The golden age gives way to grim reality

In 2008 Finland will have to give serious thought to how wealth is divided

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By Juhana Rossi
     
      The Finnish economy grew during 2007 at an exceptionally brisk and vigorous rate. Just as it has done each year for several years.
      On this score the numbers and the economic pundits are in blissfully unanimous agreement.
      However, this golden age for Finnish economic fortunes is approaching its end. Next year is expected to be a watershed period during which we shift from gold to gilded, towards a phase of more modest growth.
     
This should not be understood as meaning that the Finnish economy is about to run into a brick wall with the turn of the calendar page. Quite the opposite. Experts are predicting growth of just under 3% over the next twelve months.
      This figure is a splendid one, at least if one compares it against what is in prospect for most other developed industrial nations.
      But now we are not talking about the growth for one year or two, but something much more long-term - a quantum change in the direction and scale of economic growth.
     
Finland’s economic progress will slow in the years ahead as the baby-boomer generation heads into retirement.
      At that point, the share of the Finnish population made up by those working and creating wealth will decline, bringing an inevitable impediment to the growth prospects for the economy as a whole.
     
Just how big a shift are we looking at?
      In the years from 1994 to 2006, the Finnish economy grew at an average rate of 3.8% each year, according to Statistics Finland.
      Over the last two years, the rate has topped four per cent annually.
      Between 2008 and 2011, if the Ministry of Finance forecasters are to be believed, the economy will grow by an average of 2.4% annually.
      And if their predictions come to pass, this means growth over the next four years will fall below the annual average for the last hundred years. After four years, we can expect to see a further slowing in growth, warns the ministry.
     
When the economy grows at a relative snail’s pace, then also the creation of new jobs and the revenue from taxation will proceed slowly.
      And yet the need for that tax income flowing into the state’s coffers can be expected to increase a good deal more, since someone will have to pay for the care and health of the growing number of elderly people in the country.
     
This is not a pretty equation. The result, in the worst-case scenario, will be what the economists and politicians have been referring to lately as a "public sector sustainability gap".
      Usually talk of sustainability gaps and shortfalls and deficits is abstract stuff about percentages and GDP.
      What it means in essence is that from one year to the next, the nation’s outgoings are larger than the revenue coming in.
     
A very concrete example of sustainability and the gap that is emerging was given in microcosm during the autumn in the city of Kemi in Northern Finland.
      The development of the population structure and the unemployment figures in Kemi bring out very strongly those factors that will put Finland as a whole between a rock and a hard place before very long.
      The overall population of Kemi has declined, and the share of the citizenry made up by elderly people who have retired from working life has grown.
     
At the same time, the rate of joblessness in Kemi has consistently topped the 15% mark from one year to the next.
      This is a heart-breakingly big number, particularly when one puts it into the context of a Finland that has been barrelling forwards in recent years on excellent growth figures.
      The reduction in tax revenue has caused a meltdown in the city’s finances.
      As a consequence, last spring, the Kemi city fathers resolved to lay off the great majority of the town’s municipal workers for between two and four weeks.
     
The lay-offs also affected the staff at Sauvosaari Hospital, which tends to the needs of bed-ridden and immobilised elderly people.
      When the carers and nurses were told to stay at home, the work carried out at the hospital had to be scaled back, among other things by reducing the frequency with which patients were washed or had their diapers changed.
      There was a public outcry, of course, but it soon enough died down.
      This was, after all, just one individual case in a town in severly straitened circumstances.
     
The treatment of the old and infirm people in Kemi was at the same time a salutory reminder that during the golden age now apparently breathing its last, the fruits of growth have not been distributed quite evenly all over Finland and among all Finns.
      The majority of the working population, and above all the richest percentiles of Finnish society, certainly did prosper over the past decade.
      On the other hand, those in the bottom 10 per cent of the population in terms of income stayed pretty poor, and according to some barometer readings they actually found themselves even worse off than they were ten years previously.
     
The sharpening of the division into haves and have-nots should not come as a surprise to anyone.
      In recent years, Finland has adhered to neo-liberal economic policies that accentuate the importance of personal responsibility for securing one’s well-being.
      The achievements of the neo-liberal approach are quite incontestable.
      When the economy has been released from its monpolistic chains and opened up to liberalisation processes, when the role of the state has been reduced, and when the claws of the taxation bear have been clipped, the Finns have been given a glorious opportunity to improve their living standards and build their lives.
     
But when people become freer and their responsibility for their own personal well-being is increased, the poorest and most vulnerable sections of society tend to be left in the dust when free competition gets going in earnest.
      In the worst cases, poverty becomes a hereditary ailment and is passed from one generation to the next.
      Thus far, Finland has sought to alleviate the adverse effects of poverty through income transfers paid for out of tax revenue and by supplying public services free of charge.
     
But now the public and the politicians will have to draw increasingly well-defined lines on just what Finland can and cannot afford, as economic growth and the ensuing accumulation of tax revenue begins inexorably to slow down.
      These definitions will be made in the coming year for instance when the talk turns to reform of social welfare arrangements and cuts in the marginal rate of income tax.
      In the background to both reforms is an aspiration to encourage more and more Finns to create wealth for themselves and those around them.
     
In deciding on income tax rates, however, there will be an additional stand made on how much should be collected from the public purse to support those public services that Kemi was signally unable to provide for its aged residents this autumn.
      The question of reductions in personal income tax are already producing diverging opinions, even in the current climate of prosperity.
      For example, President
Tarja Halonen has consistently defended high taxation and the financing through this of public education and health care.
      On the other side of the fence, the former Finance Minister and current Speaker of Parliament Sauli Niinistö (the chairman of the National Coalition Party until 2001) and the CEO of the Sampo Group Björn Wahlroos have spoken out in favour of tax cuts.
      Halonen is defending the welfare state system. Niinistö and Wahlroos are defending economic growth and thereby the prerequisites for our well-being.
     
For many years, Finland has enjoyed the relative luxury of the fruits of economic growth and a common consensus on the funding of a welfare society.
      We shall soon get to see signs of how much of these there is to go around in the future.
     
Helsingin Sanomat / First published in print 30.12.2007


Previously in HS International Edition:
  Economic forecast criticised for forgetting impact of immigration (12.12.2007)
  Bank of Finland: Peak of growth passed - economic development still positive (11.12.2007)
  ETLA: Income disparity likely to increase as economy slows down (5.12.2007)
  Government and opposition clash over economic outlook (18.12.2007)
  Shopping the good shop against the threat of recession (27.11.2007)
  Northern city of Kemi to lay off all municipal workers for two weeks (24.4.2007)

Links:
  Ministry of Finance: Stability Programme Update for Finland 2007

JUHANA ROSSI / Helsingin Sanomat
juhana.rossi@hs.fi