Economic Policy Council: Government's key fiscal objectives well-founded, but the range of measures needs to be expanded

The economic outlook for 2024 has recently weakened. Finland's primary economic challenge is very low productivity growth, with GDP growth trailing behind other Nordic countries. While the measures in the government program are expected to improve public finances compared to no action, they may fall short of achieving the government's budgetary targets.

Tax increases should not be ruled out 

According to the government programme, the government will not increase the overall tax rate through its own decisions. This poses a significant risk to the main fiscal targets, as tax revenues as a share of GDP are projected to fall significantly during the government's term in the absence of further tax decisions, e.g. due to the electrification of transport.  Moreover, tax revenues are now projected to fall more than what was estimated when the government programme was prepared. 

A more flexible approach to taxation would enhance the government's credibility with respect to its key fiscal targets. As a minimum, the government should seek to prevent tax revenues from falling below the level projected at the time the government programme was prepared.  

Some working-age people face multiple benefit cuts

The government’s consolidation programme relies heavily on cuts to social benefits. Despite the government’s stated intention to protect the most vulnerable groups, some people with very limited economic resources will see their disposable income shrink substantially. The main problem is that cuts in different social benefits partly affect the same people. 

This problem is linked to the fact that the government has sought savings mainly in benefits for the working-age population, despite a considerable portion of social security spending going to pensioners. 

On the other hand, the government’s intention to reform the pension system offers a chance to generate savings without compromising the livelihoods of the most vulnerable people. For example, some benefits in the earnings-related pension system that are not based on wage-income should be reconsidered.

Impact of the employment policies is very uncertain

The government targets an 80% employment rate by 2031 and seeks to increase hours worked. Reforms reducing the level of social security in relation to wages are expected to increase employment by tens of thousands of new employees and enhance annual public finances by 2 billion euros through higher employment.

The employment goal is ambitious and will be hard to achieve. Employment has increased substantially over the last decade, making further improvements more difficult to achieve. In addition, the government’s employment program focusses on financial incentives, giving insufficient attention to other obstacles, such as inadequate professional skills, health issues, and labour market mismatch problems. 

The ex-ante estimates of employment effects carried out by the Ministry of Finance are based on the best available empirical studies. Nevertheless, there is considerable uncertainty associated with both the scale and timing of the reforms’ impact and estimates should not be treated as definite promises of future revenue. The impact of reforms can only be reliably assessed through systematic ex post evaluations.

More private housing construction is needed to combat rising housing costs

The underlying reason for high housing costs is limited housing supply relative to demand. However, the government’s tools to boost housing supply are restricted because major land use decisions are made by municipalities. It is crucial to incentivize cities with high house prices to zone land for housing through land use, housing, and transport agreements.

The government is reducing the construction of social housing. This course of action can be justified because social housing crowds out private housing supply and does not increase overall housing supply. Compared to social housing, the housing allowance is a more impartial and transparent way to support low-income households. 

Reduction in carbon sinks threatens to increase public expenditures

Finland may struggle to meet its carbon reduction commitments under EU climate legislation, especially the 2021-2025 carbon sink target for the land-use sector. To reduce the need for purchasing carbon sink units from other Member States, the government should create incentives to maintain and increase carbon sinks. This would also improve the cost-efficiency of Finland’s climate policy. From a public finance perspective, it would be desirable for these incentives to be based, at least in part, on landowners or the forest industry having to pay for the loss of carbon sinks they cause.