Finland: Concluding Statement of the 2021 Article IV Mission
IMF News, November 19, 2021
Source details
- Canonical URL
- Finland: Concluding Statement of the 2021 Article IV Mission
Other formats
Bibliographic details
- Published: November 19, 2021
Economic outlook
- Finland contained the pandemic successfully; around 80 percent of the population aged 12 or over are now fully vaccinated.
- The 2020 recession: output declined by 2.9 percent in 2020; output rose above its pre-pandemic level in 2021Q2.
- Labor market: the employment rate has returned to its pre-crisis level; labor shortages amid rising vacancies and supply chain bottlenecks are starting to weigh on activity.
- Inflation: consumer prices increased markedly in 2021 due to global raw materials price rises and production bottlenecks; headline inflation is expected to hover around 2 percent in 2021 and 2022 on the back of higher projected energy prices.
- IMF staff baseline projections:
- GDP growth: around 3¼ percent in 2021 and 2¾ percent in 2022.
- Output gap: projected to nearly close in 2022.
- Potential growth: forecast to converge to around 1¼ percent in the medium term, similar to pre-pandemic forecasts.
- Risks and dynamics:
- Recovery could be stronger with a faster unwinding of household savings.
- Pandemic-related risks to global growth remain high and could negatively impact Finland.
- Pandemic-induced scarring is expected to be minimal given the strong rebound.
Unwinding pandemic-related support and strengthening public finances
- Pre-pandemic government program (2019): one-off and permanent spending increases on education, employment, infrastructure, and climate policies, equivalent to an annual average around 1 percent of GDP during 2020-22.
- Pandemic fiscal support: additional fiscal support amounting to around 4¾ percent of GDP during 2020–21.
- Public debt trajectory:
- Public debt is expected to reach over 70 percent of GDP at end-2021.
- Over the medium term, fiscal deficits will gradually adjust but stabilize at a level which is around 1 percent of GDP higher than before the pandemic, largely reflecting permanent spending increases in the government’s program.
- Planned employment measures will unlikely produce sufficient fiscal gains to achieve the revised government target to stabilize debt in the middle of the decade.
- Fiscal stance and recommendations:
- The accommodative fiscal stance in 2022 is broadly appropriate to support the recovery; COVID-related support is planned to be unwound in 2022 as conditions improve.
- The structural primary deficit is projected to remain at the relatively high 2020 level of 2¼ percent of GDP.
- IMF staff recommend a moderately faster consolidation once the recovery is firmly on track to bring public debt on a declining path over the medium term to rebuild buffers and prepare for increases in aging-related spending.
- Specific policy options to support adjustment:
- Labor-market and benefit reforms:
- Continue plans to progressively close routes to early retirement for older workers.
- Better target in-work and out-of-work benefits.
- Encourage employment among secondary earners (e.g., better targeting the home care allowance and housing benefits; further improving access to childcare).
- Revenue and spending measures:
- Broaden the tax base for the standard-rate VAT.
- Increase recurrent real estate taxes (noting these are low in Finland relative to other countries).
- Focus adjustment effort on reducing expenditure given already high overall taxation.
- Conduct a spending review to identify efficiency gains and fiscal savings, including in the context of ongoing health and social services reform.
- Consider further reductions in environmentally-harmful subsidies and higher climate-related taxes.
- Fiscal framework:
- Return to original spending limits to enhance fiscal credibility; limits were relaxed for the COVID emergency and further increased for 2022 and 2023.
Achieving the goal of net-zero emissions
- Target: net-zero emissions by 2035.
- Assessment: current measures (estimates from the Ministry of Environment) would not be sufficient to reach the target.
- Policy recommendations:
- Increase and better harmonize carbon pricing across sectors.
- Reinforce carbon pricing with fiscal incentives across different sectors, including the use of feebates.
- Consider further policy measures to close the emissions gap implied by current measures.
Enhancing financial and macroprudential policies
- Financial system resilience:
- Banks are well-capitalized, liquid, and profitable.
- Lowering of structural capital buffer requirements at the onset of the pandemic provided additional lending and loss-absorbing capacity.
- Corporate and household balance sheets appear relatively unscathed after expiry of support measures.
- Vulnerabilities:
- The banking sector is large and highly concentrated, with high exposure to residential and commercial real estate; commercial real estate faces pandemic-related headwinds.
- Household debt composition shifted toward consumer and housing company loans, adding borrower-side vulnerabilities.
- Macroprudential recommendations:
- Complete planned government review of the tax treatment of different housing financing options to address compositional changes in household debt.
- Enhance borrower-based macroprudential toolkit beyond current proposals (which include loan-to-value limits for housing company loans):
- Introduce a debt-to-income (DTI) cap reflecting growing household debt vulnerabilities, in line with steps taken in many other countries.
- Supplement the DTI cap with a debt-service-to-income cap once the new comprehensive credit registry is operational.
- Tailor borrower-based measures to account for traditionally less risky borrowers, e.g., first-time homebuyers.
- Restore and reconfigure capital-based macroprudential buffers:
- Return structural capital buffer requirements to pre-pandemic levels to rebuild resilience against structural risks.
- Consider targeted capital requirements to build resilience against rising household vulnerabilities.
- Modify Finnish legislation that codifies capital buffer requirement settings to introduce a positive neutral countercyclical capital buffer rate, building macroprudential policy space.
- Current assessment: there are currently no obvious signs of real estate overvaluation or a buildup in aggregate cyclical systemic risks, but household vulnerabilities are rising.
Concluding note
- The mission thanks the authorities and other counterparts for constructive policy dialogue and productive collaboration.
Finland: Concluding Statement of the 2021 Article IV Mission — November 19, 2021. International Monetary Fund.