The Finnish Economic Policy Council: Wellbeing services counties started in challenging circumstances – More flexibility needed to address deficits

In 2024, Finland’s economic performance lagged behind the rest of the euro area and other Nordic countries. The employment rate also declined more significantly than in other Nordic nations. Sanctions imposed on Russia are a contributing factor. Additionally, the euro area’s common monetary policy has been overly restrictive for Finland. Nevertheless, the economy has started to grow again, and the decline in interest rates is expected to strengthen aggregate demand in 2025.

The deadline for wellbeing services counties to cover their deficits should be extended

Expenditures on social and healthcare services have increased rapidly, resulting in many wellbeing services counties incurring significant deficits in 2023 and 2024. Current regulation requires accumulated deficits to be offset by corresponding surpluses in 2025 and 2026, necessitating substantial spending cuts in many counties. If counties manage to do this, they are allowed to substantially increase spending again in 2027.

To safeguard essential services, it would be sensible to allow counties to distribute savings more evenly over a longer time period. The Economic Policy Council recommends granting wellbeing services counties temporary flexibility in covering their deficits. This does not necessarily entail increasing central government funding in the long term.

Deficits do not reflect the failure of the reform

The success of the health and social services reform should not be judged solely on the basis of observed spending increases. The expenditure growth and large deficits stem from external factors, such as accelerating inflation and relatively rapid wage growth, which are outside the counties’ control. To properly evaluate the reform, long-term monitoring and a broader assessment of its economic and welfare impacts is required.

Recruitment challenges, particularly in hiring doctors, pose the greatest obstacle to ensuring adequate healthcare services. The government’s decision to increase reimbursements for private healthcare services may not solve the problem, as it is likely to increase demand for doctors in the private sector. Possible solutions include better allocation of doctors’ working hours, training more doctors, and attracting international professionals.

Fiscal policy decisions reflect the government’s commitment to strengthening public finances

In spring 2024, the government adopted significant new measures to stabilize the debt-to-GDP ratio by the end of the parliamentary term. Most notably, a hike to the standard VAT rate was implemented in September 2024. Due to indexation freezes, the VAT hike erodes the purchasing power of many transfers. However, pensioners are largely shielded as pensions rise in line with inflation. Therefore, it is appropriate that the government has also slightly increased taxes on pensions.

Despite these measures, stabilizing the debt-to-GDP ratio remains very uncertain. Weak employment growth and rapidly rising costs for wellbeing services counties have worsened the fiscal outlook. Additional measures that weaken aggregate demand in the short term should be avoided, as fiscal policy is already tightening significantly in 2025, compared to 2024. Structural reforms, such as the pension reform outlined in the government program, could strengthen public finances without immediate adverse effects on aggregate demand.

Urbanization and work-related immigration boost productivity

The concentration of jobs and workers in large cities creates agglomeration benefits, which benefit both employees and businesses. Workers can more easily find jobs that match their skills, boosting productivity and enabling higher wage levels in cities. Urbanization also supports productivity growth and employment across the nation. Work-related immigration can strengthen this development without reducing the population outside urban areas.

At the beginning of the year, responsibility for employment services was transferred from the state to municipalities. This reform also increased the municipalities' share of unemployment benefits paid to their residents, creating a clear incentive for municipalities to promote employment. However, it is worth noting that removing barriers to employment often also requires health and social services, which are now under the responsibility of wellbeing services counties.