Growth must be sought through increased employment and productivity
The topic of the economic policy publication of the Ministry of Finance this year is growth policy. As the number of people available to the labour market grows, growth must be sought through increased employment and productivity. This point is noted in the review ‘Challenges for growth policy in the 2000s' released on 1 June, 2004.
The publication of the Ministry of Finance points out that these economic policy challenges must be met at a time when the Finnish economic operating environment is in a state of flux. The ability to adapt to changes in the global economy and the exploitation of technology are key factors in raising the employment rate and achieving a favourable trend in productivity.
The challenges and problems which Finland faces are not cyclical in nature: they are structural and permanent. The Ministry of Finance estimates that the sustainability of Finland's public economy is in danger from the considerable pressures to increase pension (TEL) contributions in the coming years and decades. Together with the income tax cuts demanded by tax competition and employment policy, this means that the resources available to the central government and to local authorities will not develop as favourably as they have done in the past.
Expenditure pressures threaten the stability of the public economy
As revenues decline, there are pressures towards increasing public expenditure. The population is ageing, which translates into a need for increasing expenditure by as much as 6% in relation to overall production over the next 25 years. Speeding up productivity trends in the public sector and reassessing service transfer and income transfer systems are key factors in controlling public spending.
Particular attention must be paid to the development of local authority expenditure. At the beginning of this decade, public spending in municipalities has increased by 5.5% per year. Employment in the municipal sector has increased considerably in recent years, and this trend is expected to continue in the near future. In 2002, the number of people employed in local government grew by 10,000, or 2%. According to the estimate of the basic services programme, municipal employment will increase by a total of nearly 30,000, or 6%-7%, between 2002 and 2008. The rapid increase in expenditure is threatening the stability of the municipal economy.
Employment-supporting tax cuts should be continued
The employment rate can be increased by alleviating taxation on work, by promoting entrepreneurship, by improving pension systems and the functioning of the labour market, and by combating exclusion. Tax cuts can also boost productivity as the benefits of improved expertise yield more of a return to the employer and the employee.
However, the Ministry of Finance stresses that tax cuts do not finance themselves. In a situation where the national economy is running a deficit, tax cuts would have to be balanced by measures that limit public spending and strengthen economic growth and employment sustainably.
Training must be enhanced
The average education attainment of Finns has risen rapidly, and this trend will continue as age groups with lesser training leave the labourmarket. Enhancing training will be a key factor in seeking ways to boost productivity in the future. In addition to expertise in high-tech, better results must be achieved in secondary education and in comprehensive school. There is already a shortage of competent professionals.
Finland's school system stands up well in international comparison. However, the Ministry of Finance is worried about how slowly young people find employment. One in five people who have completed a vocational qualification are unemployed, one in four young people drop out of their studies, and one in five young people fail to meet the requirements of comprehensive education. University studies take too long.
Instead of increasing the number of starters, the focus should be on increasing the number of graduates. Halving the number of dropouts equals a saving of as much as 10% in training costs. There are also savings to be found in the school network, which is disproportionate to the present population structure. Resources are wasted in maintaining small schools, and this situation will get worse as the population ages.
According to an estimate by the Ministry of Finance, the present municipality system in Finland cannot sustain a school network in the future. There are 41 municipalities in Finland where fewer than 10 children were born last year, and 104 municipalities with fewer than 20 births.
Competition must be boosted and climate policy costs cut
Finland's record-breaking economic growth in the late 1990s was largely based on ‘creative destruction', with weaker companies failing and being replaced by high-tech production. The Ministry of Finance stresses that the challenge in economic policy is to create a favourable environment for structural renewal of production in a stable economic situation. The Ministry of Finance estimates that there is scope for improvement in Finland's competitiveness, considering how high prices are in Finland compared with other EU Member States.
The climate policy decisions taken so far do not jeopardize Finland's economic growth. However, they will also not reduce the level of global emissions of greenhouse gases, meaning that new international decisions are needed. By introducing the ‘Kyoto mechanisms', climate policy costs could be drastically cut, as industrialized countries could finance emission reductions in developing countries and elsewhere where they can be achieved more cost-effectively.
Energy subsidies will have to be reviewed in addition to energy taxation when Finland's climate strategy is revised. The Ministry of Finance considers that high-level nuclear power expertise will have to be relied on in the future too. Such a policy would bring the kind of security that companies need to make investment decisions.
Further information: Markus Sovala, head of the economic policy unit
+358 40 761 2723, [email protected]
Challenges:
- The Government's employment goal is difficult to achieve now that economic growth has been delayed.
- The labour force available to the labour market is beginning to shrink, and economic growth will be largely dependent on improvements in productivity.
- A significant share of industrial investment is going abroad.
- Maintaining Finland's position in high-tech production will become more difficult as competition gets tighter.
- New technology has not been exploited fully, especially in the provision of services.
- As employees' pension contributions rise, tax cuts should be made in state and municipal taxation, but there are pressures to increase public expenditure particularly in municipalities.
- The Finnish education system produces good results in international comparison, but young people find employment slowly.
- One in every five who has completed a vocational qualification is unemployed; one in four young people drop out of their studies; one in five young people do not attain the educational requirements of comprehensive school. University studies last too long.
- Finland's municipality system is too expensive at the moment and cannot sustain a school network in the future. Finland has 41 municipalities where fewer than 10 children were born last year, and 104 municipalities with fewer than 20 births.
- Finland's price level is higher than that of other EU Member States, which indicates a weak competition situation.
What should be done:
- Economic growth should be sought through improving the employment rate and productivity and enacting reforms to achieve this.
- The employment rate can be raised by alleviating taxation on work, by promoting entrepreneurship, by improving pension systems and the labour market, and by combating exclusion.
- Tax cuts provide incentives for improved productivity.
- Tax cuts do not finance themselves; they must be balanced with control of public expenditure and measures to improve economic growth and employment.
- Service and income transfer systems must be improved, and the tasks of the public sector must be reappraised.
- Education must be enhanced, focusing on increasing the number of graduates rather than the number of starters.
- Learning problems in comprehensive school and the dropout rate in secondary education must be addressed.
- The Finnish school network must be adapted to the population structure.
- Competition policy must be boosted to improve productivity growth.
- The Kyoto mechanisms must be implemented to improve the results of climate policy and to limit its costs.
- The use of energy subsidies must be reviewed when revising Finland's climate strategy.
- It will be necessary to continue to rely on high-quality Finnish nuclear power expertise.