Helsinki (05.08.1999 - Juhani Artto) In the early 1990s the Finnish economy went through its deepest recession since the Second World War. In just a few years a state of nearly full employment crashed to one of almost 20 per cent unemployment. Gross domestic product fell by a tenth of its pre-recession level. A banking crisis was triggered, with a final bill of FIM 40-50 billion (FIM 1.00 = EUR 0.17 = USD 0.17), creating a financial climate which even forced many healthy enterprises into bankruptcy.
The future of society's social character was severely in doubt.
Welfare structures, however, were maintained. These were mainly financed by huge budget deficits, swelling a national debt of FIM 50 billion to FIM 420 billion in only seven years.
Without cuts in public welfare programmes indebtedness would have worsened even more. From today's perspective these cuts mean an annual FIM 55 billion saving in public expenditure. Nevertheless, 70 per cent of public expenditure consists of welfare services (unemployment benefits, education, health, child care, pensions, income support etc.). Ten per cent goes on interest and on debt repayment.
In 1994, following four years of downslide, the economy began to grow again. Last year it grew rapidly for a fifth consecutive year and the forecasts for this and next year look good. Last year the government was able to maintain a balanced budget. The OECD believes that a growth rate exceeding three per cent will continue. This and next year Finland will have a budget surplus. The unemployment rate is forecast to fall below ten per cent soon, which will also helps to boost the budget surplus.
Politicians and national economic planners are now discussing what to do with this, still modest, budget surplus. Three alternatives have been proposed: (1) to reduce the overall tax rate (which is among the highest in the world), (2) to improve welfare programmes or (3) to concentrate on reducing the national debt to fortify the national economy against new setbacks, whatever their origins may be.
The third alternative seems to have the strongest support among the most influential groups in society. Cautious tax reductions are also under discussion, especially in connection with next autumn's collective agreement negotiations. The largest central trade union organisation, SAK, favours a combination of a slight tax cut and modest pay increases with a view to a continued increase in real incomes. In the two previous income policy rounds of the latter half of the 1990s, the labour market partners and the government have successfully applied this model.
A common objective of the main social partners is to secure economic growth. Failure in this respect would reopen doubts about the sustainability of the Finnish welfare State.
One looming factor is the approaching rapid change in the age structure. Over the next decades pensions will demand a significantly growing part of the national income. Last year this was FIM 79 billion, which was 11.7 per cent of the GDP of FIM 676 billion.
In ten years the labour force will begin to shrink in absolute terms. To forestall this development the government and the labour market partners are now paying increased attention to how to extend careers in working life. The average age of retirement is currently 60 years, although the official pension age is 65 years.
In the Finnish pension model about a third of annual expenditure is financed by the capital incomes of the pension funds and the remaining two thirds originate from the annual pension fees paid by employers and employees.
Closely connected to this is another major goal: to increase the employment rate from its present level of 64 per cent to 70 per cent. Prime Minister Paavo Lipponen's government also aims to reduce the unemployment rate to seven per cent.
As a consequence of the early 1990s recession, public expenditure rose to more than 60 per cent of GDP. Now it is back to about 50 per cent, which is close to the average for European Union Member States. Continued tight budgetary policy offers prospects of reducing this towards 40 per cent without undermining the standard of social security enjoyed in Finland.
By 2002-2004 Finland is expected to have been able to divest the high interest loans originating from the difficult times in its economy. This will further increase the manoeuvring room for alternative policy considerations.
An absolute condition of realising these positive perspectives is continued economic growth of at least 2.5 - 3.0 per cent annually. Without this, the Finnish welfare State will again face an uncertain future.
The government and the labour market partners agree on the basic model of how favourable economic growth can be maintained. With an open economy and high export dependency "the Finnish road" relies heavily on a high standard of education, large R&D investments and technologically world-class production.
The trade union movement strongly opposes the idea entertained by certain employer circles in favour of a more American growth model and employment strategies which depend significantly on low pay jobs and a modest level of public social expenditure.
Perhaps the best example of the "Finnish road" is the success of the Nokia Group, which is well-known around the world for its mobile telephones. In the last few years Nokia, its numerous subcontractors and the whole electronic industrial cluster have been able to increase the hi-tech component in Finnish exports from ten to twenty per cent.
Another recent feature which the Finns are pleased - not to say proud - to mention to their friends and to audiences abroad is their number one global ranking in Internet connectivity.
In the coming months the major decisions will concentrate on the next round of collective agreement negotiations and next year's State budget considerations.
For the collective agreement negotiations SAK president Lauri Ihalainen has defined - as the most important qualitative goal - reinforcing the generally binding character of national collective agreements. The leader of the conservative Coalition Party Sauli Niinistö - who is Minister of Finance in the present government - has rejected this demand outright.
A mixed flavour in the starting points for negotiation is also provided by three powerful trade unions - the Chemical Workers, Paper Workers and Electricians. Their position prefers industry-wide negotiations within a large tripartite incomes policy solution providing a framework for them. The three unions consider sectoral problems to be so severe that they do not believe that a major tripartite incomes policy agreement would leave enough room for solving them.
On the other hand the strict demands imposed by eleven European Union Member States involved in the common currency adds pressure to opt for a major tripartite collective agreement for the third time in a row.