Public Finances in the XXI Century: Limitations, Challenges and Directions of Reforms in Finland

Abstract

The paper by Anne Brunila is based on the report of a working group set up by the Finnish Economic Council with the task “to evaluate the operating framework of the public sector in Finland, the long-term challenges and pressures for change, and to present different policy options to ensure that the public sector will be able to carry out and develop its main welfare functions in a sustainable manner”. The paper describes the challenges faced by the Finnish welfare system: population ageing, increasing number of early retirements and declining labour force participation. Long-term projections based on generational accounting are presented to assess the extent of the ensuing financing pressures. The policy options to address such pressures are discussed and the need for measures aimed at raising labour force participation and productivity is stressed. In addition to removing the incentives for early retirement and the disincentives to work longer, the author argues that a marked reduction of the tax burden targeted on labour would be necessary. Taking into account the objectives set in the Stability and Growth Pact, this tax reduction in turn requires savings in government expenditure.