IMF recommends continued fiscal adjustments

The International Monetary Fund (IMF) published its annual report on the Finnish economy on Monday 19 January. According to the IMF, efforts to strengthen public finances will have to continue for several years.

Finland should seek to consolidate by half a per cent of GDP annually. According to the IMF, this pace of consolidation should be maintained until the fiscal balance is closed and debt is on a declining path. 

Finland’s new national fiscal framework will help curb indebtedness. Fiscal adjustment will require strong political commitment, a re-evaluation of spending and an assessment of indirect taxes. 

The IMF’s report highlights numerous possible adjustment measures, such as improving the efficiency of social security, cutting business subsidies and reforming pensions. 

The IMF would focus structural tax reforms on removing tax expenditures for fossil fuels and bringing reduced value added tax rates closer to the general tax rate.  

The IMF emphasises the need to boost productivity through structural reforms and to improve the functioning the labour market and upskill the labour force. AI skills should be a particular focus.

Growth to restart this year

Finland’s economy is set to return to growth as private demand recovers. The economy will grow about 1.5 per cent in the coming years.

Inflation will remain at two per cent, which will lead to growing real wages and disposable income. This, along with tax cuts and large household savings, will support private consumption and investments. The IMF estimates the growth in potential output to be about one per cent.

Risks are tilted to the downside. This is primarily due to trade tensions and geoeconomic uncertainty.

Significant deterioration of public finances

Finland’s public finances have deteriorated in recent years. This is not due to the economic cycle alone, but numerous other factors as well: increased defence and immigration-related spending, rising goods and services prices, higher pension payments from inflation indexation, mounting interest expenditure, and pressure from health and social services. These reasons have led to the deficit remaining at 4.5 per cent of GDP in 2025, despite the spending cuts implemented by the Government. Without further measures, the debt ratio will approach 95 per cent of GDP by the end of the decade.

Finland needs to enhance growth potential

According to the IMF, Finland’s greatest growth potential lies in raising productivity, particularly through improved functioning of the labour markets, education policy and deeper integration with the EU single market.

The IMF praised previous reforms to strengthen incentives for accepting work, but thinks that further measures are needed. The IMF highlights the importance of strengthening tertiary education and proposes limiting the scope for students to pursue more than one degree at the same level in order to free up capacity for first-time entrants. It also proposes student fees for higher education degrees, because the attainment rate is lower than peer countries and challenges in public finances limit opportunities to increase funding.

The IMF stresses the need for measures to more effectively integrate immigrants into the labour markets, including streamlining work-based immigration procedures and expanding Finnish-language training.

The IMF also highlights AI, digitalisation and innovation preparedness as key drivers of growth. Though Finland has a strong foundation, more widespread adoption of technology might reshape the labour markets and increase the risk of structural unemployment. The situation calls for investments in tertiary education, active labour market policies and AI skills. 

Foundations of the financial sector should be strengthened

According to the IMF, Finland’s financial system is generally stable, and the banking sector is resilient. Systemic risks are contained, though sectoral risks remain. In particular, the IMF draws attention to real estate market risks.

The IMF’s assessment is largely based on its previous assessments of the financial sector (FSAP). It notes that Finland’s financial sector is large and highly integrated into international markets – particularly other Nordic countries – which exposes the system to cross-border shocks.

Macroprudential buffers should be enhanced, and limits on housing finance should not be relaxed.

Report a part of IMF country monitoring

The IMF publishes similar reports on all its member countries as part of its country monitoring activities. The report covers public finances, labour markets, productivity and financial markets. The report is based on assessments by IMF experts and on discussions they have had with Finnish authorities, labour market organisations, financial institutions, research institutes and other organisations.

The IMF’s visits to member countries are called Article IV Consultations, because they are required by Article IV of the IMF’s Articles of Agreement.

The IMF published its statement on Finland on 10 November and the full report on 19 January.

Inquiries:
Sari Sontag, Senior Ministerial Adviser, tel. +358 295 530 181, sari.sontag(at)gov.fi
Jussi Lindgren, Economic Policy Adviser to the Minister of Finance, tel. +358 295 530 514, jussi.lindgren(at)gov.fi