On 23 January 2024 the IMF issued a report following discussions with Finland under Article IV of the IMF’s articles of agreement.

The report notes that although Finland’s economy recovered quickly from the pandemic, the war in Ukraine has worsened the outlook, with high inflation and rising interest rates. It is estimated that the economy contracted by 0.5% in 2023 and only modest growth is projected for 2024, driven by a recovery in household purchasing power and easing financial conditions. In the medium term, economic growth is expected to improve to around 1.5% due to increased investment and employment resulting from the labour market reforms.

Finland’s economic outlook is subject to downside risks from greater geo-economic fragmentation and a rise in international energy prices. Also the combination of high household debt, falling house prices, higher unemployment, and rising interest rates could tip the economy into a deeper recession. Planned investments as part of the green transition are an upside risk over the medium term.

The government program targets a medium-term fiscal adjustment through spending cuts and fiscal gains from higher employment. The IMF report considers that additional measures are needed. The report notes that a target of achieving overall fiscal balance by 2028 would begin to reduce public debt and build buffers to support the expected increase in age-related spending. Higher tax revenues¬ could be collected through the indexation of excise taxes, the expansion of carbon taxation, greater standardization of value added tax (VAT) rates and reform of the taxation of dividends from non-listed firms.

The IMF considers that structural reforms should focus on labour markets by reducing skills mismatches, encouraging employment and boosting productivity. The report notes that the government has a reform agenda to raise employment by reforming social benefits, increasing labour market flexibility, and reducing the labour tax wedge. The IMF considers that policy should also focus on reducing skill mismatches and attracting talent from abroad. The report also welcomes the government’s commitment to increase research and development investment.

The report notes that Finland’s new climate policies include an increase in the production of low-emission energy and an expansion in wind-turbine capacity. These would not be sufficient to achieve the 2035 carbon neutral target. The IMF therefore recommends that additional policies could include strengthening carbon pricing and increasing the role of carbon-sinks in the land use sector.