Finland Agrees on $11.9 Billion Plan to Pay for Aging Costs

Finland’s six-party government, presiding over the worst-performing economy in the Nordic region, agreed on a 9 billion-euro ($11.9 billion) plan that includes boosting employment and productivity by 2017 to ensure it has money to pay for its aging population.

The government will push through enough measures to close a sustainability gap of 4.7 percent of gross domestic product, Prime Minister Jyrki Katainen said at a press conference in Helsinki yesterday.

“Finland is at a crossroads,” Finance Minister Jutta Urpilainen said yesterday. “Either we let the welfare society wither or we defend it decisively.”

Finland’s economy has failed to exit its second contraction in four years, even as the German and French economies pulled the 17-member euro area out of its longest recession in the second quarter. Demand for Finnish exports has waned, prompting companies to cut jobs and reducing domestic spending. Finnish trade unions and employer organizations agreed on a three-year framework wage accord today, within which individual unions will negotiate their own collective agreements.

The government cut its GDP forecast to a 0.5 percent contraction this year from 0.4 percent forecast June 19. It kept its estimate of 1.2 percent growth in 2014. The sustainability gap measures the difference between available funds and the amount needed to pay for future public spending.

Yield Falls

The yield on Finland’s 1.5 percent 10-year bonds fell 1 basis point to 2.128 percent at 5:49 p.m. in Helsinki and the spread to similar-maturity German securities narrowed by 0.1 basis point to 27.3 basis points. One basis point is 0.01 percentage point. Finland is the only one of the five Nordic countries to use the single currency.

“The new measures should take Finland a long way toward more sustainable public finances,” Pasi Kuoppamaeki and Juhana Brotherus, economists at Danske Bank A/S in Helsinki, said in a note to clients. “Positive cyclical developments in the global economy should help exports and bring GDP to a positive trend in the latter part of 2013.”

Making Finland’s 320 municipalities merge into bigger units to help pay for the municipally funded health-care system will contribute about 1 percentage point, boosting productivity growth in public services will account for 1.4 percentage point to closing the gap.

Extending Careers

Extending careers and increasing the supply of labor will account for 1.4 percentage point, while 0.3 percentage point will come from reducing structural unemployment. The government also said it will “improve the production potential of the economy,” contributing 0.6 percentage point to closing the sustainability gap. Those measures include an “extremely moderate” wage accord for several years, Katainen said.

Finland, which is preparing to look after Europe’s fastest aging population, has sought to change its municipal and social-services structures since at least 2005. The government will establish a governing council for the capital city area to coordinate land use, employment and economic policies.

“The sustainability gap has taken a long time to emerge and it will keep on growing if nothing is done,” Katainen said. “Doing nothing would change nothing and that would mean Finland changing for the worse.”

Women Workers

Finland is looking to extend careers, including finding ways to make people start working earlier, take fewer breaks during their working life and retire older. Ways to improve productivity, especially in the public sector, can also help alleviate stress on future finances.

The government proposed yesterday that monthly grants for infant care after regular parental leave are split equally by both parents. The measure is intended to push more women into the work force. Cutting the period for which student grants are paid and allowing unemployed people to earn 400 euros a month for six months without losing benefits are other measures intended to boost the supply of labor.

The International Monetary Fund told Finnish policy makers last year that raising the pension age to 67 from 63 would be enough to close the sustainability gap. Urpilainen’s Social Democratic Party opposes raising the threshold before the next general election in April 2015, having made a campaign pledge in 2011. The government refrained from deciding on a higher retirement age, agreeing instead to target other measures to boost the average pension age to 62.4 years from the current 60.9 years by 2025. Labor unions and employer organization will discuss changing the pension system by second half 2014, the Confederation of Finnish Industries said today.

Stable AAA

Finland needs to attract 200,000 more workers to join the ranks of the employed to make up for those retiring to keep its dependency ratio static by 2030, the finance ministry estimates. The employment rate among the 15 to 74-year-olds must rise to 66 percent from the current 61 percent, it said.

Finland’s has the euro-area’s only stable AAA credit rating at Standard & Poor’s, Moody’s Investors Service and Fitch Ratings. The top grade is underpinned by prudent, transparent, and consensus-based policy making, S&P said Jan. 14. It may lose the rating if structural imbalances aren’t “adequately addressed” through reforms, the rating company said. Eliminating the sustainability gap will require improving competitiveness, Moody’s said on May 29.

Falling Competitiveness

The country’s unit labor costs, which show how well workers are paid relative to productivity, are 15 percent higher than in Germany and more than 20 percent above levels in Sweden, according to averages spanning 30 years and compiled by the Research Institute of the Finnish Economy ETLA.

Improving productivity, including in the public sector, should be Finland’s “first and foremost” target if it wants to preserve its welfare society and that is best done by reducing the fragmentation of municipal services, the Organisation for Economic Co-operation and Development said in a report on Feb. 28.

Finland, which hasn’t breached the European Union’s fiscal rules, will see its debt to GDP breaching 60 percent threshold in 2015 after growing to 56.9 percent this year, the Bank of Finland forecast on June 11. The average debt ratio in the euro area increased to 92.2 percent in the first quarter, the EU’s statistics office said on July 22.

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