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Box 2. Summary of measures in the2003 Budget proposals

Box 2. Summary of measures in the2003 Budget proposals

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Macroeconomic developments, prospects and policy challenges



Table 8.



37



Short-term projections



Percentage changes, volume

2000

Current

prices,

billion EUR



2001



2002



2003



2004



GDP components

Private consumption

Government consumption



65.2

27.0



1.1

2.1



2.5

2.0



2.1

1.8



2.4

1.9



Gross fixed capital formation

Public sector

Private sector

Residential

Non-residential



25.1

3.3

21.8

6.4

15.4



4.0

0.8

4.6

–10.7

10.2



–2.3

1.3

–2.9

–1.2

–3.4



–0.1

0.0

–0.1

2.4

–0.8



2.9

0.0

3.4

1.4

4.0



117.4

1.0

118.3



1.9

–0.8

1.0



1.4

–0.6

0.6



1.6

0.3

1.9



2.4

0.3

2.8



56.4

44.0

12.4



–2.2

0.1

–1.1



2.6

–0.9

1.6



7.0

6.7

1.1



8.7

8.2

1.4



Final domestic demand

Stockbuilding1

Total domestic demand

Exports of goods and services

Imports of goods and services

Foreign balance1

Statistical discrepancy1

GDP

GDP of the euro area

Prices and wages

Harmonised index of consumer prices

GDP deflator

Private sector wage rate

Labour market

Employment

Unemployment rate (level, % of labour force)



0.4



0.9



–0.5



0.5



0.0



131.1

..



0.7

1.5



1.6

0.8



3.2

1.8



3.8

2.7



..

..

..



2.7

3.0

5.3



1.7

1.4

4.2



2.0

2.1

4.2



1.8

2.4

4.1



1.4

9.2



0.0

9.3



0.5

9.5



1.4

9.4



2 3262

9.8



Current account balance (% of GDP)



..



6.4



6.5



6.5



7.6



Interest rates (%)

Short-term

Long-term



..

..



4.2

5.0



3.3

5.0



3.0

4.7



3.6

5.0



Memorandum items

Output gap (level, % of potential GDP)

Net lending (% of GDP)

Household saving ratio (% of disposable income)



..

..

..



–0.2

4.9

2.4



–1.8

3.2

2.8



–1.8

2.9

3.0



–1.3

3.6

2.6



1. Contribution to GDP growth.

2. Thousand persons.

Source:

OECD (2002), OECD Economic Outlook, No. 72.



operating with excess capacity, business investment may not pick up much

during 2003. On the other hand, residential investment should rise moderately in

response to increasing house prices, and following the run down in stocks in 2002,

stockbuilding may make some positive contribution to growth, of the order of a



© OECD 2003



38



OECD Economic Surveys: Finland



¼ percentage point. GDP growth may further increase in 2004 both as world trade

and exports further accelerate and business fixed investment begins to revive.

Despite the pick-up in growth, unemployment may not decline by much

– the flip side of labour hoarding during the downturn – and is likely to remain

well above the euro area average. Inflation should remain low, although it may not

fall much further, despite the continued presence of slack in the economy as indicated by a negative output gap. This is because the central wage agreement is

likely to push up overall unit labour costs by about 2 per cent per annum in 2003

and slightly less in 2004. This would imply a sustained period in which unit labour

costs increased faster, or are at least in line with, the GDP deflator, in contrast with

much of the experience of the 1990s when the rate of change was clearly below

that of the GDP deflator.

Even with growth recovering to above potential rates, the objective of a

general government surplus equal to 4½ per cent of GDP is unlikely to be

reached. A significant part of revenue losses since 2000 are unlikely to be recovered in the upturn because they were related to exceptionally strong asset prices.

Moreover, continuing wage pressures in the public sector may raise the deflator

for government consumption, which could be running well ahead of the GDP

deflator. Finally, there may be significant losses in indirect tax revenue in 2004,

perhaps equivalent to as much as 1 per cent of GDP, as a result of measures to

comply with EU directives on harmonising indirect taxation on cars and alcohol

(see Chapter IIII for details).

Substantial uncertainties surround the projections

A major concern is whether the recent pick-up in export growth will be

sustained. Much depends on the performance of ICT-based exports, which have

weathered the industry-wide downturn relatively well. However, prospects for the

industry in 2003 and beyond depend on a positive international reaction of

consumers to third-generation mobile telephony. If the pick-up in international

demand is delayed there is a risk that employment will suffer, with knock on

effects on domestic demand.

Main policy challenges

One of the main challenges facing macroeconomic policy-makers is preparing for the impact of population ageing on public finances, while at the same

time ensuring that there is scope for further cuts in taxation. The effect of ageing

on the budgetary position is recognised by the authorities as reflected in the

ambitious setting of current fiscal objectives and as further demonstrated by the

recent agreement on a wide-ranging pension reform. However, given that the overall effects of the reform are uncertain and may not become clear for many

decades, as discussed further in Chapter II, a prudent approach would suggest



© OECD 2003



Macroeconomic developments, prospects and policy challenges



39



that the general government surplus target of 4½ per cent of GDP should be maintained for the remainder of the decade. At the same time slippage against this

target should be tolerated to the extent that it reflects cyclical weakness.

Over the next few years it would also seem desirable to at least hold general government expenditure constant in real terms at the level envisaged in the

2003 Budget proposal. Clarification of the nature of the real expenditure target

(which should focus on primary expenditure) as well as reforms that bind the

annual budget procedure more closely to medium-term targets would be helpful

in achieving these objectives. Moreover, there is probably scope for reducing

spending in some areas (Chapter III), which would allow for further tax cuts during

the recovery as soon as the general government surplus returns to 4½ per cent of

GDP. If the recovery was insufficient to return the surplus to target then further

expenditure restraint should be the preferred course of action given that the tax

burden is already too high.

Comparison with earlier experience and with other countries, suggests

that there is scope both to raise participation rates and lower structural unemployment, and reforms could also lead to sizeable efficiency gains in many sectors,

including the public sector (Chapters III and IV). As well as being worthy in their

own right, progress in these areas would strengthen the economy against the

impending demographic shock as well as provide some insurance against the

possibility that the growth contribution of the ICT sector may not be as large as in

the past.



© OECD 2003



II.



Ageing, pension reform and long-term

public finances



Ageing occurs earlier and is more rapid in Finland than in most other

OECD countries. Recognising the urgent need to act, Finland is among the few

OECD countries to introduce a comprehensive pension reform to address one of

the major fiscal pressures resulting from ageing. This chapter first highlights the

major features of the reform and assesses its effects. It then considers it in the

broader context of the ageing pressures on long-term public finances. In particular

it addresses the question of how ageing and the pension reform should influence

the setting of current fiscal objectives.

Demographic trends

Finland’s population will peak in the early 2020s, at about 5.3 million people, but the labour force will already start to decline in 2004 by ½ per cent annually. The old-age dependency ratio (those over 65 years as a percentage of the

working age population) will rise from 23 per cent currently to about 37 per cent

by 2020, the fastest rise in the OECD area. Ageing will continue with the dependency ratio reaching 45 per cent around 2030, although thereafter the dependency

ratio will plateau at just under 50 per cent over the period 2040-50 (Figure 9).

The current system and the pension reform

Currently, there are two old-age pension schemes: the national pension

scheme and the earnings-related pension scheme. The national pension scheme

guarantees a minimum income for resident persons who are not entitled to an

earnings-related pension, or to those for which the latter is small. The earningsrelated pension consists of all the pensions that have accrued from each employment contract and from self-employment. Benefits are based on the number of

years in employment, the accrual rate and the “pensionable wage” which is based

on the gross wage net of employee’s pension contributions. The system is of a

defined-benefit nature, based on tripartite agreements and governed by several

pension acts. It is financed by employer’s and employee’s contributions and

consists of a mix of a pay-as-you-go and a funded system. The employer’s and



© OECD 2003



OECD Economic Surveys: Finland



42



Figure 9.



The demographics of ageing in Finland

Population aged 65 and over1



Finland



4



Norway



Sweden



EU



Annual growth rate (%)



4



3



3



2



2



1



1



0



0



-1

1990



95



2000



05



10



15



20



25



30



35



40



45



50



60



-1

60



As a percentage of population aged 15-64

50



50



40



40



30



30



20

1990



20

95



2000



05



10



15



20



25



30



35



40



45



50



1. Data for the period 2001-50 are medium variant population projections.

Source: United Nations (2001), World Population Prospects 1950-2050 (The 2000 Revision).



employee’s contributions are used directly to pay for current pensions and indirectly to fund future pension payments. Pre-funding is collective and, thus, has no

effect on the size of the pension, but it affects the future path of contribution rates.

The reform is focused on the earnings-related pension scheme and the various

options to retire early.

The reform14 was agreed in autumn 2002 and is expected to be voted by

parliament in early 2003. It will affect pensions as from 2005. Agreement on the

reform so far only concerns pensions for those working in the private sector,

although reform of public sector pensions is likely to be agreed in 2003 and is

expected to be along similar lines.



© OECD 2003



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