Assessment and recommendations
A number of features of the Finnish economy place the country in a good position to benefit from the opportunities of globalisation; these include openness to international trade and foreign direct investment, a high education level of the population, and a strong innovation record. Indeed, top Finnish firms, such as Nokia, have been flexible and innovative in taking advantage of these opportunities through outsourcing and specialisation. Moreover, the government plays a key role in easing the pain that economic restructuring can involve; the tax and benefit system facilitates a significant redistribution of the benefits of globalisation and social safety nets provide support for those who lose their job.
Getting the most out of globalisation
Openness to international trade and foreign direct investment, a high education level, a strong innovation record, and social safety nets that support those adversely affected, put Finland in a good position to benefit from the opportunities offered by globalisation. However, the fiscal challenges posed by ageing suggest that the Nordic model of social support will not be sustainable without significantly higher employment together with more efficient public spending and taxation. In addition, labour market institutions and some other policies do not permit sufficient flexibility to promote the rapid reallocation of resources that globalisation and technical change demand, while the tax and welfare systems distort economic choices in a number of areas. As a result, labour shortages are rising, despite a still high level of unemployment, and some industries are facing severe competitive pressures. By considering these problems through the lens of globalisation, this chapter identifies the key challenges facing the economy – challenges that are taken up in more detail in the following chapters.
Recent macroeconomic performance and fiscal sustainability
This chapter briefly summarises Finland’s recent economic performance and highlights the potential for cutting labour taxes in the near term, by pairing tax cuts with offsetting contractionary policies. Priorities for achieving longer term fiscal sustainability are also discussed, including further pension reform.
Setting tax policies that support the Nordic model
Finland’s extensive welfare arrangements require a relatively high overall level of taxation. Partly as a response to increased international integration, Finland introduced the dual income tax system at the beginning of the 1990s. Under this system companies and personal capital income are taxed at a relatively low rate on a broad base, while labour income is taxed more heavily. This has made corporate and capital taxation more competitive, without significantly lowering the total tax take. However, the dual income tax system has introduced incentives for some groups of workers to re-classify labour as capital income. In addition, there are concerns about the potential implications of high taxes on labour demand and supply. Although taxation of high-income workers has been reduced, it remains high by international standards. In the context of globalisation, there are concerns that high taxation of skilled workers may encourage more offshoring of highly skilled jobs, and potentially outward migration. In contrast, immobile factors such as property are taxed lightly.
Reforming the municipal service sector
To prevent tax rates from rising as ageing puts new pressures on services such as health and elderly care, significant efficiency gains in the provision of municipal social services are needed. But production of many social services is dominated by the public sector and is suffering from falling productivity levels. The government is hoping to improve productivity through municipal mergers, deepened municipal cooperation and improved service delivery methods. However, the evidence from municipal mergers and co-operation in the past decades shows that efficiency gains are not guaranteed automatically. That is why much emphasis has to be put on other policies. This chapter discusses the role that more competition can play in promoting productivity growth and innovation in the social services sector. There is much more that the public authorities should do to facilitate the introduction of new methods for the delivery of social services, by levelling the playing field for greater private sector involvement and competition, while at the same time guaranteeing service quality and funding. Such a strategy should raise productivity, permit slower growth in local government expenditure, and encourage diversification in the provision of publicly-funded services. As Finland’s lower-tech industries continue to shrink as a share of total value added, this sector also offers opportunities for economic diversification.
A better functioning labour market
Finland’s embrace of the opportunities offered by globalisation has encouraged the emergence of leading edge industries and has facilitated a steady decline in the unemployment rate to around the EU15 average. Nevertheless, participation rates remain below pre-recession levels, especially among certain age groups, youth unemployment remains uncomfortably high, wage setting remains particularly inflexible, and growing labour mismatches and skill shortages are acting as constraints on the economy. While recent governments have taken steps to address some of these issues, Finland’s rapidly ageing population means that these issues need to be tackled with a greater degree of purpose and urgency.
Making tertiary education as good as compulsory education
The educational level of the Finnish population has risen considerably in recent decades. Comprehensive schools perform particularly well, as witnessed by the PISA results, providing an excellent foundation for Finland to benefit from the opportunities offered by globalisation. Some aspects of tertiary education could, however, be strengthened. This chapter analyses the inefficiencies in the Finnish advanced education system – especially the slow transition from upper secondary school to tertiary education, where many students spend several years attempting to enter higher education or the field of their choice – as well as other reasons for the late labour market availability of Finnish tertiary graduates. The chapter also proposes a number of ways to respond better to sharply rising labour market bottlenecks in a country where unemployment is still high.
Accessing and integrating foreign labour
Accessing foreign workers is one way in which Finland can tackle the challenge of a rapidly declining labour force and address emerging skill shortages. While successive governments have proposed tapping into the international labour market, there has been little progress. The number of immigrants remains relatively low and the employment rate of the current stock of immigrants is significantly lower than that for the whole population. More should be done to promote language and vocational training for foreign-born residents, encourage diversity in the workplace and assist firms in attracting foreign workers with the right skills.
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