With population ageing setting in sooner and more forcefully than in other OECD countries, Finland needs to reorder its fiscal priorities so as to ensure fiscal sustainability. That will require considerable reform as public spending currently expands vigorously. While GDP growth has slowed from the exceptionally rapid pace of the late 1990s, public consumption has continued to grow fast, as new obligations by central government and popular demand led municipalities to expand service provision. After some consolidation in 2003, local government spending has accelerated again and the deficit has widened to ¾ per cent of GDP in 2004 for the municipalities considered as a whole – despite still larger transfers from central government. At the same time, the tax burden is high, especially on labour. Ensuring the sustainability of public finances over the long term, while maintaining the essential parts of the welfare society will only be possible by i) raising the effectiveness of public spending, ii) reforming the financing of municipalities to encourage better control of spending and limit future rises in municipal income taxation and iii) rebalancing the mix between public and private provision and funding of services. This working paper discusses ways in which progress could be made on such a policy agenda. It relates to the 2004 OECD Economic Survey of Finland (www.oecd.org/eco/surveys/finland) updating the Survey’s analysis by incorporating data for 2004 and recent developments.
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