Economic Survey Winter 2024

This Economic Survey offers projections of economic developments in 2024–2027. In addition to short-term prospects, it includes a medium-term economic outlook extending to 2029.

The forecast and trend projections in the survey are prepared independently by the Ministry of Finance Economics Department based on the Act on the implementation of the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union and on multi-annual budgetary frameworks (869/2012).

The forecasts are based on quarterly national accounts data published by Statistics Finland in November 2023 and on other public statistical sources available by 13 December 2024.

Helsinki December 2024

Ministry of Finance Economics Department

Mikko Spolander Director General

Janne Huovari Senior Financial Advisor Head of Macro Forecasting

Jenni Pääkkönen Senior Financial Advisor Head of Public Finance

Preface

The Finnish economy is at a turning point. There are both positive and negative developments, but the outlook points towards accelerated growth.

Let us begin with the positive developments. The recession is behind us. The economy has grown in every quarter of the current year from the previous one. Inflation has subsided. Interest rates have fallen and are expected to decrease faster than previously expected. The purchasing power of households is increasing. The cost competitiveness of companies in the international market is good. The housing market has picked up, and the downturn in construction has come to an end. In addition, the working-age population is increasing. Although working-age immigrants face greater challenges in finding employment and tend to work in lower-paid jobs compared to those born in Finland, the growing supply of labour will gradually translate into employment and production as the outlook period progresses and the economy transitions from a recession to a phase of stronger growth.

What about the negative developments? Stronger growth will require greater confidence in the future to support it. Consumer and business confidence has indeed risen over the year, but is still below average. Fear of unemployment is undermining the confidence of households. Employment has weakened, although the economy has grown. At the same time, a considerable number of working-age people have arrived in the country. Without a strong turnaround and increased demand for labour, the growth in labour has led to higher unemployment.

In addition, Europe is struggling. The recession in Germany shows no signs of easing, and growth projections for the euro area economy have been revised to reflect weaker growth. Geopolitical tensions and the threat of a trade war have increased. The situation is further complicated by the government crises in Germany and France.

We estimate, however, that the turnaround in factors supporting economic growth is already strong enough to drive a robust recovery starting in 2025. The strengthening of growth will begin to increase employment and improve confidence in the future among households and businesses, further supporting growth. We also estimate that growth will continue at an above-average rate for several years.

As weaker employment and subdued private consumption impact public finances more severely this year and next than previously estimated, general government deficits are expected to be larger than previously estimated throughout the outlook period. On the other hand, the accelerating economic growth and the implementation of the saving measures and tax increases agreed upon by the government, will gradually improve public finances. In addition, various reforms and measures to promote private investments will support employment and production growth in the longer term. We estimate that general government deficits will begin to decline from next year onwards, and the growth of general government debt to GDP will begin to stabilise.

If the adjustment package agreed by the Government – including the wellbeing services counties and municipal administration’s own adjustment plans – is carried out to the planned extent and within the planned timeframe, and economic growth does not underperform expectations, the debt to GDP will stabilise by 2027. Our projection that the economy will grow at an above-average rate for a longer period supports the stabilisation of the debt-to-GDP ratio.

The agenda of any government – regardless of its composition – is to build a dynamic and stable society. Several working groups and other parties are currently seeking ways for the Government to support the vitality of the economy and sustainable public finances.

From the perspective of the economy and public finances, vitality encompasses employment, education, competence and smart capital, innovation, technology, efficiency and competitiveness. Sustainability, in turn, refers to the public sector’s service pledges that are fulfilled effectively and efficiently and that are in line with the vitality of the economy and the income generated through it.

In Finland, many factors that determine the vitality of the economy are in good shape. Economic structures and public spending are better than they are reputed to be – but not sufficiently strong.

The economy’s productivity and income are growing slowly, while fulfilling the public sector’s service pledges is increasing public expenditure at a rapid pace year after year. The imbalance between the economy’s income generation and the public sector’s service pledges risks driving public finances into an unsustainable situation —not in the short term but certainly in the long term – despite the fact that, thanks to the economic policy implemented, the estimated sustainability gap in public finances has decreased compared to previous years.

We could and must be able to do better. There are certainly solutions available. The vitality of Finland’s economy and Finnish society with its structures has not reached such a peak of development from which any deviation would inevitably lead to a worse situation than at present. A simple comparison with our neighbouring Nordic countries is enough to substantiate this claim.

Effective economic policy and sustainable public finances are grounded in a thorough and comprehensive analysis of the economy’s vitality and the public sector’s service pledges. What are the key drivers of vitality in the future and the related opportunities and uncertainties? What kind of benefits do service pledges generate for society in relation to the costs they incur for public finances? What are proven effective measures to promote vitality and to take advantage of the opportunities opening up before us?

Opportunities pave the way towards a dynamic and stable society. There is certainly no shortage of opportunities in the world – especially now, as climate change, modern technologies, artificial intelligence, the energy transition, material recycling and the structural changes of production and consumption demand solutions and create new markets globally. By leveraging these opportunities, it is possible to generate the kind of economic vitality needed to sustainably fulfil the service pledges integral to a Nordic welfare society.

Summary

Economic outlook for 2024–2027

The Finnish economy switched from a downturn to slight growth in the first part of the year but, on an annual basis, gross domestic product (GDP) will be 0.3% lower in 2024 than in the previous year. Output has been most adversely affected by the significant reduction in construction, and private consumption will also slightly decrease this year. Growth, on the other hand, is driven by foreign trade, with exports increasing despite the challenging environment. The slowing of inflation and the decline in interest rates will also put both consumption and investment on a path of growth next year. However, growth is weakened by cuts in public expenditure and tax increases. GDP is projected to grow by 1.6% in 2025 and 1.5% in 2026 and 2027.

Risks overshadowing the positive outlook for the global economy

The global economic outlook is cautiously optimistic, but is overshadowed by significant risks. Growth has remained reasonably strong despite trade policy tensions and geopolitical challenges. In the Eurozone, slowing inflation, rising real incomes and falling interest rates support recovery, but the difficulties of the German industry and political risks in key countries create uncertainty and have weakened growth prospects. In the United States, the strong employment situation is sustaining private consumption, although very rapid growth will slow over the outlook period. In China, the recovery of exports and stimulative economic policies are supporting the economy, but the weakness of domestic demand and the threat of deflation overshadow the outlook.

A key threat to global economic growth is the future trade policy of the United States and the response of other countries to it. An increase in United States tariffs would primarily have negative effects on its own economy. Countermeasures and the escalation of a trade war, on the other hand, would weaken global economic growth as a whole.

The growth of Finnish exports is accelerating, but at a slower pace than expected, as the subdued economic growth of the Eurozone is holding back demand for goods exports in particular. The growth of services exports, on the other hand, has already accelerated. Despite the growth in exports, the impact of net exports on economic growth will be small in the coming years, as imports will also increase sharply due to the increase in investments. Finland’s current account is expected to be slightly negative throughout the outlook period.

Growth in real incomes increases consumption

Inflation has clearly slowed and, in the coming years, it will remain moderate. Tax increases, such as higher value added tax and tobacco tax, raise consumer prices and slow the decline in inflation. The impact of these indirect tax changes on inflation will cumulatively exceed one percentage point in 2025–2027. Despite this, inflation remains low, averaging 1.5% in 2024–2027. The rise in service prices is supporting inflation, but otherwise price pressures are quite moderate. In particular, the fall in energy prices and the fall in interest rates are supporting the slowdown in inflation.

As inflation slows, households’ real incomes have started to grow. This has not yet been reflected in consumption, as consumption has declined, and household savings have increased significantly. The growth of real incomes will slow in 2025, but private consumption is still expected to increase. The decline in interest rates is easing the debt servicing expenditure of households with housing loans, and accumulated savings are starting to be directed towards consumption. The growth in consumption will accelerate in 2026 as the employment situation improves.

Investments will increase from next year

The sharp decline in construction seems to have come to a halt. Starting next year, housing construction is expected to recover as the decline in interest rates stimulates the housing market. However, the recovery will take time, as there are still a lot of new apartments available on the market. In other construction, the rise will be faster. Both construction and investments in machinery and equipment will be accelerated by the energy transition and related projects. Especially for next year, a lot of new investments are expected, as defence procurements will also significantly increase the volume of investments. Investments in research and product development and investments related to digitalisation are also on the rise, supported by increased public investments and tax incentives.

Employment recovery is delayed

The turn for the better in the labour market is shifting to 2025, when the economic recovery will increase demand for labour. In 2024, employment is expected to weaken, especially in manufacturing and construction, and the unemployment rate is expected to rise to almost 8.5%. Although the lack of skilled labour curbs redundancies, job vacancies are decreasing and unemployment is growing broadly. In 2025, the labour market will start to recover, but the decline in unemployment will be slow.

In 2026–2027, employment will improve as the economy strengthens, and the employment rate will start to rise again. Growth is being supported by government measures to increase labour supply and increased immigration. The unemployment rate is declining slowly and will be about 7.4% in 2027, which is still slightly above the level of structural unemployment. The growth of the working-age population increases labour and employment in the long term, but during the forecast period, it is reflected particularly in a lower employment rate.

Growth in the working-age population increases potential output

In the medium term, 2028–2029, the Finnish economy is expected to grow by 1.4% annually. Growth will be sustained by the fact that, following the downturn, Finland’s economic output is below its potential level and, during the forecast period, output will close the gap with potential output. As a result of immigration, the working-age population has started to grow, and this is likely to increase the potential output of the Finnish economy. In the forecast, the assumption about immigration has been revised upwards for the coming years, although not as much as in Statistics Finland’s recent Population projection.

The growth of potential output is slowed down by the already prolonged period of very weak productivity growth. During the outlook period, total factor productivity is not expected to grow much, in contrast to the early 2000s when growth averaged around 2% annually.

After initial rapid growth, the debt ratio will stabilise as deficits shrink and the economy recovers

In 2024, general government deficit is expected to be 4.2% of GDP. The weak economic cycle is reflected in public finances in many ways and, in addition, the rapid inflation of recent years is still affecting expenditure this year. Due to the weak business cycle, tax revenues have grown moderately this year. In contrast, property income has grown strongly this year, which is especially reflected in social security funds and, to a lesser extent, in central government. Expenditure growth has continued at a rapid pace in all sectors, albeit partly for different reasons. Central government expenditure increased, especially due to investments in preparedness and security. In local government, the growth in expenditure has been driven by the increase in personnel expenses and purchased services. Social security expenditure, in turn, has increased significantly due to considerable index increases in pensions and increased unemployment.

In 2025, tax revenues are expected to grow faster than in the current year, as the economic recovery gains momentum and taxes are increased. The rapid growth of property income, on the other hand, will slow. Furthermore, the measures introduced by the Government (of which about EUR 8 billion in total is included in the forecast at the 2027 level) will strengthen central government finances from next year onwards.

From 2025 onwards, the growth of pension expenditure will slow, as index increases become more moderate than in recent years. In local government, the fastest growth in expenditure now seems to be behind us, but much depends on future wage agreements. In central government finances, defence investments in particular will raise expenditure next year and keep it at a high level in the near future. As a result of the adjustment measures, unemployment expenditure will start to decline despite high unemployment. As a result of these factors, the general government deficit is expected to decrease to 3.5% of GDP in 2025. The deficit will fall below 3% of GDP in 2026 and continue to fall to about 2% in 2029.

This year, the general government debt-to-GDP ratio will rise above 82%, from which it will rise to 85% next year. The reduction of deficits together with expected economic growth are sufficient to slow the growth of the debt ratio and stabilise it momentarily at the turn of the decade. If the Government’s entire EUR 9 billion package of measures is carried out as planned, the debt ratio will stabilise already by the end of this parliamentary term and remain stable for longer time period. After that, it will start rising moderately. The uncertainty in the debt forecast and scenario is considerable, and the outlook for several years ahead is unclear. After the update of the population projection and the changes in forecast, the sustainability gap is expected to be 1.5% of GDP.

Risks

Both global economic risks and domestic economic development contribute to the uncertainty of the forecast. The future economic policies of the United States, particularly its trade policies, pose a risk to global economic growth. For the recovering euro economy, an escalating trade war would be highly detrimental, in addition to the existing geoeconomic risks. The weaker-than-expected growth in the Eurozone and the global economy as a whole would also be reflected in Finland’s economy, manifesting a stalled export growth and postponed investments.

In the domestic economy, consumption growth has been postponed as household saving has increased. If consumers remain cautious, even if interest rates fall and incomes grow, the economy will not grow at the expected rate. However, there are also positive risks in the Finnish economy. There are numerous investment plans, which could provide a stronger boost to the economy than anticipated. The increase in immigration has increased the potential of labour and the economy. As demand recovers, the economy has significant growth potential, and the output level could exceed expectations.

The uncertainty of the economic growth forecast can be illustrated with confidence intervals around the forecast based on past forecast errors. Confidence intervals describe the range within which actual figures have fallen in previous forecasts with an 80% probability. However, these confidence intervals only reflect the normal uncertainty involved in forecasts, and do not take into account the particular risk factors present in each instance of forecasting.

1Economic Outlook

1.1Global Economy

The outlook for the global economy is relatively positive, though it is overshadowed by significant risks. Heightened trade policy tensions, in particular, could hinder growth and potentially accelerate inflation. Such tensions would also obstruct the anticipated recovery in global trade.

Despite numerous uncertainties, global economic growth has remained fairly robust, and the forecast for the coming period remains cautiously optimistic. In the euro area, slower inflation and rising real incomes are supporting the economic recovery, yet the region’s prospects remain highly challenging. The robust performance of the US economy continues to be driven by private consumption, although economic growth is expected to slow over the forecast period. China’s growth is also projected to decelerate during the forecast period, despite a recovery in exports. The global economy is forecast to grow by 3.1% this year, slowing to 2.9% in 2025 and further to 2.8% in 2026.

1.1.1Growth prospects

The prolonged phase of slow growth in the euro area is expected to end next year, with the recovery supported by declining inflation and relatively strong nominal wage growth, which will bolster private consumption. This is supported by improving consumer confidence over the past two years. Nonetheless, various challenges cloud the outlook, most notably the difficulties facing Germany’s manufacture sector. Additionally, the euro area faces a challenging geopolitical situation, as well as political uncertainties in Germany and France. Conversely, relatively positive prospects in Southern Europe are expected to support the recovery of the euro area as a whole. Growth in the euro area is projected to recover from 0.8% this year to 1.2% in 2025, rising further to 1.3% in 2026.

The favourable economic development in the United States is anticipated to persist throughout the forecast period, largely underpinned by strong private consumption, facilitated by a favourable employment situation. Although the momentum in the labour market is slowing, unemployment remains near historically low levels. Consumer confidence in the current situation remains strong, and optimism about future developments has improved. Expansionary fiscal policies continue to sustain growth, but concerns persist about the high level of public indebtedness. Uncertainty surrounding the new administration’s trade policies also casts a shadow over the outlook. GDP growth in the US is expected to slow from 2.8% this year to 2% in both 2025 and 2026.

While uncertainties remain regarding China’s economic development, relatively robust growth is anticipated during the forecast period. Consumer confidence remains low, constraining domestic consumption. Fiscal stimulus has primarily focused on restructuring local government debt. Policies aimed at stimulating domestic demand are still expected. A weak yuan supports exports, which have grown strongly, partly due to significant state-led industrial policy measures. Export growth is anticipated to remain strong during the forecast period, although the global threat of protectionism and potential trade policy actions could impact trade flows. Economic growth in China is projected to decelerate from 4.2% this year to 4% in 2025 and 3.8% in 2026.

India’s rapid economic growth is supported by expansionary fiscal policy. Investment growth, in particular, remains robust. In Japan, modest real wage growth continues to weigh on the recovery of private consumption. In the United Kingdom, economic growth has exceeded expectations, but weak productivity and a low labour force participation rate cast a shadow over the outlook. The government is expected to significantly increase public spending. Sweden’s economic recovery next year is expected to be driven by private consumption.

The global economic outlook described above is subject to significant risks. The foremost negative risk stems from the anticipated trade policy measures of the new US administration. On their own, these measures would primarily impact the US economy, particularly in the form of rising prices. The direct effects on the broader global economy would be minimal. However, should other economies respond to US actions, the global repercussions could be substantial. Global economic growth would slow, and inflation could accelerate again. Geopolitical challenges further overshadow global economic growth. For Europe, the deteriorating situation in Ukraine is a particularly significant concern. The tense situation in the Middle East may also impact energy markets. Additionally, continued political instability in Germany and France could weaken sentiment across Europe. China’s economic development is associated with numerous risks that could affect the global economy. The primary risk is the that the economy is drive to deflation. Another key concern relates to the impact of industrial policy measures on exports and, consequently, trade relations. Furthermore, the interlinked issues of local government debt and the heavily indebted real estate sector remain significant risks.

On the positive side, faster-than-expected recovery in the United States and the euro area could have broader beneficial effects on the global economy. Similarly, an easing of geopolitical tensions would improve global sentiment.

1.1.2Financial Markets and Commodities

Global financial markets have remained surprisingly stable despite increasing tensions. Stock markets, particularly in the United States, have performed strongly this year. Short-term market interest rates have declined as inflation has decelerated and monetary policy has eased broadly. Central banks are expected to continue lowering steering rates next year. In government bond markets, interest rates have shown no clear trend this year, except in France where rates have risen since the summer. Currency markets have been marked by the strengthening of the US dollar and the weakening of the Chinese yuan. Anticipated trade policy measures in the US are expected to further strengthen the dollar in the short term. The price of gold has reached record highs, primarily due to escalating geopolitical tensions. Cryptocurrencies, led by Bitcoin, experienced significant gains following the US presidential elections, although they remain subject to exceptionally high risks.

Commodity markets have also been calm despite rising tensions. The tense situation in the Middle East and production cuts by OPEC+ countries have had little impact on crude oil prices. The natural gas market in Europe is expected to remain stable. Electricity futures indicate stable development during the forecast period. Prices for industrial raw materials show no significant pressure in either direction. The price of Nordic pulp has developed favourably over the past year.

1.1.3Global Trade

The prolonged sluggishness in global trade is expected to end with a recovery in 2025. This recovery will be broad-based, with European trade in particular rebounding after a long decline. Global trade is expected to see modest growth of 0.9% in 2024, followed by an acceleration to 3.6% in 2025, before stabilising with a growth rate of 3.1% in 2026.

A key risk to the baseline outlook for global trade is the anticipated trade policy measures in the US and the likely responses from other nations. A potential trade war could significantly hamper trade growth. The fragmentation of the global economy into trading blocs would further slow global trade. Geoeconomic tensions are exacerbated by China’s position as a major producer of strategic raw materials. On the other hand, global trade could recover more quickly than anticipated if trade policy tensions materialise to a lesser extent than feared.

¹ Fiscal year (April 1st to March 31st)

Sources: Statistical authorities, MoF

Sources: CPB, Macrobond, HWWI, Statistics Finland, MoF

1.2Foreign trade

Finland’s foreign trade is recovering more slowly than expected due to the contraction of goods trade within the Eurozone. However, the global economy is expected to gain momentum in the coming years, boosting investments and imports. As the economy recovers, price growth is expected to remain moderate.

1.2.1Exports and imports

Finnish exports have recovered over the past year, driven by strong growth in services sold to Asia and Europe. Conversely, the contraction in goods trade within the Eurozone has continued, explaining the subdued performance of Finnish goods exports. The sluggish performance of goods exports is delaying Finland’s economic recovery, though the foreign trade cycle has reached its lowest point, with exports to emerging economies and the US gaining momentum. Due to the slow recovery of the Eurozone economy and goods trade, Finland’s foreign trade growth prospects remain weaker in the coming years than previously anticipated.

Although the impact of the strikes earlier in the year on goods trade was relatively short-lived, goods exports have remained subdued towards the end of the year. Goods trade is expected to improve next year as demand in Finland’s key export markets picks up. Recovery over the coming years is expected to be broad-based, with both goods and services exports closing the gap in growth potential. Improved price competitiveness will support exports and contribute to balancing the current account deficit. However, export growth is proving slower than expected, mainly due to the sluggish recovery of Eurozone economies, which affects Finland’s export demand, particularly in goods trade.

Imports will grow strongly next year as exports and the domestic economy recover. Investment growth will particularly support import growth next year. Projects related to the green transition, new data centres and fighter aircraft acquisitions involve significant import components. However, imports will slightly decline after next year and stabilise closer to pre-pandemic levels by 2027.

¹ As calculated in the national accounts

1.2.2Balance of payments

Export and import prices will decline further this year, although at a significantly slower pace than last year. The continuation of a general decline in price levels, particularly for crude oil and other energy products, has driven this trend. From next year onwards, as global trade recovers, the prices of goods and services are expected to rise. However, wage increases have already accelerated the growth of service prices this year. Prices for goods and services are expected to follow a steady upward trajectory from next year onwards, in line with the global economic recovery.

The current account is close to equilibrium this year but is projected to remain in deficit throughout the forecast period, driven by the service balance deficit. In recent years, this deficit has been exacerbated primarily by the acquisition of other business services abroad by the industrial sector. In addition, tourism and transport services have contributed to the deficit. The current account deficit is expected to level off at just under 1 percent of GDP, as a surplus in the trade balance offsets the deficit in the service balance. However, imports of investment goods will reduce the trade balance surplus. Goods imports are projected to grow by approximately 5 percent in 2025, stabilising at around 3 percent annually for 2026–2027.

1.3Prices and costs

Tax increases are driving consumer prices higher, but other inflationary pressures have remained moderate. The cost of owner-occupied housing is declining as interest rates fall, and inflation over the coming years is expected to be significantly slower than in recent years.

Inflation has remained around 1% in recent months. Price increases are primarily driven by services, even as the cost of owner-occupied housing has turned downward. Energy prices have continued to decline in recent months, particularly due to falling fuel prices.

The impact of indirect taxes, particularly VAT and tobacco tax increases, is expected to accelerate inflation over the forecast period. The direct impact of all indirect tax changes on inflation between 2025 and 2027 is estimated to be over one percentage point cumulatively. The forecast assumes that most tax changes will be fully passed on to prices. However, firms may not always be able to fully transfer tax increases to prices, which would result in a smaller impact on inflation.

Excluding inflationary pressures from tax increases, leading indicators continue to point to relatively moderate price pressures. Import prices are still declining, and the increase in freight costs from Asia to Europe has not been reflected in import prices. Oil prices fell during the autumn. Meanwhile, global food prices started to rise again. Domestically, producer prices in agriculture and industry continue to decline from the previous year. In the service sector, the increase in producer prices has continued to slow, and no significant changes have been observed in companies’ selling price expectations. The weakened labour market conditions do not support a rapid recovery in demand.

Services are expected to contribute the most to inflation during the forecast period. The rise in food and goods prices remains slow, although goods prices are not expected to return to their previous downward trend. The impact of energy on inflation will remain negative throughout the forecast period, provided that consumer electricity prices continue their gradual normalisation and there are no significant shifts in oil prices.

Mortgage and consumer loan interest rates have had a significant impact on the national consumer price index (CPI) in recent years, and this will remain the case during the forecast period. Due to rising interest rates, inflation as measured by the CPI has been faster than that measured by the harmonised index of consumer prices (HICP) over the past two years. However, in 2025 and 2026, as interest rates decline, the impact will reverse, and inflation measured by the HICP will outpace that measured by the CPI.

Inflation is expected to average 1.6% in 2024, 1.1% in 2025, 1.4% in 2026 and 1.8% in 2027. The slowdown in inflation next year is attributed to the negative impact of owner-occupied housing on inflation as interest rates decline. Conversely, inflation measured by the HICP will accelerate as the negative impact of energy wanes, increases in indirect taxes drive prices higher and demand for other goods gradually recovers.

Short-term risks to price developments are fairly balanced but, in the longer term, the risks are skewed upwards. High price levels, VAT increases and weak labour market conditions may continue to dampen demand more than anticipated. Conversely, on the upside, risks include wage increases stemming from new collective bargaining agreements and price effects resulting from geopolitical tensions or a potential trade war. Over the longer term, factors such as further slowing of globalisation, efforts to improve the resilience of supply chains and the economic impacts of climate change mitigation could drive prices higher than usual in the coming years.

¹ As calculated in the National Accounts

² Harmonised index of consumer prices, excluding energy and food

1.4Wages and incomes

The pace of wage growth in the coming years will largely depend on the new collective bargaining agreements to be negotiated soon. Nominal wage growth is expected to exceed inflation. The combined purchasing power of households is expected to grow in 2024 as consumer price inflation moderates. However, in 2025, purchasing power growth is anticipated to stall due to weak labour market conditions, cuts to social benefits and increases in VAT, which will constrain households’ disposable real income.

In the first three quarters of 2024, nominal wage growth slowed to 3.3% compared to 4.0% last year. In the third quarter, wages rose by 2.6% year-on-year. The slowdown resulted from a decrease in the growth rate of contractual wages, although wage drift increased. Additionally, one-off payments made last year inflated the base of comparison. The growth in contractual wages slowed, particularly in the local government sector, but similar trends were observed in other public and private sectors. By industry, the most significant slowdowns in earnings growth occurred in real estate services, retail and social services. Real wages increased by 1.5% in the first half of the year, as earnings growth outpaced inflation for four consecutive quarters.

Many two-year collective bargaining agreements will expire at the end of 2024 or in early 2025 across both private and public sectors. Agreed wage increases were generally around 4.5% annually in 2023. In 2024, the annual impact of these contractual increases will be approximately 1.5 percentage points due to the absence of one-off payments included in the previous agreements. However, wage drift is expected to increase earnings further. In many industries, the timing of negotiated increases is earlier in the year compared to 2023. In local government, wage increases will continue to significantly outpace those in other sectors in 2024. Overall, nominal wages are projected to rise by approximately 3% in 2024.

Real wages declined by more than 6.5% between 2021 and 2023. This real wage gap will not be fully closed over the next two years. From 2025 to 2027, with most collective agreements expiring, real wage growth in the economy is expected to align with subdued productivity growth. Local government wage increases will remain substantial in 2025. Nominal wages are forecast to grow by just over 3% annually between 2025 and 2027. Structural factors suggest limited upward pressure on nominal wages, as unemployment remains above its structural level.

The total wage bill increased by 1.5% in the first half of the year. This growth was driven almost entirely by higher earnings, as the number of employed persons declined. The public sector, particularly local government, experienced the fastest growth in the total wage bill. In the private sector, the wage bill grew in finance, insurance and social services but contracted in construction due to declining employment.

The development of the wage bill depends not only on nominal wages but also on overall employment and the reallocation of labour across industries. As employment declines, the wage bill is expected to grow by about 2% in 2024, with nominal wage growth slowing. In 2025, nominal wage growth is expected to accelerate compared to 2024, while employment increases only slightly, leading to a 4% increase in the wage bill. Between 2026 and 2027, nominal wage growth is expected to remain around 3%, with employment growing by just over 1% annually. Under these assumptions, the wage bill is forecast to grow by around 4½% annually in 2026 and 2027.

The real earnings of wage earners began to grow in 2024 but, at the same time, the growth of the wage bill slowed due to weak labour market conditions. The average interest rate on mortgage debt began to decline in summer 2024, and this downward trend is expected to continue into 2025, providing some relief to indebted households.

The purchasing power of households, as measured by real disposable income, is forecast to grow by approximately 2% in 2024. This increase has been driven by the sharp deceleration in inflation, resulting in significantly lower price increases for private consumption than in previous years. Purchasing power has also been boosted by the large index-linked increases to pensions, which have driven a substantial rise in cash social benefits received, as well as a reduction in social security contributions due to lower unemployment insurance contributions.

In 2025, the growth in real disposable incomes is expected to slow markedly. The growth of cash social benefits will come to a halt as pension index increases shrink, and cuts to social benefits, along with index freezes, begin to take effect. The wage bill will continue to grow sluggishly, as labour market conditions are not expected to improve significantly in 2025. Private consumption prices will rise slightly faster due to VAT rate increases, further weighing on household purchasing power.

In 2026, purchasing power is expected to improve as employment begins to recover and the growth of the wage bill accelerates.

¹ The index of wage and salary earnings divided by the consumer price index.

² Computed by dividing the national wage bill by the number of hours worked by wage and salary earners. The figures are affected by structural changes in the economy.

³ Compensation of employees divided by gross value added in volume at basic prices.

1.5Consumption

Despite easing inflation and declining loan interest rates, households have reduced consumption and increased savings. Weak labour market conditions are dampening consumer confidence but, as interest rates decline, accumulated savings are expected to be gradually spent, leading to a modest 1% growth in private consumption in 2025. The development of public consumption expenditure is constrained by government austerity measures.

Although household disposable real incomes began to grow in 2024 due to slowing inflation, this has not been reflected in household consumption, which has been on a downward trend during the year. As incomes have increased while consumption has remained weak, household savings have grown significantly.

While the growth of real incomes is expected to slow down in 2025, private consumption is anticipated to increase as lower interest rates reduce the financial burden on indebted households and accumulated savings gradually flow into consumption. Consumption growth is expected to accelerate in 2026 as labour market conditions improve.

Prices for private consumption are estimated to increase by only 1% in 2024 due to declining energy prices and moderation of other prices. In 2025, increases in VAT rates and stabilisation of energy prices will lead to a 2% rise in private consumption prices.

Consumer confidence improved slightly during the autumn but remains significantly below average. While consumers view Finland’s economic situation as particularly bleak, their perception of their personal financial situation has improved compared to earlier in the year.

Private consumption declined during 2024, particularly in the second quarter, when consumption fell more sharply than anticipated. Additionally, the Statistics Finland data series revision, published on 18 September, lowered the level of household consumption expenditure in nominal terms from 2010 onwards by as much as EUR 3.5 billion annually, equivalent to 2.7% of total consumption. The largest monetary adjustments in the revised data affected healthcare services.

Consumption of durable goods declined significantly in 2024, reaching its lowest level since 2015. New passenger car registrations have remained low, and the shift in demand to the used car market has not fully offset the drop in new car consumption. However, consumer survey data on purchase intentions for durable goods improved slightly during the autumn, suggesting that consumption of durable goods is likely to recover in 2025.

The consumption of short-lived goods, including food, energy and fuel, fell by 3.5% in the second quarter of 2024, marking the largest single quarterly drop in the 21st century. Historically stable quarterly consumption trends for short-lived goods have become unusually volatile since 2020, complicating forecasts for private consumption as a whole. The reasons for these significant fluctuations remain unclear, but the increasing reliance on highly volatile pricing mechanisms, such as those for electricity traded on spot markets, may be a contributing factor.

Consumption of services underperformed expectations in 2024, remaining at the same level as the previous year. In 2025, services consumption is expected to increase as consumer confidence improves.

Following the national accounts revision, household savings rates have been revised significantly higher from 2010 onwards. Since the global financial crisis, the average net savings rate is now approximately 2%, compared to less than 1% prior to the revision.

In 2024, the savings rate is expected to rise to nearly 4% as households reduce consumption. In 2025-2027, the savings rate is projected to decline towards 2% as consumption recovers and income growth slows.

The household debt ratio declined rapidly in 2023 due to reduced demand for new housing loans. Despite falling interest rates, housing loan demand remained subdued in 2024, resulting in a continued decline in the debt ratio. The debt ratio is expected to rise slightly in 2025 as interest rates fall further and housing loan demand strengthens.

Public consumption grew by 3.4% in 2023. Growth in public consumption is projected to slow to approximately 1.2% this year, contract by 0.5% in 2025 and decline further by 0.4% in 2026. The development of public consumption expenditure is constrained by government austerity measures and structural adjustment efforts by wellbeing services counties.

The value of public consumption will be mainly supported by rising prices during the forecast period. Wage growth in the public sector will be driven by agreements on municipal and welfare sector salary system reforms, as well as contracts to standardise wages in wellbeing services counties. These agreements are expected to maintain wage growth in the local government sector above the overall economy’s wage growth rate until 2027. Public sector wage agreements will expire in spring 2025, and new agreements will influence wage development in subsequent years.

¹ Household debt at end-year in relation to disposable income

1.6Investments

Construction is recovering from a deep slump, but the rise in residential construction is slow. The energy transition is accelerating investments by companies, and defence acquisitions are boosting public sector investments.

The decline in investments continued during the first three quarters of the year. The decline was particularly steep in housing construction. This year, investments in machinery and equipment have also clearly decreased. However, the worst in construction is probably behind us and some growth in non-residential construction has already been seen since the beginning of the year. In machinery and equipment, the decline is likely to be short-lived and investments will clearly grow, driven by the energy transition and defence investments. In 2024, investments will contract by a total of 5.6%, but they are expected to grow by 7.4% next year, 2.6% in 2026 and 4.1% in 2027.

Residential construction investments have declined from their peak at the start of 2022 by about 36%. During the first three quarters of 2024, housing construction continued to decline, but it appears that the bottom has been reached. Housing construction will contract by a total of 12% in 2024 but is expected to grow by about 5% next year. The number of housing starts produced on market terms is still exceptionally low, and currently, state-subsidized residential construction maintains new housing construction. Residential construction as a whole is also supported by repair construction, although a slight decline has been seen there, too.

However, there are signs of improvement. The housing market recovery has started with the fall in interest rates. Sales volumes have taken a moderate upturn and at least the decline in home prices has come to a halt. There should also be demand for housing, as internal migration and active immigration are increasing the need for housing. Currently, construction activity is clearly below the level required to meet long-term needs. Nevertheless, housing construction will not recover overnight because there are still unsold dwellings in the wake of the construction boom of the past few years, and the price difference between new and old dwellings is still too significant for the new dwellings to sell well enough.

The situation in non-residential construction is better than in housing construction even though it, too, has decreased substantially. During the first three quarters of 2024, non-residential construction took a slight upturn. Non-residential construction will contract by 5% this year but grow by 6% next year. The recovery of construction is also being boosted by construction relating to the energy transition and the investment programme of the Government. There are nearly EUR 270 billion worth of green transition investment plans in Finland. While most of these plans will not materialize, a substantial number of projects are already planned for next year, many of which have already started or been decided upon. These projects involve investments in data centres, wind power and batteries.

Investments related to the energy transition are also significantly boosting machinery and equipment investments. The decline seen this year in machinery and equipment investments is therefore expected to be temporary. Affordable energy has made Finland an attractive investment destination, and in addition to the energy transition, growth will stem from investments in digitalization and the utilization of artificial intelligence. Machinery and equipment investments will also increase due to defense spending, particularly fighter jet acquisitions in the coming years. The size and timing of the investments involve a great deal of uncertainty. In addition, the investments are also affected by the military aid packages to Ukraine since they are recognised as negative investments in the national accounts. Especially for 2025, there will be a substantial growth in investments in terms of investments in both defence and the green transition.

Investments in research and product development as well as software and database investments have been on the increase even though there was a dip in 2023. Growth will continue because Finland plans to increase R&D funding to 4% of GDP by 2030. This is supported by the growth of public R&D funding, the tax deduction right for R&D expenditure that entered into effect at the beginning of 2023, as well as financial support and loans under the EU’s Recovery and Resilience Facility. Research and product development is also driven by technological progress, which encourages companies to invest in R&D activities.

Public investments will grow this year even though deficits limit the investment capacity of central and local government. State investments are increased by strengthening border control and national defence, as well as EU investment funding. The Act on Research and Development Funding will also substantially increase central government investments between 2024 and 2030. In 2025, the first deliveries of the Finnish Air Force’s multirole fighters will substantially increase public investments, which will remain at high level for several years. In local government, investment pressure will remain at an elevated level due to population migration and the repair backlog of the building stock. On the other hand, increased costs and financing costs slow down investments. Government decisions have a significant impact on the development of public investments.

¹ Includes also other cultivated assets and intellectual property products

1.7Domestic production

Total output is starting to rise. The turn is a result of the improving development in secondary production.

1.7.1GDP and productivity

Economic output growth started in early 2024 following the downturn in the second half of last year. Total output increased in every quarter of the year. In July–September, gross value added for the economy was 1% higher than at the end of last year. With the exception of construction, the value added generated by the main industries was higher in the third quarter than at the end of last year. Construction output has continuously declined year-on-year for two years, and a rapid turnaround is not in sight.

The development of economic productivity is weak. In 2022 and 2023, value added per working hour decreased by slightly more than half a percent per year on average. In 2024, productivity has increased by about half a percent. More output per working hour has been achieved compared to last year, particularly in primary production, but also in manufacturing. The productivity of services is continuously deteriorating for the second year. Labour productivity will improve cyclically, particularly in 2025, as output will increase ahead of a significant rise in labour demand. In 2026 and 2027, productivity growth will slow down again as output growth slows down.

Total output will decline further in 2024. Manufacturing output is still suffering from stagnant export markets, causing the value of new orders to decrease. In addition, output was also hit by strikes at the start of the year. Even though the sharp decline in construction is ending, construction output in 2024 is well below the levels of 2023. In 2024, the value added of the national economy will contract by 0.2%, as secondary production output will decline at the rate of last year. Output will be maintained by services and especially primary production in certain industries.

Output is expected to recover from 2025 onwards, driven not only by industrial output accelerated by export demand but also by the recovery of construction enabled by interest rate cuts and the creation of services resulting from this, too. The growth rate projected for 2025 is 1.3%, and growth of 1.5%, the average rate for this millennium, is projected for 2026. In 2027, total output growth is expected to slow down again to 1.3%.

1.7.2Sectors

Despite the tough start to the year, the outlook for manufacturing has improved slightly. Value added in manufacturing is slightly negative for the current year and is expected to grow by about 3 percent in the next year. The growth in value added will level off to about 2 percent from 2026 onwards. The latter part of the year in particular has been quite promising for manufacturing, as growth has been seen in several of the most significant industry sectors in the third quarter of the year. The volume of value added in industrial production has increased, especially in the forest and chemical industry.

However, the development of turnover has been relatively modest in the industry sector and there is hardly any growth in the big picture. New industry orders also remained more or less at the same level during the autumn. During the first half of the year, industrial output suffered from weakness in the export markets and strikes in the early part of the year. However, the upward trend in industrial export turnover towards the end of the year offers cautious indications of improvement.

Forest industry output and turnover increased in the autumn compared to the year before. The development has been relatively positive, although the growth outlook is slightly weaker in Germany and across Europe, which are the main export markets for the forest industry. In the chemical industry, output and new orders are also growing compared to the year before, although turnover has decreased. Correspondingly, in the metal industry, output and new orders decreased in the autumn compared to the year before. The turnover of the metal industry has grown slightly despite the weak start to the year. However, the volume of manufacturing increased during the autumn, especially driven by the forest and chemical industry.

The value added of construction has declined sharply since the beginning of 2022, and the level of output is now approximately a quarter lower than before the onset of the downturn. However, this year the decline in construction has halted, and recovery is expected to begin next year. The turnover in construction has already been growing, and the extremely weak outlook for construction has slightly improved. In 2024, construction will still be about eight percent lower on an annual basis compared to last year. Next year, the value added of construction is expected to grow by just under five percent, with growth accelerating in 2026. The recovery in construction will be supported by the rebound in residential construction and investments related to the energy transition.

As regards the trade sectors, 2024 has been very weak. In January–October, trade sales volumes decreased by 3%. The hike of the standard value-added tax rate that took place in September led to a significant decline in trade sales volumes, with only a slight improvement in October. Value added in trade for the whole of 2024 is projected to show a substantial decline, as the hike in value-added tax will worsen the outlook for trade in the rest of the year, too.

In other private services, the current year has also been weak, and sales volumes decreased by 0.7% in January–October. In September, the increase in VAT clearly reduced the sales volume of other services, and demand in October also remained fairly weak.

In 2024, the value added of private services will be lower than in the previous year. On the other hand, the volume of public services is expected to grow clearly in 2024, maintaining the total value added of services at the previous year’s level.

Confidence in other private service sectors improved in November according to the Business Tendency Survey of the Confederation of Finnish Industries (EK). In particular, sales expectations in the coming months have increased in services. On the other hand, confidence in retail trade continued to be fairly weak.

In 2025, value added in services will grow half a per cent and about one per cent in 2026, as falling interest rates and faster growth in manufacturing and construction will boost the demand for private services.

¹ Share of total value added at current prices

1.8Labour Market

The improvement in the labour market development is shifting to 2025. Unemployment remains higher than its structural level.

The turn for the better in the labour market is shifting to next year. According to trend observations, the number of people in employment in autumn 2024 was about 26,000 fewer than at the beginning of the year. Moreover, the number of unemployed people continues to show a pronounced upward trend. The decline in the number of people in employment was most strongly affected by the decrease in employment in manufacturing and construction as well as in business services. The decline was slowed down by the growth of employment in health and social services. The number of hours worked declined less than the number of employed persons even though the number of part-time employees decreased.

In 2024, the number of employed people will decline by one per cent due to weak labour demand caused by the sluggish economy. There have been fewer job vacancies in services and manufacturing this year than in 2023. In addition, companies are planning to employ significantly fewer people, especially in construction and retail. The number of employed persons in construction remains clearly below the 2023 figure. However, the general shortage of skilled labour is causing companies to hold on to their employees to some extent, as there are signs of recovery in the economy. In addition, local government will employ more persons in healthcare in particular. Due to the decline in employment and the substantial number of layoffs, the number of hours worked will clearly contract across the economy.

2025, the strengthening economic recovery will drive an increase in demand for labour. In-creased immigration supports labour supply in addition to the high number of unemployed people. Due to the still subdued economic growth, the Government’s policy measures supporting employment are not expected to significantly increase the number of people in employment, even though they support the supply of labour. The number of people in employment will increase only by 0.2 percent on average, as the turn for the better in employment is not expected until later in the year.

Despite the adjustment of general government finances, economic growth in 2026 and 2027 will be relatively strong and employment will increase annually by an average of about 1%. Growth in employment is broad-based and it is also supported by the measures boosting the supply of labour introduced by the Government, the first of which took effect in 2024. It is estimated that, in 2027, the measures will increase the number of employed persons by a few tens of thousands. The employment rate in the age group 15–64 will rise close to 73%, but it will remain at a level lower than during the previous peak in 2022. In addition to demand and policy measures, employment growth will also be supported by an increasing working-age population. In 2027, increased immigration is projected to result in the 15–64 age group exceeding the autumn forecast by over 60,000 people. Although not all immigrants will have entered employment yet, the employment rate is expected to nearly reach its previous peak of 2022 by 2027.

The number of unemployed persons increased in the early months of the year across the board and especially in construction and specialist professions. Unemployment among men increased slightly more than unemployment among women. In particular, in the age group 35–44, unemployment among men increased largely at the same rate as among women in the age group 25–34. This means the active population in the labour market is large, up 14,000 year on year. The number of persons in the active population has also been increased by brisk immigration.

The rise in unemployment will continue in 2024 and in a more subdued manner in 2025. The contraction of construction activity, in particular, will increase unemployment in secondary production. In manufacturing, too, employment will contract from the high level. The unemployment rate will rise on average to nearly 8.5% across the economy in 2025.

The turnaround in the economy and employment in 2026 and 2027 will reduce unemployment, but the competence requirements set for skilled workers will slow the reduction in unemployment. The unemployment rate will remain at 7.5% in 2027, which is about 0.5 percentage points above the level of structural unemployment in Finland estimated using the common methodology of the European Commission.

1.9Medium-Term Outlook 2028–2029

Over the medium term, economic output is projected to grow 1.4% per year. The employment rate will rise to 73.9% in 2029.

The medium-term projection is based on an estimate of potential output growth, which is considered to determine the medium-term and long-term growth potential of the Finnish economy.³ Potential output refers to the economy’s long-term growth path or a sustainable level of output that ensures stable inflation, which is achievable when economic capacity is in normal use.⁴

Over the medium term, economic output is projected to grow moderately. In 2028 and 2029, GDP growth will be 1.4% per year. The factors supporting GDP growth include the growth in private investments, which are expected to remain strong due to investments related to the green transition. The Finnish economy is projected to remain below its normal capacity in 2028. However, economic output will approach the estimated potential output level, and the output gap will be closed at the end of the outlook period in 2029.

The employment rate (ages 15–64) is projected to increase moderately in 2028 and 2029. The employment rate will rise to 73.4% in 2028 and to 73.9% in 2029. In addition to the rate of economic growth, the positive growth in employment will also be influenced by the employment measures of the Government’s structural policy. The unemployment rate in turn is projected to fall and the unemployment gap is expected to close in 2029.⁵ In 2029, the unemployment rate is expected to be 7%.

The rise in consumer prices is expected to reach alignment with the European Central Bank’s medium-term inflation target in 2028. The change in consumer prices is expected to be 2% in 2028 and 2029.

During the period 2024–2029, potential output is projected to grow by about 0.8% per year on average. The development of potential output depends on the development of labour input, capital stock and total factor productivity. It is estimated that, in the period 2024–2029, the average growth contribution of the labour input will be about 0.3% each year. The growth contribution of the labour input is weakened by the decrease in the growth impact of hours worked by each employed person, which has continued for several years. As a result of positive net immigration, the working-age population is projected to grow more in the medium term than before. The growth of the working-age population increases the growth impact of the labour input.

In addition to labour input, the production conditions of the economy are also influenced by the capital stock. Growth in capital stock will boost potential output growth by around 0.3% each year between 2024 and 2029. Growth contribution of capital stock has remained relatively stable throughout the 2000s.

Total factor productivity is the third source of potential output growth. This is expected to grow at a slightly faster rate towards the end of the outlook period, compared to the situation a few years ago. However, productivity growth remains weak compared with the early 2000s. The weak growth is due to such factors as structural changes in the Finnish economy. The output of high-productivity sectors has declined, and services have become more predominant in the overall structure of the economy. Slow productivity growth has also been a typical feature of other developed economies, but labour productivity growth has been particularly slow in Finland. In the period 2024–2029, total factor productivity is expected to grow at an annual average rate of about 0.1%, down from an annual average of about 2% in the early 2000s.

¹ Estimated according the method developed jointly by the EU Commission and Member States

2General Government Finances

2.1General government

The year 2024 has been challenging for public finances. The deficit is deteriorating to 4.2% of GDP, while the debt ratio exceeds 82%. Despite extensive fiscal consolidation measures, the deficit will only begin to improve gradually from 2025 onwards, as significant procurement projects simultaneously increase expenditure. The pace of debt accumulation will also begin to slow from 2025 onwards.

The general government deficit reached 4.2% of GDP in 2024 due to weak economic conditions, an increase in contingency expenditure and the lingering effects of rapid inflation in previous years. Tax revenues continued to grow, albeit sluggishly. The significant reduction in unemployment insurance contributions also weakened the budgetary position. As a result of the large deficit and, among other factors, defence procurement financing, public debt is projected to rise rapidly beyond 82% of GDP in 2024.

In 2025, the deficit is expected to improve to 3.5%. Although substantial defence procurement increases expenditure, fiscal consolidation measures decided in the Government Programme and the spring 2024 spending limits discussion will significantly reduce expenditure and increase revenue. In the following years, the budgetary position will continue to improve gradually, reaching 2.0% by 2029.

Public debt will surpass 82% of GDP in 2024, representing an increase of over 5 percentage points from the previous year. This rapid growth is attributed to deficits in sectors accumulating debt, weak economic conditions and financing for the F-35 procurement project, which has not yet been reflected in the deficit but is already being financed. Additionally, statistically recorded debt is being driven by factors such as an increase in state-guaranteed housing loans. In 2025, the growth of the debt ratio is expected to slow as savings measures take effect and the economic situation improves. Subsequently, the growth of the debt ratio will decelerate further, with the debt ratio forecast to reach approximately 87% by the end of the projection period in 2029.

In the long term, an imbalance persists between general government finances revenues and expenditure, representing a structural sustainability gap. The sustainability gap indicates the degree to which general government finances would need to be strengthened in the near future to ensure long-term fiscal balance. The Ministry of Finance estimates the sustainability gap to be around 1.5% of GDP, equivalent to approximately EUR 5 billion at 2029 levels. Compared to the previous forecast, the sustainability gap estimate has decreased by approximately 0.5 percentage points. The revision is influenced by updates to demographic scenarios and forecast adjustments.

Among the subsectors of general government, central government remains the most deficit-ridden. Central government’s fiscal position will deteriorate in 2025, despite extensive fiscal consolidation measures being implemented. Expenditure is being driven by national defence and border security requirements, among other factors. Although tax revenue growth has been slow, it is expected to recover as a result of tax increases. Interest expenditure will continue to rise due to higher interest rates and increased debt levels. While central government’s fiscal position will improve over the forecast period, it will remain significantly in deficit.

The local government deficit is expected to remain at approximately 1.1% of GDP in 2024, improving to 0.7% in 2025. However, the deficit in municipal administration is projected to deepen to 0.6% of GDP between 2025 and 2027, as temporary reductions in state transfers slow revenue growth for municipalities. Growth in expenditure in the wellbeing services counties will slow markedly in 2025, with increased state funding improving their budgetary position. Despite ongoing fiscal consolidation efforts, the need for further adjustment measures in the wellbeing services counties remains substantial.

Social security funds are estimated to have a surplus of 0.4% of GDP in 2024. This surplus is expected to increase to 1.6% of GDP in the coming forecast years. Earnings-related pension institutions will remain in surplus throughout the forecast period, driven in particular by growth in property income. The growth of pension expenditures was rapid in 2024 but will decelerate in 2025 as inflation subsides. The budgetary position of other social security funds will gradually improve during the forecast period, achieving balance by the end of the period. The deepened deficit of 2024 is primarily explained by the reduction in unemployment insurance contributions.

¹ Incl. capital taxes

² Net lending excluding gross interest expenses

¹ Net lending excluding gross interest expenses

² Regulation (EU) 2024/1263 of the European Parliament and of the Council, Article 2(2)

2.2Central government

The central government’s fiscal position will weaken in 2025, despite numerous measures implemented by the government to balance finances. Expenditure is being driven by national defence and border security requirements, among other factors. Tax revenue growth has been slow but is expected to accelerate due to improved economic conditions and decisions on taxation. However, interest expenditure is rising due to higher interest rates and growing debt levels. While central government’s fiscal position will improve over the forecast period, it will remain significantly in deficit.

In the spring 2024 spending limits discussion, in addition to major consolidation measures outlined in the Government Programme, Prime Minister Petteri Orpo’s government decided on further additional measures worth EUR 3 billion to strengthen general government finances starting in 2025. Although these and previously decided measures will improve the central government’s budgetary position, it will continue to be burdened by earlier expenditure-increasing decisions, rising interest costs, and slow tax revenue growth. During the forecast period, central government expenditures will also be increased by the F-35 fighter project and additional costs caused by Russia’s war of aggression, including spending on national defence, immigration and security of supply. In 2025, the rapid increase in funding for wellbeing services counties will further boost central government expenditure.

Inflation and moderation in wage growth have slowed the growth of consumption expenditure. From 2025 onwards, savings measures across nearly all administrative sectors will curb the growth of consumption expenditure. In addition, responsibility for the provision of public employment and business services (TE services) will be transferred from central government to municipalities. The costs associated with this transfer will be offset by increased state transfers to municipalities. Central government’s share of all public sector consumption expenditure has been declining throughout the 21st century, and this trend is expected to continue in the coming years.

In 2024, investments rose sharply as procurement projects to replace defence materials donated to Ukraine were launched. The new Act on State Financing of Research and Development 2024–2030 is also boosting investment from 2024 onwards. Deliveries of F-35 multirole fighters, starting in 2025, will elevate the level of investment to unusually high levels through to the end of the forecast period. The 2025 budget proposal includes significant investments in rail transport, road resurfacing and reducing infrastructure repair backlogs. Border control investments will also increase, with new patrol vessels to be delivered to the Border Guard in 2025 and 2026. In the latter part of the forecast period, investments will also be boosted by the delivery of vessels under the Defence Forces’ Squadron 2020 project.

Interest expenditure by central government has risen rapidly due to increasing interest rates and debt levels. In 2024, interest expenditure in the national accounts framework is estimated at EUR 2.8 billion. Despite recent interest rate reductions, interest expenditure will continue to grow and is projected to reach EUR 4.8 billion, or 4.6% of total central government expenditure, by 2029.

Central government tax revenues grew modestly in 2024. In 2025, tax revenue growth will accelerate due to improved economic conditions and tax measures decided by the government in the spring of 2024. Between 2026 and 2029, tax revenues are forecast to grow by an average of 3.3% per year.

Revenue from direct taxes stagnated in 2024 compared to the previous year. Corporate tax receipts declined, and household income tax growth was under 1%. In 2025, the operating surplus of businesses and wage sum growth are expected to improve, leading to better growth in corporate and household income taxes.

Production and import tax revenues grew by approximately 2% in 2024, but growth is expected to accelerate to nearly 7% in 2025. From 2026 to 2029, growth will average 2.4% annually. Value-added tax (VAT) constitutes over 70% of production and import taxes, with its growth peaking in 2025 due to the general VAT rate increase introduced in September 2024. The changes to tax bases outlined in the Government Programme will also take effect in 2025. Other taxes on production and imports include for example taxes on energy and the vehicle tax and the revenue of these two tax categories will contract in all years of the forecast period.

Central government’s budgetary position is expected to weaken at the beginning of the forecast period as a result of weak revenue development due to slow economic growth, increased investment expenditure and rising funding for wellbeing services counties. From 2026 onwards, the budgetary position is forecast to improve due to fiscal consolidation measures and a recovering economy, reaching a deficit of 2.7% of GDP in 2029.

¹ Includes gift and inheritance taxes

² Net lending excluding gross interest expenses

2.3Municipal administration

The municipal administration deficit will deepen to 0.6% of GDP in 2025-2027 due to, among other things, an increase in consumption expenditure and investments as well as cuts in central government transfers to municipalities. The growing imbalance between expenditure and revenue in municipal administration will increase the need for consolidation measures.

The municipal administration deficit is expected to remain at approximately EUR 1.2 billion in 2024, or 0.4% of GDP, nearly unchanged from the previous year. Economic stagnation is reducing municipal corporate tax revenues in 2024, although other tax types are expected to develop positively. State transfers to municipalities are decreasing due to retrospective adjustments related to the health and social services reform and government-decided index savings.

The municipal administration deficit is projected to deepen to 0.6% of GDP between 2025 and 2027. Consumption expenditure by municipal administration will continue to grow relatively rapidly during the forecast years, primarily due to price increases. Although inflation has returned to moderate levels, wage development in the municipal sector is expected to exceed the general wage growth during 2025–2027 because of previously agreed programmes to reform municipal salary systems. Labour agreements in the municipal sector are set to expire in the spring of 2025, so the terms for the coming years will be determined later.

In addition to price increases, consumption expenditure volume will rise exceptionally in 2025 due to the TE services reform. Under this reform, municipalities and joint municipal authorities will assume responsibility for organising these services, and their financial responsibility for unemployment benefits will also increase. Post-reform, employment trends will have a greater impact on municipal finances, making municipal administration more sensitive to economic cycles. However, municipal responsibilities will continue to focus primarily on education and cultural services, where the overall demand for services is declining. The decreasing number of pupils will not directly reduce education costs at the same rate, so this reduction in the demand for services has been moderated as usual in the expenditure pressure calculations.

In addition to consumption expenditure pressures, municipal administration expenses are increasing due to investments. The deteriorating financial situation of municipal administration and rising financing costs highlight the importance of careful assessment of investment needs. Nonetheless, there are numerous essential investments, as municipal investments are primarily directed towards buildings, roads and other core infrastructure.

In 2025, state transfers to municipalities will grow due to the new responsibilities arising from the TE services reform. However, these increases will be accompanied by significant cuts between 2025 and 2027, including retrospective adjustments related to the health and social services reform and an index cap of one percentage point decided by the government.

Tax revenues remain the most significant income source for municipalities. Weaker financial prospects were expected to prompt municipal tax rate increases, but only about one-fifth of municipalities raised their tax rates for 2025. The average municipal tax rate across Finland will rise to 7.59% in 2025, generating an estimated additional EUR 85 million annually in municipal tax revenues. However, it is clear that tax revenues alone will not suffice to address the growing expenditure pressures in municipal administration. As a result, municipal fiscal consolidation efforts are expected to focus on curbing expenditure growth. This is supported by reports from many municipalities in the autumn about launching co-determination negotiations.

Deficits are increasing municipal administration debt, and the debt-to-GDP ratio will continue to grow during the forecast years.

¹ Excl. Helsinki's social welfare and health care services and rescue services

² Net lending excluding gross interest expenses

2.4Wellbeing service counties

Expenditure growth in wellbeing services counties will slow significantly in 2025, and increased state funding will improve their budgetary position. Nevertheless, the need for fiscal consolidation in these regions remains substantial.

The growth in expenditure for wellbeing services counties slowed significantly in 2024, and their financial position stabilised. However, the imbalance between revenue and expenditure remains. Expenditure still significantly exceeds revenues, leaving counties with substantial accounting deficits. The sector’s budgetary position under the national accounts framework stands at -0.7% of GDP.

In 2025, the budgetary position is expected to improve to -0.1% of GDP. This improvement is driven primarily by increased state funding, alongside expenditure-reducing consolidation measures. Wellbeing services counties have prepared significant consolidation measures in their budgets, with an estimated impact of EUR 0.5 billion accounted for in the 2025 forecast. Accounting results for the counties are expected to show a slight surplus or balance. In subsequent years, the sector’s budgetary position is expected to weaken slightly due to expenditure growth and the forecast reduction in state funding in 2028 based on spending limits.

In 2025, consumption expenditure in the counties is forecast to grow by just over 2%, compared to an estimated 5% growth in 2024. This moderation reflects adjustments to the counties’ responsibilities made by the government and consolidation measures implemented by the counties themselves. It is assumed that salary increases in the counties will follow general wage growth trends, with additional increases tied to agreed pay programmes through to 2027. The assumption regarding the scale of wage increases is based on established forecasting practices. As the current agreement period is ending, future increases could be higher or lower than anticipated. Investments in the counties are expected to remain high in 2024 but will decline slightly in subsequent years. However, large-scale investment projects are anticipated to maintain investment levels at a relatively high rate in the coming years.

The main revenue source for wellbeing services counties is state funding, complemented by a much smaller share from client fees. State funding will increase significantly in 2025 as retrospective adjustments based on 2023 data are incorporated into the budget. In the forecast for the coming years, the amount of retrospective adjustments is based on provisions made in the state budget and spending limits. If counties’ expenditure were to develop as predicted, the retrospective adjustment would be larger. Broad increases in client fees will also take effect in 2025.

The counties face substantial fiscal consolidation requirements to address the deficits accumulated in the first two years of their existence. Preliminary budget and other data have been used to estimate the extent of these measures in the forecast. The actual scope of consolidation may differ from these estimates. Labour shortages in the counties also present challenges, potentially increasing reliance on service purchases and associated costs, while slowing wage growth and impairing service availability. Risks are also linked to the outcomes of wage negotiations.

¹ Incl. Helsinki's social welfare and health care services and rescue services

² Net lending excluding gross interest expenses

¹ Net lending excluding gross interest expenses

2.5Social security funds

Social security funds are estimated to have a surplus of 0.4% of GDP in 2024. This surplus is expected to increase to 1.6% of GDP in the coming forecast years. Employment pension schemes will remain in surplus throughout the forecast period, driven in particular by growth in property income. The budgetary position of other social security funds will gradually improve during the forecast period, achieving balance by the end of the period. The deepened deficit of 2024 is primarily explained by the reduction in unemployment insurance contributions.

2.5.1Employment pension schemes

In 2024, the surplus of employment pension schemes is estimated at 0.9% of GDP. The surplus will gradually improve to 1.6% of GDP by 2029. Pension expenditure is projected to increase by just under 7% in 2024 compared to the previous year, primarily due to index adjustments. The growth in expenditures will decelerate in subsequent forecast years, with average annual growth of approximately 3%.

The budgetary position of employment pension schemes remains in surplus, driven by growth in property income. However, property income growth in 2024 has been slower than anticipated, leading to weaker results across the forecast period. The primary risks in the sector’s forecast are tied to developments in property income. Predicting property income is particularly challenging due to rapid changes in interest rates and their effects on both fund and interest income. In addition to property income, earnings-related pension contributions provide significant revenues for the sector. Between 2022 and 2025, employer pension contributions are higher to compensate for reductions introduced in early 2020. The revenues of pension institutions are estimated to grow by just under 6% in 2024, with similar growth expected in 2025. In subsequent years, annual revenue growth is forecast to slow to an average of just under 4%.

¹ Net lending excluding gross interest expenses

2.5.2Other social security funds

Other social security funds are expected to post a deficit of 0.5% of GDP in 2024. Their budgetary position is forecast to improve to -0.2% of GDP in 2025 and gradually achieve balance by the end of the forecast period.

In 2024, total expenditure for other social security funds is projected to grow by slightly under 6%. From 2025 onwards, expenditure growth is expected to turn negative, driven by fiscal consolidation measures outlined in the Government Programme and spring budget negotiations for 2025–2027. A significant portion of these measures target unemployment-related expenses. Unemployment, however, has risen sharply in 2024 due to weak economic conditions, leading to increased unemployment expenditure since 2023. Unemployment costs are projected to gradually decline as unemployment decreases and consolidation measures take effect. The impact assessments of these measures indicate a gradual reduction in unemployment costs. In the latter years of the forecast period, total expenditure will see a slight uptick due to growth in non-unemployment-related expenses.

The revenues of other social security funds are expected to decline by over 6% in 2024 but rebound with growth of just under 3% in 2025. The decline in 2024 revenues is primarily due to the reduction in social security contributions collected, largely driven by lower unemployment insurance contributions. The reduction in unemployment contributions stems from the Employment Fund’s cyclical buffer being filled and the impacts of measures outlined in the Government Programme. Starting in 2025, the redistribution of financial obligations (so-called channelling solution) will impact the social security contributions received by the sector. Under this arrangement, unemployment insurance contributions will be reduced based on anticipated savings in benefits, while health insurance contributions will be increased. This adjustment will also correspondingly reduce state contributions to the sector’s expenditure. In 2026, revenues are projected to remain at the same level as the previous year and, in the later years of the forecast period, they are expected to see slight growth.

¹ Annual averages. The contributions of employers and the unemployment and employment pension contributions of beneficiaries as percentages of wages and salaries. The figures are weighted averages.

Themes

• The service trade deficit and its drivers
• VAT increased - did consumer prices rise?
• Population scenario assumptions
• Impact of population trends on the public debt ratio
• Long-term changes in general government debt-to-GDP ratio