  "publication": "IMF News, November 19, 2021",
  "sourceUrl": "https://www.imf.org/en/news/articles/2021/11/18/finland-summary-concluding-statement-of-the-2021-article-iv-mission",
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  "summary": "Finland contained the pandemic successfully; around 80 percent of the population aged 12 or over are now fully vaccinated.",
  "publishDate": "2021-11-19",
  "sections": [
    {
      "heading": "Economic outlook",
      "content": "- Finland contained the pandemic successfully; around 80 percent of the population aged 12 or over are now fully vaccinated.\n- The 2020 recession: output declined by 2.9 percent in 2020; output rose above its pre-pandemic level in 2021Q2.\n- Labor market: the employment rate has returned to its pre-crisis level; labor shortages amid rising vacancies and supply chain bottlenecks are starting to weigh on activity.\n- Inflation: consumer prices increased markedly in 2021 due to global raw materials price rises and production bottlenecks; headline inflation is expected to hover around 2 percent in 2021 and 2022 on the back of higher projected energy prices.\n- IMF staff baseline projections:\n  - GDP growth: around 3¼ percent in 2021 and 2¾ percent in 2022.\n  - Output gap: projected to nearly close in 2022.\n  - Potential growth: forecast to converge to around 1¼ percent in the medium term, similar to pre-pandemic forecasts.\n- Risks and dynamics:\n  - Recovery could be stronger with a faster unwinding of household savings.\n  - Pandemic-related risks to global growth remain high and could negatively impact Finland.\n  - Pandemic-induced scarring is expected to be minimal given the strong rebound."
    },
    {
      "heading": "Unwinding pandemic-related support and strengthening public finances",
      "content": "- Pre-pandemic government program (2019): one-off and permanent spending increases on education, employment, infrastructure, and climate policies, equivalent to an annual average around 1 percent of GDP during 2020-22.\n- Pandemic fiscal support: additional fiscal support amounting to around 4¾ percent of GDP during 2020–21.\n- Public debt trajectory:\n  - Public debt is expected to reach over 70 percent of GDP at end-2021.\n  - Over the medium term, fiscal deficits will gradually adjust but stabilize at a level which is around 1 percent of GDP higher than before the pandemic, largely reflecting permanent spending increases in the government’s program.\n  - Planned employment measures will unlikely produce sufficient fiscal gains to achieve the revised government target to stabilize debt in the middle of the decade.\n- Fiscal stance and recommendations:\n  - The accommodative fiscal stance in 2022 is broadly appropriate to support the recovery; COVID-related support is planned to be unwound in 2022 as conditions improve.\n  - The structural primary deficit is projected to remain at the relatively high 2020 level of 2¼ percent of GDP.\n  - IMF staff recommend a moderately faster consolidation once the recovery is firmly on track to bring public debt on a declining path over the medium term to rebuild buffers and prepare for increases in aging-related spending.\n- Specific policy options to support adjustment:\n  - Labor-market and benefit reforms:\n    - Continue plans to progressively close routes to early retirement for older workers.\n    - Better target in-work and out-of-work benefits.\n    - Encourage employment among secondary earners (e.g., better targeting the home care allowance and housing benefits; further improving access to childcare).\n  - Revenue and spending measures:\n    - Broaden the tax base for the standard-rate VAT.\n    - Increase recurrent real estate taxes (noting these are low in Finland relative to other countries).\n    - Focus adjustment effort on reducing expenditure given already high overall taxation.\n    - Conduct a spending review to identify efficiency gains and fiscal savings, including in the context of ongoing health and social services reform.\n    - Consider further reductions in environmentally-harmful subsidies and higher climate-related taxes.\n  - Fiscal framework:\n    - Return to original spending limits to enhance fiscal credibility; limits were relaxed for the COVID emergency and further increased for 2022 and 2023."
    },
    {
      "heading": "Achieving the goal of net-zero emissions",
      "content": "- Target: net-zero emissions by 2035.\n- Assessment: current measures (estimates from the Ministry of Environment) would not be sufficient to reach the target.\n- Policy recommendations:\n  - Increase and better harmonize carbon pricing across sectors.\n  - Reinforce carbon pricing with fiscal incentives across different sectors, including the use of feebates.\n  - Consider further policy measures to close the emissions gap implied by current measures."
    },
    {
      "heading": "Enhancing financial and macroprudential policies",
      "content": "- Financial system resilience:\n  - Banks are well-capitalized, liquid, and profitable.\n  - Lowering of structural capital buffer requirements at the onset of the pandemic provided additional lending and loss-absorbing capacity.\n  - Corporate and household balance sheets appear relatively unscathed after expiry of support measures.\n- Vulnerabilities:\n  - The banking sector is large and highly concentrated, with high exposure to residential and commercial real estate; commercial real estate faces pandemic-related headwinds.\n  - Household debt composition shifted toward consumer and housing company loans, adding borrower-side vulnerabilities.\n- Macroprudential recommendations:\n  - Complete planned government review of the tax treatment of different housing financing options to address compositional changes in household debt.\n  - Enhance borrower-based macroprudential toolkit beyond current proposals (which include loan-to-value limits for housing company loans):\n    - Introduce a debt-to-income (DTI) cap reflecting growing household debt vulnerabilities, in line with steps taken in many other countries.\n    - Supplement the DTI cap with a debt-service-to-income cap once the new comprehensive credit registry is operational.\n    - Tailor borrower-based measures to account for traditionally less risky borrowers, e.g., first-time homebuyers.\n  - Restore and reconfigure capital-based macroprudential buffers:\n    - Return structural capital buffer requirements to pre-pandemic levels to rebuild resilience against structural risks.\n    - Consider targeted capital requirements to build resilience against rising household vulnerabilities.\n    - Modify Finnish legislation that codifies capital buffer requirement settings to introduce a positive neutral countercyclical capital buffer rate, building macroprudential policy space.\n- Current assessment: there are currently no obvious signs of real estate overvaluation or a buildup in aggregate cyclical systemic risks, but household vulnerabilities are rising."
    },
    {
      "heading": "Concluding note",
      "content": "- The mission thanks the authorities and other counterparts for constructive policy dialogue and productive collaboration.\n\nFinland: Concluding Statement of the 2021 Article IV Mission — November 19, 2021. International Monetary Fund.\n\n---\n\n\n References\n\n- Finland and the IMF\n- IMF Policy Advice -- A Factsheet\n- Mission Concluding Statements\n- PRESS CENTER\n- https://www.imf.org/en/home\n\nSource: https://www.imf.org/en/news/articles/2021/11/18/finland-summary-concluding-statement-of-the-2021-article-iv-mission"
    }
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    "Published: November 19, 2021",
    "Finland contained the pandemic successfully; around 80 percent of the population aged 12 or over are now fully vaccinated.",
    "The 2020 recession: output declined by 2.9 percent in 2020; output rose above its pre-pandemic level in 2021Q2.",
    "Labor market: the employment rate has returned to its pre-crisis level; labor shortages amid rising vacancies and supply chain bottlenecks are starting to weigh on activity.",
    "Inflation: consumer prices increased markedly in 2021 due to global raw materials price rises and production bottlenecks; headline inflation is expected to hover around 2 percent in 2021 and 2022 on the back of higher projected energy prices.",
    "IMF staff baseline projections:",
    "Risks and dynamics:",
    "Pre-pandemic government program (2019): one-off and permanent spending increases on education, employment, infrastructure, and climate policies, equivalent to an annual average around 1 percent of GDP during 2020-22.",
    "Pandemic fiscal support: additional fiscal support amounting to around 4¾ percent of GDP during 2020–21.",
    "Public debt trajectory:",
    "Fiscal stance and recommendations:",
    "Specific policy options to support adjustment:",
    "Target: net-zero emissions by 2035.",
    "Assessment: current measures (estimates from the Ministry of Environment) would not be sufficient to reach the target.",
    "Policy recommendations:",
    "Financial system resilience:",
    "Vulnerabilities:",
    "Macroprudential recommendations:",
    "Current assessment: there are currently no obvious signs of real estate overvaluation or a buildup in aggregate cyclical systemic risks, but household vulnerabilities are rising.",
    "The mission thanks the authorities and other counterparts for constructive policy dialogue and productive collaboration.",
    "[Finland and the IMF](http://www.imf.org/external/country/FIN/index.htm)",
    "[IMF Policy Advice -- A Factsheet](https://www.imf.org/en/about/factsheets/imf-surveillance)",
    "[Mission Concluding Statements](https://www.imf.org/en/news/searchnews)",
    "[PRESS CENTER](http://presscenter.imf.org/)",
    "[https://www.imf.org/en/home](https://www.imf.org/en/home)"
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