EUROPEAN COMMISSION Brussels, 26.2.2020 SWD(2020) 525 final COMMISSION STAFF WORKING DOCUMENT Country Report Finland 2020 Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE EUROPEAN COUNCIL, THE COUNCIL, THE EUROPEAN CENTRAL BANK AND THE EUROGROUP 2020 European Semester: Assessment of progress on structural reforms, prevention and correction of macroeconomic imbalances, and results of in-depth reviews under Regulation (EU) No 1176/2011 {COM(2020) 150 final}



Contents Executive summary 1.Economic situation and outlook 2.Progress with country-specific recommendations 3.Reform priorities 3.1.Public finances and taxation 3.2.Financial sector27 3.3.Labour market, education and social policies30 3.4. Competitiveness, reforms and investment44 3.5.Environmental sustainability53 Annex A: Overview Table58 Annex B: Commission debt sustainability analysis and fiscal risks64 Annex C: Standard Tables65 Annex D: Investment guidance on Just Transition Fund 2021-2017 for Finland71 Annex E: Progress towards the Sustainable Development Goals (SDGs)72 References77 LIST OF Tables Table 1.1:Key economic and financial indicators - Finland

Table 2.1:Assessment of 2019 CSR implementation (*) Table 3.2.1:Financial soundness indicators, all banks in Finland Table 3.2.1a:Assessment of barriers to investment and ongoing reforms Table C.1:Financial market indicators Table C.2:Headline Social Scoreboard indicators Table C.3:Labour market and education indicators Table C.4:Social inclusion and health indicators Table C.5:Product market performance and policy indicators Table C.6:Green growth Table E.1:Indicators measuring Finland’s progress towards the SDGs LIST OF Graphs Graph 1.1: GDP growth and contributions Graph 1.2: Contributions to potential growth Graph 1.3: Investment: total construction and housing construction - Finland and the EU – As a share of value-added Graph 1.4: Annual harmonised index of consumer prices, Finland, annual average, % change Graph 1.5: Regional convergence: average GDP per head growth in 2010-2017 vs. GDP in 2010 Graph 1.6: Nominal unit labour costs in total economy (2015=100) Graph 1.7: Breakdown of balance of trade for goods (fuels not included) 2001-2018 – Cost and non-cost competitiveness impact Graph 1.9: Breakdown of external position (current and capital accounts)

Graph 1.10: Breakdown of the international investment position (% of GDP) Graph 2.1: Overall multiannual implementation of 2011-2019 county-specific-recommendations to date Graph 3.1.1: General government expenditure as a proportion of GDP, broken down by function, Finland and the EU Graph 3.1.2: Drivers of change in general government balance Graph 3.1.3: Debt as % of GDP Graph 3.1.3a: Household debt and credit bureau coverage Graph 3.3.1: Activity, employment and unemployment rates Graph 3.3.2: Population change, 2007-2018 Graph 3.3.3: Reasons for inactivity as a proportion of inactive population by sex and age group. 2018 Graph 3.3.4: Relative dispersion of employment rates by education level (2010, 2015, 2018) Graph 3.3.5: Job vacancy rates in the whole economy and in the information and communication services sector in Sweden and Finland Graph 3.3.6: Self-reported unmet needs by income quintile declared (% pop) Graph 3.3.6a: Employment rate by age and gender, 2018 Graph 3.4.1: Real labour productivity per person and hour worked in PPS (EU=100) Graph 3.4.2: Total factor productivity (TFP) (2000=100) Graph 3.4.3: Birth rate of enterprises in the information and communications services sector ‘(to be updated) Graph 3.4.4: Development of R&D expenditure (as a proportion of GDP) Graph 3.4.5: Trend of public and business R&D expenditure intensity by sectors of performance (as a proportion of GDP) Graph 3.4.6: Research and development expenditure by industry and year (current prices) Graph 3.4.7: Regional value added per worker

Graph 3.5.1: NUTS2-region the most affected by the transition from peat to carbon neutral energy production LIST OF Boxes Box 2.1: EU funds and programmes to address structural challenges and to foster growth and competitiveness in Finland Box 3.2.1: A credit registry in Finland Box 3.3.1: Monitoring performance in light of the European Pillar of Social Rights Box 3.3.2: Reaching the 75 % employment rate target Box 3.4.1: Investment challenges and reforms in Finland Executive summary The Finnish economy faces some structural challenges, but the announced government policies, if fully implemented, could go some way towards reducing the problems identified (). Finland is among the most advanced economies in the EU and among the front-runners in digital technologies and clean energy innovation. The government has also set particularly ambitious objectives for climate action, reaching carbon neutrality by 2035 and becoming the world's first fossil-free welfare society. Nevertheless, the country faces significant challenges, in particular a productivity decline after its electronic sector contracted and an ageing population combined with an employment rate lower than its Nordic neighbours. Furthermore, productive investment in Finland remains low compared to its EU peers. Addressing these challenges will strengthen the growth potential of the economy and make it more inclusive and resilient to external shocks. The medium-term reform plans announced by the new government look promising, although they may face political and implementation hurdles. Finland’s business cycle has passed its peak. Real GDP is expected to have increased by 1.4% in 2019 after 1.7% in 2018 and 3.1% in 2017. Lower GDP growth results mainly from lower net exports and less dynamic investment, in particular investment in equipment. Lower employment growth is weighing on consumer spending, while construction of residential housing is clearly decelerating. Inflation remains close to the EU average. Finland’s economic growth is projected to slow down from 2.1% over the previous three years to an average annual rate of 1.0% in 2020-2021. In the coming years, public investment is expected to partly offset the loss of momentum in global trade expansion. The country’s shrinking workforce is set to affect growth potential relatively soon as well as the long-term sustainability of public finances. The workforce appears to be ageing faster than previously estimated. As a result, the labour force’s contribution to potential GDP growth is expected to turn negative as early as 2021. The decline in the working-age population and the ageing of the overall population are soon expected to have a negative impact on public finances, notably through increasing health care, long-term care and pension expenditure weighing directly on the sustainability of public finances. Raising employment to the declared target of 75% could help Finland deal with the demographic challenge and improve the sustainability of public finances. A major objective for the new government is to attain a 75% employment rate (15-64-year olds) by 2023 (72.6% in 2019). It will require a large range of measures, especially in a low economic growth context. In particular, several characteristics of the labour market and of the social benefit system tend to affect the job opportunities of people who belong to some specific groups, while rising vacancy rates and labour shortages suggest a need to invest in skills. Tackling these issues could require structural reforms of the social benefit system, which could be politically challenging. These could include addressing the ‘unemployment tunnel’, which allows extended unemployment benefit to older people ahead of the statutory retirement age. Raising productivity appears to be key to offsetting the negative impact of the demographic challenge. Investment remains below EU average for categories that most support productivity growth, notably investment in equipment and in intellectual property. This impedes the growth potential and weighs on the country’s competitiveness. Furthermore, labour shortages in high-skilled sectors suggest a need for investing in skills that contribute to higher productivity. The new government’s plans to increase public investment in the coming years, notably in skills, education, R&D and infrastructure, could strengthen the economy’s capacity to face these challenges. Focusing investment-related economic policy on human capital, on research and innovation, on low carbon and energy transition, and on sustainable transport, would strengthen the country’s long-term growth potential. While the overall investment level in Finland appears largely satisfactory, investing further in people's skills, education and training and in coordinated professional services available to the unemployed and the inactive is needed to offset workforce losses from population ageing, reduce inactivity and long-term unemployment and potentially increase productivity. Employment would also benefit from investment in social inclusion. The ratio of R&D to GDP has not recovered since the crisis years and appears to be insufficient to diversify exports towards higher tech goods in the medium term. The decarbonisation of energy-intensive industries and the transport sector will also require higher private and public investment. Finland has made limited () progress in addressing the 2019 country-specific recommendations. There has been some progress in the following area: ·Reforms are being implemented to strengthen skills and inclusion, notably through well-integrated services and higher funding for continuous learning in vocational education and training and tertiary education. ·Measures to mitigate risks to the financial system as a whole have been adopted and other measures are being drafted to strengthen the monitoring of the household debt.

There has been limited progress in the following areas: ·The government plans to continue the social and healthcare reform initiated by Juha Sipilä’s government (2015-2019). The reform is expected to be adopted by the end of the government’s term. ·Improving incentives to work is a long-term process that entails simplifying the complex benefit system, while keeping its capacity to reduce poverty and inequalities. The benefits system reform process is expected to be implemented gradually over two government terms (to be completed by 2027). ·As regards investment-related economic policy on research and innovation, low carbon and energy transition and sustainable transport, the Finnish government has announced plans to strengthen investment in these areas. ·Work on the credit registry is still in the planning phase: the necessary legislative work on data protection has started in early 2020, while work on the credit registry itself might incur delays. The authorities are committed to having the necessary legislation in place by 2023. ·Finland performs well on the indicators of the Social Scoreboard supporting the European Pillar of Social rights. The good overall results reflect Finland's advanced welfare model with a strong social dialogue. Income inequalities are among the lowest in the EU and few people are at risk of poverty or social exclusion. Finland continues to have an education system that generally performs well. It scores well on digital skills, although a lack of specialists seems to create obstacles for companies in the information and communication services sector. Access to health care remains a concern, given the relatively high unmet health care needs. Regarding progress in reaching the national targets under the Europe 2020 strategy, the employment rate target of 78% (20-64-years old) appears to be within reach, although the low-growth environment may pose challenges. The poverty rate is low compared to the EU average, but recently it has slightly increased and the national target seems to be out of reach. The school-drop-out rate (‘early school leaving’) remained slightly above the target of 8%. The very ambitious R&D investment target of 4% of GDP is unlikely to be met. However, Finland is broadly on track to reaching its 2020 climate and energy targets. Finland is a front-runner in integrating the United Nations Sustainable Development Goals (SDGs) into public policies, and performs better than the EU average on most of those. Moreover, the country is further improving its ranking for most SDGs, but with significant progress made on SDG8 — decent work and economic growth, while it is moving moderately away from SDG9 on industry, innovation and infrastructure (). Key structural issues analysed in this report that point to particular challenges for Finland’s economy are the following: ·Weaknesses in the policy framework have hindered the participation of certain groups in the labour market. These groups notably include low-skilled men, workers close to retirement, people with a migrant background, people with partial work ability and persons with disabilities. Spending on policies to help people find or stay in work is lower in Finland than in other Nordic countries. Moreover, dispersed services for the unemployed and inactive may hinder the activation the activation of some specific groups in the labour marget. ·Other factors holding back employment are related to weak incentives inherent in the complex social benefit system. Unemployment and inactivity traps and lack of flexibility in combining income from part-time work and various benefits may somewhat hold back an increase in the employment rate. The government plans to address these issues, including through a long-term reform of the social benefit system; however, the reform is at an early stage of preparation and cannot be assessed yet. ·Demographic trends pose some risks for the sustainability of public finances and accessibility of health and long-term care services. Finland’s shrinking workforce and the ageing-related long-term trends in spending is set to affect the long-term sustainability of the country’s public finances (see above). Furthermore, the high unmet health care needs remain a concern, especially for people not covered by occupational insurance. A major reform of the healthcare system is currently being considered and is expected to be largely based on the plans and objectives of Juha Sipilä’s government. ·Productivity growth remains a challenge. Finland’s productive investment remains close to, or even below, the EU average for categories such as equipment, including information and communication technology equipment, and intellectual property products. Moreover, productive investment is rather narrowly concentrated, with an increasing gap between the most productive firms and those that are the least productive. ·Some structural factors might be holding back investment. The most commonly cited barrier to investment is the availability of skilled staff, notably in the information and communication services sector. Other impediments are: i) lengthy procedures for obtaining business permits; ii) the still limited cooperation between businesses and academia; iii) lack of coordination of smart specialisation at central level; and iv) the still modest access to finance for seed capital companies. ·Household debt remains high but the banking sector is well capitalised. Household debt, including through housing corporations, remains at historically high levels, supported by persistently low interest rates. The predominance of variable rates could create risks if interest rates rise in the medium term. Consumer credit is also rising. The lack of a comprehensive (positive) credit registry prevents banks from having a clear overview of households’ overall debt. However, the servicing of debt remains solid, and banks remain well capitalised. Moreover, further measures to contain the rising household debt are being considered. ·There are some weaknesses in the measures taken to tackle money laundering. Finland intends to update its national risk assessment of money-laundering and terrorist financing, as the current assessment dates from 2015. Preparatory work is expected to be completed in 2020. The Finnish Financial Supervisory Authority has made progress in boosting its supervisory capacity but there is scope for further improvement as regards human resources. There is also scope for applying a risk-based approach to supervision. Cooperation with the Financial Intelligence Unit beyond providing guidance to obliged entities is limited. ·Finland is broadly on track to reaching its 2020 climate targets, but its objective of reaching carbon neutrality by 2035 will require an ambitious set of new measures. The Finnish government intends to achieve this objective, notably with a further electrification of the economy, and by largely using nuclear fuel and renewable energy to generate power. This will require a comprehensive agenda of policies and measures. In this respect, decarbonising energy-intensive industries and the transport sector appear as key objectives. Sizeable investment in low carbon and energy transition as well as in sustainable transport infrastructure is being considered. The government has announced an overhaul of energy taxation and it will phase out fossil fuel subsidies on oil, coal and, possibly, peat. Waste management is advanced, but the country’s recycling rate remains below the EU average. The Commission’s proposal for a Just Transition Mechanism under the next multi-annual financial framework for the period 2021-2027, includes a Just Transition Fund, a dedicated just transition scheme under InvestEU, and a new public sector loan facility with the EIB. It is designed to ensure that the transition towards EU climate neutrality is fair, by helping the most affected regions in Finland to address the social and economic consequences. Key priorities for support by the Just Transition Fund, set up as part of the Just Transition Mechanism, are identified in Annex D, building on the analysis of the transition challenges outlined in this report. 1. Economic situation and outlook GDP growth

Economic expansion is expected to ease. Finland’s real GDP is estimated to have increased by 1.6% in 2019 (see Graph 1.1), having already decreased in 2018 (1.7%), following robust growth performances in 2016 and 2017. Growth is forecast to have been broad-based, with positive and balanced contributions from all components. Gradual cyclical slowdown in advanced economies, weakening external demand and a period of increased uncertainties, are all expected to weigh on growth. Falling consumer confidence and lower employment growth might affect private consumption, and construction investment is likely to fall. This is expected to be partly offset by an expansionary fiscal stance. In 2020 and 2021, GDP growth is forecast to decelerate, as the contribution from net exports turns negative. Graph 1.1:GDP growth and contributions Source: European Commission (Autumn forecast 2019) Potential growth Finland’s potential GDP growth prospects are affected by a gradually shrinking working-age population. The number of births declined by around 20% over the last decade and the latest update of the population projections implies even faster ageing than previously estimated. Labour contribution to potential GDP growth is expected to be negative as early as from 2021 onwards (see Graph 1.2). Assuming that current trends continue, this negative impact is anticipated to gradually increase over the coming years. While the contribution of total factor productivity and capital accumulation are projected to offset in excess the negative impact of ageing, these demographic trends are expected to represent a substantial drag on potential growth. Graph 1.2:Contributions to potential growth Source: European Commission The impact of a structural change from manufacturing to services activities has affected Finland’s aggregate productivity. From 2000 to 2018, the relative share of GDP at current prices of the highly productive manufacturing sector (average labour productivity growth of 3.4% over 2000-2018) declined by 10 percentage points (pps). At the same time, the aggregated share of construction, real estate, professional and non-market services activities, whose average productivity growth was close to zero or negative, increased by 8 percentage points. This progressive structural shift is a long-term phenomenon that could continue to negatively affect Finland’s overall potential economic growth in the years ahead. Moreover, the share of high-tech services in GDP (information & communications), whose productivity growth is high (3.3% over 2000-2018), increased by only 1 percentage point. Low levels in the categories of productivity-enhancing investment() could prevent Finland from achieving higher potential growth rates (see Section 3.4). Finland’s level of investment remains close to, or even below the EU average for investment categories that most support productivity growth. In particular, equipment investment has been among the lowest in the EU for many years, which applies specifically to ICT equipment. This is a puzzling phenomenon in an otherwise strongly digitalised economy (see Section 3.4). Furthermore, after the technological disruption that affected the country’s largest private R&D investor a decade ago, investment in intellectual property slightly recovered in 2018, but remains markedly below the level of its Nordic peers (Sweden and Denmark). Graph 1.3:Investment: total construction and housing construction - Finland and the EU – As a share of value-added Source: European Commission Construction, a less productive investment category, remains predominant at 61% of total investment (). The country still has the highest level of construction investment in the EU (see Graph 1.3). Housing construction is particularly high, as people move from rural areas to dynamic urban centres. Beyond still favourable conditions provided to borrowers, public investment in social housing and public incentives to housing construction remain sizeable. The average labour productivity growth of the construction sector is close to zero (-0.1% over the 2000-2018 period). However, amidst high territorial dispersion and limited regional labour mobility, housing construction in dynamic urban centres is expected to contribute to higher allocative efficiency. Inflation Inflation failed to pick up in 2019, remaining below the euro area average (see Graph 1.4). The pass-through from higher wages into services was smaller than in the past. Expected slower economic growth and low external price pressures implies that the period of low inflation is likely to continue, remaining below 2% over the next 2 years. Graph 1.4:Annual harmonised index of consumer prices, Finland, annual average, % change Source: European Commission Labour market After 4 years of economic growth, the labour market situation has improved, but a slowdown is expected. Employment continued increasing in 2018, both in absolute terms and in the percentage of the workforce. It increased by 2.1 pps in 2018 to reach 76.3% (20-64 year-olds), partly due to a drop in inactivity. Employment is expected to continue growing in 2019 and 2020, albeit at a slower pace. The unemployment rate has been decreasing steadily since 2016. It stood at 7.4% in 2018 down from 8.6% recorded in 2017, although still slightly above the EU average. The new government has set an ambitious employment target to be reached by the end of 2023 (see Section 3.3). The still relatively high unemployment suggests structural bottlenecks in the labour market. Youth unemployment decreased substantially in 2018 but remains above the EU average. Similarly, the activity rate is catching up but the employment figures are still below those of Nordic peers, and even below the EU average for some age groups. Among the reasons for inactivity are disincentives to work, inactivity traps, unemployment traps, bureaucratic traps, caring responsibilities, illness or disability, as well as relatively low regional mobility. Wage growth was moderate in 2018 and 2019. Real wages improved modestly in 2018. This should have changed in 2019, due to a tightening labour market (see Section 3.3). Unit labour cost is expected to have increasing in 2019 slightly faster than in the EU on average, thus not overly affecting competitiveness. Social developments The risk of poverty, social exclusion and income inequality remains among the lowest in the EU, despite a slight increase. At 16.5% in 2018 (15.7% in 2017), the risk of poverty or social exclusion remains below the EU average of 21.9%. The ratio of the income of the richest 20% compared to the poorest 20% has remained broadly stable (3.6 in 2018). Finland remains among the best performers in the EU as fighting poverty and social transfers play a major role in reducing poverty. In 2018, social transfers reduced the risk of poverty by 53.7% and the poverty gap by 82% (the EU averages are respectively 33.2% and 55%). In 2018, the income share of the poorest 40% of the population stood at 24%, being among the highest in the EU (EU average 21%). Still, the ageing population and the rising age-related expenditure remain concerns for the long-term sustainability of the Finnish public finances.

Regional disparities Regional disparities have slightly decreased in recent years, but there is still a gap between the capital region and the less developed region of North and East Finland. In terms of GDP per head, the Greater Helsinki region stood notably above the EU average (142%) in 2017 and 1.5 times higher than the weakest North and East region, where GDP per head corresponds to 91% of the EU average. In 2010, the capital region´s GDP per head was 1.7 times higher than that for North and East Finland. Graph 1.5:Regional convergence: average GDP per head growth in 2010-2017 vs. GDP in 2010 Source: European Commission – Staff calculations The decrease in regional disparities is largely due to a slow recovery in the capital region in 2010-2017 (see Graph 1.5). During this period, all regions except North and East Finland expanded at a considerably slower pace than the EU average growth rate of 1.2%. The GDP per head in Helsinki region declined, while other regions in mainland Finland modestly grew (between 0.24% and 1.19% annually), with South Finland and North and East Finland above the country average. Regional unemployment and activity rates have been converging in recent years. The dispersion of NUTS2 () regional employment rates is now at 3.2 pps, one of the lowest rates in the EU. The North and East region is lagging behind in terms of employment. Graph 1.6:Nominal unit labour costs in total economy (2015=100) Source: European Commission Competitiveness In 2019, the nominal labour costs are expected to have increased in Finland slightly faster than in its Nordic peers (see Graph 1.6) . In 2019, nominal wages are expected to have grown relatively strongly (3.1%), only partly offset by a small recovery in productivity growth (0.4%). Overall, this is set to have further pushed up nominal unit labour costs, opening the risk of decreasing the cost-competitiveness edge gained in previous years. In parallel, comparatively lower productive investment is expected to continue to weigh on productivity, and therefore, in particular, on non-cost competitiveness (see Graph 1.7). Furthermore, if business creation were to be below EU average, it might hamper the swift economic redeployment towards high-tech activities (see Section 3.4). In recent years, export market shares recovered, reducing past cumulated losses. In 2018, exports benefited from the continued recovery in world trade (see Graph 1.8) and increased shipbuilding export. However, overall, the recovery in Finland’s market shares is small compared to accumulated losses since 2008. In 2019, unit labour costs are expected to have reverted to positive growth and the real effective exchange rate appreciated slightly. In the years ahead, import growth is expected to marginally outpace export growth. As unit labour costs are set to increase faster in Finland than in the EU as a whole, further market share gains for Finland are expected to be limited. Graph 1.7:Breakdown of balance of trade for goods (fuels not included) 2001-2018 – Cost and non-cost competitiveness impact Source: European Commission External position In 2019, both current account and trade balance deficits narrowed slightly. The current account balance improved from -1.4% of GDP to

-1.1% of GDP, while the trade balance improved by 0.5 pps to -0.7% of GDP (see Graph 1.9). The current account balance is still below (-0.7%) what can be explained by fundamentals (Countinho et al., 2018). The trade balance for goods remained slightly positive, while the deficit on services decreased due to strong rise in exports of telecommunications, computer and information services. These account for almost 35% of the total exports of services (). Overall, Finland is relatively more exposed to foreign currency fluctuations as 5 out of its top 7 export markets are non-euro area countries (goods exports by country in 2018: Germany 15.1%, Sweden 10.4%, United States and the Netherlands

6.8%, China 5.5%, Russia 5.2%, and the UK 4.5%). Finland’s net international investment position has slightly improved and reverted to positive values in 2019. It improved from ‑2.0% of GDP in 2018 to 3.5% in 2019 (see Graph 1.10). Both gross assets and liabilities have increased markedly in the fourth quarter of 2018, due to the move of a major bank’s headquarters from Sweden to Helsinki. At the end of 2019, the financial sector accounted for almost half of total liabilities, while the relative share of non-financial corporations in total liabilities declined. Government social security funds remain the largest net positive sector, followed by the central bank and collective investment schemes. Graph 1.9:Breakdown of external position (current and capital accounts) Source: European Commission Financial sector and household debt Finland’s banking system remains robust and is now one of the EU’s largest in relative terms. Its balance sheet is four times the country’s GDP. The banks are highly capitalised and have low ratios of non-performing assets. In terms of risk, the banking sector is heavily reliant on wholesale market funding and has potential substantial exposure to other Nordic financial systems. The credit risk is strongly linked to high households’ indebtedness. It stood at 140% of household disposable income in 2019. Total private sector debt amounted to 142% of GDP in 2018, in line with fundamentals-based benchmarks (European Commission, 2018a) but above prudential, estimated at around 125% of GDP. Both non-financial corporations and household debt lie above their prudential values (of 56% and 68% of GDP, respectively), while household debt, at 65% of GDP in 2018 is also above its fundamental value of around 57% of GDP). European Systematic Risk Board issued recommendations in June 2019 (European Systemic Risk Board, 2019) that call for activation of income-related borrowers-based measures. As one of the proposed measures to curb household indebtedness, the authorities have started preparatory work to establish a comprehensive credit registry by 2023. Housing market

There is continued and growing disparity in house prices between the bigger cities and the rest of Finland. On a country level, by third quarter prices increased in nominal terms both for new buildings and existing housing stock, but deflated prices of existing housing stock were slightly lower than in 2018. However, prices in Helsinki and the bigger cities (where there is a net migration) are clearly rising faster than in the rest of the country. There is likely to be little price pressure, due to the construction of a high number of new buildings in recent years, which increased the stock of unsold dwellings. As indicated by the decreasing number of building permits and building starts, it is likely that the supply of new dwellings will drop in 2020 and 2021, putting more upward pressure on prices in the medium term. Graph 1.10:Breakdown of the international investment position (% of GDP) Source: European Commission Public finances The general government headline balance is forecast to deteriorate. According to the Commission 2019 Autumn Forecast, the deficit is expected to increase from -0.8% of GDP in 2018 to -1.1% of GDP in 2019. While economic and employment developments continue to support tax revenues and contain spending on social benefits, the outlook for government revenue has clearly deteriorated in line with macroeconomic trends. Furthermore, higher-than-expected spending by local authorities in the first half of 2019 further deteriorated the projected balance. The recent statistical data revisions also resulted in the balance for 2018 deteriorating by 0.1 pp. The general government balance is forecast to further deteriorate to -1.4% of GDP in 2020 and – assuming no-policy-change – to -1.6% of GDP in 2021. The public debt-to-GDP ratio may approach the 60% benchmark ratio in the medium term. Finland reduced its gross public debt from the peak of 63% of GDP in 2016 to 59% of GDP in 2018. The Commission forecasts that the government debt ratio will remain close to this level in 2019 and 2020, and will start increasing in 2021. In the long term, the costs of ageing, in particular related to healthcare and long-term care, are projected to weigh on the sustainability of Finland’s public finances. Sustainable development governance Finland is a front-runner in integrating the United Nations Sustainable Development Goals (SDGs) into public policies (), and performs better than EU average on most of those. Finland was one of the first countries in the world to prepare a national programme to interpret the United Nations’ 2030 Agenda. It was one of the first countries to voluntarily report on its progress at the UN High-Level Political Forum on Sustainable Development 2030 Agenda in July 2016 (). Unsurprisingly, Finland ranks higher than EU average for most SDGs, except on a few sub-items. Overall, the country is improving its ranking for 11 SDGs, out of 17, but with significant progress made on three of them: Decent work and economic growth (SDG8), Climate action (SDG13) and Peace, justice and strong institutions (SDG16). It is moving moderately away from three SDGs: Partnership for the goals (SDG17), No poverty (SDG1) and Industry, innovation and infrastructure (SDG9) (see Annex E). Table 1.1:Key economic and financial indicators - Finland Source: Eurostat and ECB as of 4-2-2020, where available; European Commission for forecast figures (Winter forecast 2020 for real GDP and HICP, Autumn forecast 2019 otherwise) 2. Progress with country-specific recommendations Finland has achieved some progress in implementing the country-specific recommendations (CSRs) addressed to it since 2011 (). Overall, Finland has recorded at least ‘some’ progress on 70% of all CSRs addressed to it since 2011, and ‘limited’ progress on the remaining 30% of the CSRs. Over recent years, Finland has been addressing the challenges to the long-term sustainability of public finances by adopting a pension reform that came into force in 2017. External sector challenges have abated and cost competitiveness has improved thanks in particular to the measures in the Competitiveness Pact of 2016. Finland has also taken action to increase incentives to accept work and to strengthen active labour market policies. Graph 2.1:Overall multiannual implementation of 2011-2019 county-specific-recommendations to date Source: European Commission The pension reform has strengthened the long-term sustainability of public finances. The ageing population is putting pressure on the pension and healthcare systems. The reform of the earnings-related pension system, which linked statutory retirement age to life expectancy, was enacted in late 2015. Under the reform, the lowest statutory retirement age has gradually started to rise from 63 to 65 as from 2018. In 2019, the minimum retirement age was 63 years and 6 months. Efforts to improve cost-efficiency of healthcare services are still ongoing. The gradual improvement of cost competitiveness has been supported by the implementation of the CSRs since 2014. Progress has been made in aligning wage growth with productivity developments, which has resulted in a slower increase of unit labour costs and improved cost-competitiveness relative to competitor economies. A new Finnish wage-setting model was being discussed. In this model, pay rises in the non-tradable sector would have been linked to the increases first agreed in the tradable sector. However, no formal agreement on this link was reached. Reforms in the labour market have advanced, but activity of some groups is still low. Several measures have been introduced to activate unemployed job seekers, such as carrying out regular interviews with the unemployed. In order to increase incentives to work, the earnings-related unemployment insurance was been cut in time several years ago. Nevertheless, dispersed services for unemployed and inactive people may still hamper the activation of some specific groups in the labour market. Moreover, spending on active labour market policies is still lower in Finland than in other Nordic countries. Finland has taken measures in several policy areas and has made limited () progress in addressing its 2019 CSRs. To improve the long-term sustainability of public finances, the government plans to continue the social and healthcare reform initiated by the previous government. The reform still aims at addressing the fragmentation of the system and the related financial challenges faced by small, remote municipalities. The centralisation of service provision to the county level is being considered and would likely lead to increases in efficiency. Accessibility to health and long-term care would be promoted by means of strengthening the primary care system. The government plans to adopt the reform by the end of its term. On addressing labour market and social challenges, more integrated and personalised services are expected thanks to the announced work ability reform as well as a result of the service experiments carried out in municipalities. The reform of vocational education and training is in its final stages of implementation and the funding model should increase incentives to strengthen links with businesses and provide more re-skilling and upskilling opportunities for adults. Similar development is expected in tertiary education in 2021, when its new funding scheme will enter into force. Moreover, the government is launching a ‘continuous learning’ reform to help adult workers address skills shortages. Other factors holding back employment are related to disincentives inherent in the complex social benefit system. Unemployment and inactivity traps, the ‘unemployment tunnel’ as well as a lack of flexibility in combining work income and various social benefits — constitute impediments to higher employment rate. The government plans to address some of these issues through a long-term reform of the social benefit system. Increasing the minimum age for extended unemployment benefits, the so-called ‘unemployment tunnel’, from 61 to 62 and deployment of the real-time income register are improving incentives to take up work or to remain at work. On investment-related economic policy, the amount of public money to support research and development is expected to increase. In parallel, the government’s objective is to make Finland carbon neutral by 2035 and the world’s first fossil-fuel-free society. This will require a comprehensive agenda of policies and measures, including large investments in low carbon and energy transition as well as in sustainable transport infrastructure. Sustainable infrastructure investment is being planned, notably to increase labour mobility. A new national transport system will be developed in 2020-2021 under the lead of a parliamentary steering group. The government has announced an overhaul of energy taxation, notably with a pledge to phase out fossil fuel subsidies on oil, coal and, possibly, peat. Some progress has been observed in the monitoring of the household debt. Private-sector debt remains at historically high levels, as a result of persistently low interest rates. However, the servicing of debt remains solid, and banks remain well capitalised. Moreover, in early October, the Ministry of Finance proposed to limit to 60% the loan to value ratio (selling price ratio) applicable to housing companies. In parallel, a debt-to-income ratio will be applied to households when their loan requests exceed a certain threshold, while the legislation relating to consumer credit has been tightened. Further macro-prudential measures to contain the household debt are being considered.

Work on the credit registry is still being planned. The government has recently decided that the credit registry is to be managed by a public entity. The necessary legislative work on data protection was expected to start in January 2020, while work on the registry itself might be delayed. Nevertheless, the authorities are committed to having the necessary legislation in place by 2023. Upon request from a Member State, the Commission can provide tailor-made expertise via the structural reform support programme to help design and implement growth-enhancing reforms. Since 2019, such support has been provided to Finland for three projects that involved i) facilitating domestic and foreign investment by assessing the impact of regulations on international investment in Finland, ii) measuring the size of the digital economy in Finland and its impact on taxation, and iii) proposing an improved VAT reporting model. Table 2.1:Assessment of 2019 CSR implementation (*) Source: European Commission (*) The assessment of CSR 3 does not take into account the contribution of the EU 2021-2027 cohesion policy funds. The regulatory framework underpinning the programming of the 2021-2027 EU cohesion policy funds has not yet been adopted by the co-legislators, pending inter alia an agreement on the multiannual financial framework (MFF). Box 2.1: EU funds and programmes to address structural challenges and to foster growth and competitiveness in Finland Finland is a beneficiary of EU support. The financial allocation from the EU Cohesion policy funds for Finland amounts to €2.6 billion ( I ) in the current Multiannual Financial Framework, equivalent to around 0.2% of the GDP annually. By the end of 2019, some €2.1 billion (around 79% of the total) was allocated to specific projects and €1.2 billion was reported as spent by the selected projects ( II ) showing a level of implementation well above the average. EU Cohesion policy funding also contributes to addressing structural challenges in Finland. The Cohesion Policy programmes for Finland have allocated EU funding of €581.9 million for smart growth, €186.5 million for sustainable growth and €502.7 million for inclusive growth. In 2019 following the performance review ( III ) €160.9 million have been made available within performing priorities. EU Cohesion policy funding is contributing to transformations of the Finnish economy and society by promoting growth and employment via investments, among others, in research, technological development and innovation, competitiveness of enterprises, low carbon society, employment, education and social inclusion. By 2019, investments driven by the ERDF have already led to the creation of more than 5,800 new jobs and 320 new enterprises. Almost 10,000 companies had participated in projects run by research and development institutions, more than 1,400 companies had started to export or expand their exports. The ESF supported over 200,000 participants finding a job, among which over 30,000 long-term employed and 26,000 migrants. Moreover, to tackle youth unemployment, the ESF has invested in projects to improve educational outcomes and access to the labour market for over 37,000 participants under 30 years old ( IV ). Agricultural and fisheries funds and other EU programmes also contribute to addressing the investment needs. The European Agricultural Fund for Rural Development (EARDF) makes available in total €5.7 billion, and the European Maritime and Fisheries Fund (EMFF) in total €141 million (including the national co-financing for both). Finland benefits also from other EU programmes, such as for example the Connecting Europe Facility, which allocated EU funding of €190 million to specific projects on strategic transport networks; or Horizon 2020, which allocated EU funding of €1.1 billion (including 340 SMEs with about €216 million). EU funding contributes to mobilisation of important private investment. European Structural and Investment funds (ESIF) supported programmes alone mobilise additional capital by committing about €43 million in the form of loans, guarantees and equity. EU funds already invest on actions in line with the Sustainable Development Goals (SDGs). In Finland, European Structural and Investment Funds support 12 out the 17 SDGs and up to 98% of the expenditure is contributing to those. 3. Reform priorities 3.1.Public finances and taxation 3.1.1.fiscal policies Fiscal policies helped lower the deficit by reducing public expenditure in 2015-2017. The general government balance improved from its lowest at -3% of GDP in 2014 to -0.8% in 2018, in the context of economic growth and fiscal consolidation. Between 2014 and 2017, the government expenditure as a proportion of GDP fell from 58.1% to 54.2% (see Graph 3.1.1). It was driven mainly by cuts in spending on health, education, economic affairs as well as social protection. The public wage bill has also come down due to the measures in the 2017 Competitiveness Pact (wage freeze and a temporary reduction in holiday bonuses), lowering expenditure on general public services by 0.4% of GDP. Total public spending remained second highest in the EU, still well above the EU average (54.2% vs 45.8%). Graph 3.1.1:General government expenditure as a proportion of GDP, broken down by function, Finland and the EU Source: Eurostat In 2019, the government decided to change the fiscal stance and pursue expansionary policies by means of fostering structural reforms. The government’s plans anticipate a permanent increase in annual expenditure by €1.1 billion (0.5% of GDP) in 2020, increasing to €1.4 billion by 2023. The government also plans to spend a total of €3.1 billion (1.3% of GDP) on ‘future-oriented investments’ in 2020-2023. The planned increases in spending will be directed towards labour market and social security reforms, investment in education and health care as well as the maintenance of transport infrastructure. Tax hikes, asset sales and the projected increase in income taxes from new jobs are the main sources of finance for the government programme. The new permanent expenditures are planned to be primarily covered through increases of excise duties reaching €0.7 billion (0.3% of GDP) by 2023. The government plans to cover the remaining gap to achieve a balanced budget in 2023 from the expected revenue from the higher employment rate. The 'future-oriented investments', which the government plans to phase out by 2023, are to be financed by sales of State assets. The initial expenditure-revenue mismatch on top of underlying trends is expected to lead to the general government balance deteriorating (see Graph 3.1.2). The headline deficit is forecast to increase from 1.1% of GDP in 2019 to 1.4% of GDP in 2020 and 1.6% of GDP in 2021. Graph 3.1.2:Drivers of change in general government balance Source: European Commission It is not certain that the higher public spending will lead to a proportional increase in the public debt. Finland has a large stock of financial assets that the government is going to use to finance part of this planned expenditure. Finland reduced its gross public debt from the peak of 63% of GDP in 2016 to 59% of GDP in 2018. The Commission forecasts that the government debt ratio will remain close to this level in 2019 and 2020. It will start increasing in 2021, not least due to substantial military expenditure that will kick in. Taxation Finland's tax structure is characterised by a high overall tax burden skewed to labour and consumption. In 2018, the total tax burden (43.2% of GDP) was among the highest in the EU. This is mostly driven by a relatively high level of personal income taxation (12.2% of GDP) and of taxes on consumption (14.2% of GDP). By contrast, revenues from capital taxes, including recurrent immovable property taxes, are at 7.1% of GDP, somewhat below the EU average. The government decided to continue the gradual tax shift away from taxation of labour income towards consumption taxes. It proposed a moderate decrease of the personal income tax by adjusting lower and middle income tax brackets. The tax base will be strengthened by phasing out the mortgage interest deduction and reducing the tax credit for household expenses. At the same time, increases in excise duties on tobacco products, soft drinks are scheduled, which can lead to health and welfare benefits. Taxes on transport fuels will also increase in 2020. The reform of immovable property taxation remains on the agenda. The aim is to ensure a better overall match between the immovable property tax base and the market value of properties. The government programme points out that immovable property taxes must take into account the environmental aspects. Regarding taxes on capital, the government is also studying the prospects for introducing, from 2022 onwards, a 5% withholding tax on dividends payable to foreign funds and other corporations that are currently exempt from dividend tax. Revenue from environmentally-related taxes remains above the EU average,. Environmental taxes accounted for 2.9% of GDP in 2018 (EU average 2.4%), and energy taxes for 1.9% of GDP on the same level as the EU average. While subsidies had almost disappeared by 2016, tax exemptions remained in place in 2016 for fossil fuels used in transport (), mobile machinery, agriculture, energy-intensive businesses, heating, etc. These exemptions totalled €1.6 billion (or 0.7% of GDP) in 2016 (Organisation for Economic Co-operation and Development, 2020). A general tax reform for sustainable development will cover energy taxation, transport taxation, promotion of the circular economy and will include a study on the taxation of emissions-based consumption. The General Government Fiscal Plan for 2020-2023 includes appropriations for the carbon neutrality targets, the wellbeing of the environment and biodiversity, reducing emissions, supporting renewable energy and public transport. Efforts to improve tax compliance continue with the implementation of the income register and deployment of special tax number systems. The income register (see also European Commission, 2019a) became operational in 2019, and the first experiences have revealed that some corrective measures are needed to make sure that the data are reported correctly. There will be more support provided to small businesses and civil society organisations. The income register will be expanded in two separate stages. As from 2020, all data users who are covered under the Income Register Act began to use the income register data. From 2021, data on pensions and benefits will also be reported and enforcement authorities will begin to use income register data. The Finnish Tax Administration has introduced special tax number systems to improve tax collection and prevent a grey economy from developing. Based on the positive experience in the construction industry (), the system will be introduced in the shipbuilding sector. The need to introduce it in other sectors, such as tourism and restaurants, will be assessed. Fiscal framework

Finland is the only euro area Member State that has designated a Ministry of Finance department as the independent forecast producer in the meaning of Regulation (EU) 473/2013. The management of the Economics Department and the Budget Department of the Ministry of Finance are separated and the Economics Department carries out its forecasting activities independently. However, this particular arrangement warrants regular surveillance to ensure that the separation and independence of both functions within the one institution are preserved. The government follows some ‘green budgeting’ practices. Since 2017, budget proposals include a chapter focusing on climate change and sustainable development (see Section 3.5). It examines which appropriations included in the budget foster green targets. In particular, it presents the appropriations that promote i) the use of renewable energy, ii) biodiversity and the wellbeing of the environment and nature, iii) emissions reduction, iv) bio-economy solutions and v) developing Finland into a low-carbon society. The chapter also covers taxes that are significant in terms of the goal of a carbon-neutral Finland, such as energy taxes, motor vehicle tax, car tax, excise duty on certain beverage packaging and waste tax. Furthermore, it includes a qualitative assessment of components of public funding that are detrimental to the environment, on the basis of earlier studies. At the beginning of the new term, the government carried out a spending review. Spending reviews are detailed inspections of public expenditure aimed at identifying savings and efficiency gains against the current composition of public expenditure. The previous spending review aimed at providing a detailed description of central government expenditure to be considered in government negotiations after the 2015 elections, with a view also to informing ministers of the new government. The 2019 elections triggered an update of the spending review process. The spending review carried out in the first half of 2019 covered all central government expenditure, including transfers to local governments and social security funds and excluding operational expenditure, expenditure items of less than €50 million and VAT expenses. 3.1.2.Debt sustainability analysis and fiscal risks No significant risks of fiscal stress are anticipated for Finland in the short term. The value of the S0 indicator, the Commission’s early-detection indicator of fiscal stress over one year, is below its critical threshold, for both the fiscal and financial competitiveness sub-indices (see Annex B). The low spreads on sovereign yields and credit-default swaps point to a favourable financial market perception of Finland’s solvency. Finland is facing fiscal sustainability risks in the medium to long term. The sustainability gap indicator S1 points to medium risks, mainly due to the projected increase in age-related public spending. According to this indicator, a cumulative gradual improvement in the structural primary balance of 0.5% of GDP, relative to the baseline scenario, would be required over 5 years to reach the debt ratio of 60% of GDP by 2034. In the long term, the fiscal sustainability gap indicator S2 points to medium risks. Based on the no-policy-change scenario, the S2 indicator () is estimated at 3.6% of GDP. This is worse than estimated last year, due to the more unfavourable initial budgetary position that will impact the S2 indicator to the tune of 1.7% of GDP out of the 3.6% of GDP (up from 0.7% of GDP last year). The projected contribution of the increase in ageing costs remains high (1.9% of GDP), driven by the projected increase in expenditure on long-term care (1.6% of GDP). Public debt is projected to increase over the forecast period. The debt sustainability analysis points to medium risks over the medium term. Under the baseline scenario of no policy change, the debt ratio is projected to increase gradually to about 62% of GDP in around 2030. The debt will primarily grow due to ageing. If the costs of ageing (pensions, long-term care and healthcare expenditure) were left out of the debt projections, the debt ratio would gradually decline to about 53% of GDP in the same period (see Graph 3.1.3). In addition, debt is also projected to grow due to negative primary balances, which will be partially compensated by a favourable contribution of the snowball effect (see Annex B). If Finland was to comply with all fiscal rules under the Stability and Growth Pact, the debt-to-GDP ratio would decline to about 50% of GDP in 2030. By contrast, government debt in 2030 would reach 65% of GDP if economic growth were lower than in the baseline scenario. Graph 3.1.3:Debt as % of GDP Source: European Commission Healthcare and social care reform The increasing spending on long-term care highlights the urgent need to address the sustainability of the health care system. While expenditure on health care alone is below the EU average in terms of current spending (5.5% of GDP vs 6.6% of GDP in the EU), expenditure on long-term care is at 2.2% of GDP, the fourth highest in the EU. By 2070, spending on health and long-term care is expected to grow due to an ageing population and other non-demographic drivers by 13% and 93% respectively. The financing of healthcare consists mainly of government schemes, 62% compared to 36% of the EU average (Organisation for Economic Co-operation and Development/EU, 2018). However, the current system is fragmented, and consists of three channels: the municipal system, the national health insurance system and occupational healthcare. The level of out-of-pocket payments is higher than the EU average and has been increasing over the last three years. After the setback in March 2019, the reform of the healthcare system remains on the political agenda. The regional government health and social services (SOTE) reform prepared by the government in 2015-2019 was not presented to the Parliament in the end, due to, among other things, constitutional concerns. The government is planning to implement the revised reform by spring 2023. The main item of the reform is still the consolidation of management of both health and social care services at regional level. The related plans to reorganise public sector administration for these services at State, regional and municipal levels are also maintained. The reform will put more emphasis on equal access to services and their quality. However, increasing the role of private healthcare providers and granting the patients freedom of choice between public and private services, which was included in the previous version of the reform, is no longer considered. The government’s reform of the healthcare system is to focus on primary care services. About €140 million will be spent over the next three years and 1,000 additional doctors are to be hired in health and social care centres. In particular, the government plans to i) raise the minimum staffing level for care personnel; ii) improve access to basic-level services (shorter maximum waiting times); iii) increase home care resources and informal care; iv) design a national mental health strategy; v) continue the programme to address child and family services; and vi) reform the Act on Disability Services and Assistance. The second aspect of the reform is the transfer of healthcare matters from the 295 municipalities to new administrative entities (15 to 18 counties), albeit at a slower pace than initially planned. Preparations for the administrative reform have started with a study on special arrangements for Uusimaa, the Helsinki metropolitan area. Management at the regional level is expected to improve efficiency. The reform aims at addressing the financial weakness of municipalities, some of which struggle to fulfil their legal obligations in healthcare provision. The consolidation is expected to strengthen the management of the system. The risk-pooling of the population and the access to specialists are likely to improve. The main factor for boosting efficiency will be the ability of the Ministry of Social Affairs and Health to monitor and manage the performance of the future regional healthcare entities. However, no study has been initiated so far on possible cost savings from the reform. Reaching an agreement on the reform has been a challenge for the last 15 years. The new stepwise and consultative approach adopted by the government may prove to be a more effective way to adopt the reform. However, whereas the expansion of primary healthcare to improve accessibility has a clear budget, deadlines and deliverables, the governance reform aiming at improving fiscal sustainability is still being formulated. 3.2. Financial sector 3.2.1.BANKING SECTOR The banking sector is large and its profitability has been slightly declining in recent years. Finland’s banking sector is highly concentrated with the top three players occupying over 70% of the market across all main segments. It is one of the largest in Europe in relative terms, with a balance sheet equivalent to four times the country’s economic output. Banks remain profitable but profit margins have somewhat deteriorated over recent years, and remained mostly stable in 2019 (see Table 3.2.1). A major factor involved are the heavy investments in modernising the IT infrastructure, pushing the average cost/income ratio to 63% in the first 6 months of 2019. Table 3.2.1:Financial soundness indicators, all banks in Finland Source: ECB, CBD Banks are highly capitalised, but the Finnish banking system’s reliance on wholesale funding remains a vulnerability. The sector’s capital levels exceed minimum requirements by a large margin. The sector’s aggregate Common Equity Tier 1 (CET1) ratio declined to 16.6% in 2019. The decline reflected the move of Nordea Group to Helsinki (end-2018), as well as the impact of a minimum risk-weight of 15% on mortgages imposed by the Finnish Financial Supervision Authority in January 2018. Capital ratios are bound to be further challenged by the introduction of Basel III capital requirements. The quality of the loan books is very good, with a low ratio of non-performing loans. However, with a system-wide loan-to-deposit ratio of 127.2%, Finnish banks are more dependent on market funding than some of their European competitors. This is one of the long-lasting structural vulnerabilities of the system, even if at present market access remains relatively easy and prices are favourable. The banks are limiting this vulnerability with a large pool of liquid assets that is higher than the aggregate funding gap, and a steadily increasing issuance and use of long-term debt, mainly covered bonds. They are slowly (on average by €5 billion yearly) replacing securities with a shorter-term repayment profile. While this limits the refinancing risk, it also increases the interconnectedness of credit institutions and their exposure to the Nordic housing markets. Access to finance remained easier than in most EU countries. According to the 2019 survey on access to finance of enterprises, access to finance for small and medium-size enterprises in Finland is deemed the least problematic of all surveyed countries (European Central Bank, 2019). However, in 2017, the size of investment in seed capital companies remained relatively modest, even though it increased in line with the EU average (Flachenecker et al., 2020). Also, the cost of borrowing small amounts relative to large loans is higher than the EU average.

3.2.2.HOUSEHOLD DEBT Robust domestic demand remains the driver behind loan growth. The loan books of Finnish banks’ continue to grow at 2.4% and 6.6% (second quarter 2019) in the household and corporate segments respectively. Loans to non-financial corporations currently represent about 40% of banks’ aggregate loan book to the private sector. In the current environment of low interest rates, most firms and retail clients can easily afford bank credit for any purpose. It is nevertheless concerning that households seem to resort also to borrowing from unsupervised payday loan companies, which aggressively market their services. Household debt to disposable income remains high, close to 140%, similarly to 2018. As in recent years, most of the credit stock, including new lending, is taken at variable rates, which makes borrowers vulnerable to potential rapid changes in the monetary policy stance. The legislative framework required for developing the credit registry is being put in place. A comprehensive credit registry would allow a more complete picture of the overall indebtedness level of households. Following the 2018 report commissioned by the Ministry of Justice that proposed establishing a centralised credit registry, preparatory and analytical work started in 2019. Legislative work has started in early 2020. The registry is expected to be established by the end of the government’s term. It will run alongside the income registry system that is already in operation. A key feature of the credit registry is data protection,. The feasibility study estimates the total cost of the credit registry project at €20 million,. While the registry is expected to ultimately become a fully comprehensive system covering all credit granted to individuals, the coverage of the registry is expected to be developed gradually. At the first stage, at least consumer credit would be included. 3.2.3.ANTI-MONEY LAUNDERING Finland adopted its action plan for the prevention of grey economy and economic crime in June 2018. Money laundering risk in Finland comes primarily from the grey economy. In recent years there have been large-scale alleged money laundering cases in the Nordic EU Member States, which have been looked at in the ‘Report on the assessment of recent alleged money laundering cases involving EU credit institutions’(European Commission, 2019b). The Finnish Financial Supervisory Authority (FIN-FSA) has made progress in boosting its supervisory capacity but more needs to be done. Finland is currently working on a preparatory study for a new national risk assessment, to be completed in 2020. The mutual evaluation report released by the Financial Action Task Force in April 2019, assessed Finland’s anti-money laundering and counter-terrorist financing system and concluded that the financial supervision needed to be strengthen. In particular, it concluded that the following steps were needed: i) the development of a risk classification tool; ii) a better understanding and correct application of the risk-based approach; iii) the revision of inspection procedures and iv) the establishment of a dissuasive sanctioning policy could all enhance the supervisor’s ability to adequately address money-laundering and terrorist financing risks. Following the evaluation, Finland is subject to enhanced monitoring and will have to regularly report on progress made. Finland is committed to rapidly strengthening capacity and has recently provided additional financial and human resources to key competent authorities. Yet, more such resources need to be provided to FIN-FSA. In several cases, the financial supervisor has looked at suspected money laundering in the banking sector. The first sanctions were issued in December 2019 against one bank and one investment company for breaches of money laundering / terrorism financing obligations. The workload for the Financial Intelligence Unit (FIU) has increased markedly over the past year. The number of suspicious transaction reports received by the FIU increased by 64.2% in 2019. In response, the FIU increased its number of staff. In many areas, such as giving guidance to obliged entities, there is a close cooperation between the supervisor (FIN-FSA) and the FIU. However, cooperation is lacking in the consultations on fit and proper tests and the contact between FIN-FSA and the FIU is otherwise limited, as the FIU can only share little information with the FIN-FSA, while the FIN-FSA only shares general information.. Box 3.2.1: A credit registry in Finland A credit information system collects, processes and distributes information for managing credit-related decisions and for financial supervision. The key participants in credit reporting are the data subjects, the data providers, the service providers and the users. There are two main types of service providers. Credit registries (typically government owned) have as their primary objective to support financial sector supervision and monitor systemic risks. Credit bureaus (in most cases privately owned) aim principally at improving the quality and availability of data so that creditors can make better-informed decisions. In terms of reported information, credit information systems may deal with negative and positive data. Negative data is normally limited to the reporting of unfulfilled financial obligations, such as late payments, defaults and bankruptcies, and is only registered when there is an adverse event. Positive data complements the data captured by negative-only files. Among other things, it may include information on assets and liabilities, debt ratios, loan types, lending institutions, guarantees, debt maturities, or repayment patterns. In Finland, credit information is provided by credit bureaus that collect mainly negative information, with notably low coverage when compared to the EU. The coverage ratio has been stable over recent years, whereas in the EU there was a general tendency to increase the coverage of credit information. Furthermore, many EU countries have established public credit registries, and the vast majority of EU credit information systems incorporate positive data as well. At the same time, since 2012, household debt in Finland has been increasing and has exceeded the EU average, while in the EU it has been decreasing (see Graph 1). In this context, the 2019 Country Specific Recommendation (COM(2019) 526) calls for the establishment of a credit registry system in Finland to strengthen the monitoring of household debt (see Section 3.2.2 for recent developments). Graph 3.1.3a: Household debt and credit bureau coverage Sources: Eurostat (2019a), World Bank (2019)

Note: Coverage indicates the number of individuals and firms listed in a credit bureau, with current information on repayment history, unpaid debts, or credit outstanding. The number is expressed as a percentage of the adult population. Well-developed credit information systems with wide coverage are recognised as having several advantages. First, information sharing has a positive impact on information asymmetries and repayment behaviour. Second, credit information systems are important for financial sector regulation and supervision, as well as for the assessment of micro- and macro-prudential risks. Third, and particularly pertinent for Finland, is the link with indebtedness. Credit information sharing can function as a mechanism for borrower discipline and can mitigate the incentive to over-borrow. It reveals borrowers’ debt exposure to all lenders and could eventually reduce aggregate indebtedness, as highly indebted parties receive less credit. Information sharing arrangements are also powerful determinants specifically for household debt, and for related insolvencies and defaults (van Roy et al., 2017; Bennardo et al., 2015, Jappelli et al., 2005, 2013; Padilla et al., 1997, 2000; Girault et al., 2010; Brown et al., 2007). The benefits of collecting positive data are also accredited. In systems without positive data, there may be information gaps and limited oversight of the overall debt level. For example, there would be no information available on debtors that meet their financial obligations regularly, without any adverse events. By contrast, positive data is more comprehensive. Its use improves the ability of lenders to separate low- from high-risk borrowers and, therefore, assists in the efficient extension of credit. Studies link the inclusion of positive information with better lending decisions, credit that is low-priced and fairly distributed, lower default rates and reduced loan losses (Doblas-Madrid et al., 2013; International Finance Corporation, 2012; Turner, 2010). Finally, while credit information systems that include positive data can be useful, regulatory and legal frameworks on privacy and data protection issues should be complied with accordingly. 3.3. Labour market, education and social policies 3.3.1.Labour market After four years of economic growth, the employment rate is historically high, but a slowdown is expected. The employment rate (20-64 years) increased by 2.1 pps in 2018 to reach 76.3% (see Graph 3.3.1). In parallel, the unemployment rate has been decreasing and stood at 7.4% in 2018, a sharp reduction from the 8.6% recorded in 2017. The decline in unemployment also led to a drop in long-term unemployment, which decreased by 0.5 pps to 1.6% in 2018, well below the EU average. Employment is expected to have increased in 2019 and to continue increasing in 2020, albeit at a slower pace. However, some groups, e.g. people of a migrant background still have low employment rates (see the section on social policies below). Graph 3.3.1:Activity, employment and unemployment rates Source: Eurostat Labour shortages are growing, especially in the ICT sector. According to the Finnish public employment service, the number of vacancies increased by 4% in the first two quarters of 2019 to reach 114 000 in 2019. Out of those, around 50% were reported as hard-to-fill vacancies. In particular, the percentage of companies reporting hard-to-fill () vacancies for jobs requiring ICT specialist skills is above the EU average (see also section on skills below). Wages are expected to have grown further in 2019 due to the tightening labour market and to higher contractual wage increases. Nominal wages are expected to have grown in 2019 by 3.1%, above the expected rate of inflation (see Section 1). Most of the collective agreements will expire by 2020. Wage negotiations with public and private sectors for 2020 and beyond started in autumn 2019 and are expected to end in spring 2020. So far, it is difficult to predict to what extent the outcome will take account of productivity developments, competitiveness considerations and wage adequacy. Based on the first round of negotiations, wages are expected to grow by around 3% in the next two years (). The most contentious issue will likely be the working time extension (of up to 24 hours per year) that had been agreed in the Competitiveness Pact in 2016. The technology industry dropped the working time extension in exchange for the possibility to agree locally on extra working hours. The gender pay gap remains at 16.7% just above the EU average. The gender pay gap is partly due to gender occupational segregation in the labour market and long family leaves used mostly by mothers. More women are hired on temporary contracts, with Finland having the second largest gender difference in the EU. The government proposes tackling unjustified pay differences and pay discrimination by improving pay transparency with legislation (Valtioneuvoston kanslia, 2019). Addressing gender segregation through targeted employment and educational policies could increase labour supply in sectors that are facing shortages. Demographic trends are putting pressure on the labour market. The working-age population has been shrinking since 2016 because of ageing (see Graph 3.3.2). Until now, the impact of this on total population growth has been more than offset by positive net migration. Nevertheless, declining fertility puts a strain on the long-term outlook for labour supply. The fertility rate has dropped dramatically in the last 10 years and now ranks among the lowest in the EU (Official Statistics of Finland, 2019). By the end of 2060, the share of working-age population is projected to reduce by 5 pps. The causes of this sudden drop are unclear, but the following possibilities could be considered as reasons: i) difficulty to reconcile family and working life; ii) concerns about the future; iii) the postponement of having children; iv) increased childlessness and v) policy measures that discourage people from having children such as the non-indexation of the universal child allowance or limitations to the universal right to child-care have been eased since 2020. Graph 3.3.2:Population change, 2007-2018 Source: European Commission calculations based on Finland Statistics (data for 2019 are until August) Activity has surged in recent years, but structural bottlenecks remain in the labour market. The total activity rate reached 82% in 2018, up from 80.7% a year earlier. This is above the EU average (78.4%). However, the activity rate of men between 25 and 54 is below the EU average. According to labour force survey in September 2019, the unemployment rate of men increased by 0.4% compared to September 2018, whereas the unemployment rate of women decreased by 1.3%. The activity rate for women at childbearing age (20-39), even though higher than EU average, is around 4 pps. lower in Finland than in its Nordic EU peers. The activity rate of older cohorts (55-64) is 8 pps above the EU average, but remains lower than in other Nordic countries. The government has set ambitious employment targets; removing structural bottlenecks to activity will be key to achieve it (see Box 3.3.2). It will would contribute to achieving the UN Sustainable Development Goal 8 on full employment and economic growth. Drivers for inactivity appear somewhat gender and age specific, in addition to low educational attainment. Family and caring responsibilities appear to affect women disproportionally more than men. The main drivers for men’s inactivity are illness or disability (see Graph 3.3.3). Retirement is the main reason of older cohorts’(55-64) inactivity. The employment rate of low-skilled adults remains below the EU average. However, the number of low-skilled adults is relatively small in Finland (). Addressing inactivity requires a variety of measures depending on the target group. Graph 3.3.3:Reasons for inactivity as a proportion of inactive population by sex and age group. 2018 Source: Eurostat

Incentives to work Inactivity and employment traps remain, but some measures have been taken in recent years to address them. Certain benefits, and their combinations, constitute unemployment or inactivity traps (European Commission, 2016a, 2017, 2018b & 2019b). A reform of the social security system has started, which addresses the overall challenge of inactivity and employment traps (see Box 3.3.2). To address bureaucratic traps (European Commission, 2019b), Finland deployed a real-time income register in 2019. It contains real-time information on salaries and benefits (the latter starting from 1 January 2020). It has the potential to speed-up handling times of unemployment and other benefits, thus increasing certainty of income level if taking-up part-time or short-term work. Moreover, it could open up possibilities for a more effective combination of work-related-income and benefits in the future. Incentives for carers could improve their long-term employment prospects. Long spells involving caring responsibilities, which fall often on women, weaken the labour market position of carers. Women with a migrant background are disproportionally underrepresented in the labour market. The activity rate gap between women born outside the EU and in the EU in 2018 was very high (non-EU 18.2pp - EU 9.5pp). The government has passed legislation to restore full access rights to childcare for children from families experiencing unemployment or inactivity. The government aims to reform family leave. The main objective is to grant both parents an equal number of non-transferable days of family-related leave. The proposed reform could have a positive effect on work-life balance and gender equality. The government is exploring the idea of streamlining the homecare leave system by looking into for example the possibility of paying the home care allowance directly to grandparents. This could open up more opportunities for some parents to return to work or to education. A deeper reform of home-care leave combined with increased investments in access to and quality of early childhood education and care could bring about sustainable results in terms of integrating women into the labour market, especially those from the above-mentioned groups. The pension reform has reduced the number of new old-age retirees. Based on the 2017 pension reform, the earliest eligibility threshold for old-age retirement rises per age group until it reaches 65 years old in 2027. The reform has affected the number of people moving from employment to retirement. The Finnish Centre for Pensions estimates that the number of old-age retirees dropped by 8% between 2017 and 2018, mainly because of the reform. This could partly explain the positive trend of the employment rate for people over 55 years old and it is expected to continue due to the increasing retirement age. The extended unemployment insurance benefits for older workers partly contribute to unemployment in the oldest age groups. The eligibility of older unemployed people, over 61 years of age, for extended benefits reduces their incentives to return to work before retirement. Moreover, it could involuntarily encourage employers to dismiss those employees who qualify for the extended benefits. The social partners proposed to the government an increase of the eligibility age for extended unemployment benefits from 61 to 62 for those born after 1961. The amendment came into force at the beginning of 2020. According to an estimation, the extension would decrease the number of unemployed people by 7,400 by the end of 2025 (Reipas, 2019). In the current context, the full phasing out of such a system and improving incentives for older workers to stay at work would contribute to reduce labour shortages. Activation measures Sustainable activation of target groups is a challenge. Finland is spending more than the EU average on active labour market policies but less than its Nordic peers. In particular, Finland spends one third of its total budget for labour market policies on active measures, whereas Sweden spends around half (Organisation for Economic Co-operation and Development, 2016). The public employment services (PES) have suffered from staff reductions over the last ten years, partly due to efforts to digitalise the services. Deployment of new technologies in the services could also have a negative consequence: putting the PES under threat of losing its position in the labour market as the main player that helps unemployed people find work. It could be beneficial to focus more on activating unemployed men in their prime working age, people with partial work ability and migrants, given their low employment rates. There is a lack of coordination in providing integrated services for people who are ‘hard-to-place’. In recent years, multi-professional services have been launched for different target groups (European Commission, 2017 & 2018b). However, the services for long-term unemployed people and people with ‘partial work ability’ could benefit from tighter coordination and commitment on the part of key players, especially between local PES and municipalities. The challenges are seemingly the lack of human resources as well as incompatible data exchange systems that are preventing services from being effectively integrated. Municipal level experiments seek to address the challenges. Municipalities participating in the experiment were selected in 2019. A law for piloting transfer of employment services from the government’s employment offices to municipalities is under preparation. The new programme promotes the decentralisation of employment and entrepreneurship services to municipality level. The experiments will continue until 2022 and the results will feed into the design of future service structures. The government has repealed the ‘active model’, a conditional unemployment benefit scheme that was introduced in 2018 (European Commission, 2018 & 2019). Based on the government’s proposal, the automatic reduction of unemployment benefits has now been removed, while leaving the other parts of the system untouched. According to an evaluation on its effectiveness (Kyyrä et al., 2019), it was difficult to prove the direct effects of the active model on employment due to the fast economic growth and increased demand for labour. At the same time, the evaluation acknowledged that the model was successful in encouraging unemployed people to use the employment services and that it increased their participation in active labour market measures. It is important that the PES are strengthened so they can intervene rapidly to reduce the risk of long-term unemployment and shifts to inactivity. Following the revision of the ‘active model’, consideration could be given to designing other mechanisms that would increase incentives to look for work or take part in training. Pay subsidies are a key measure put forward by the government to increase employment. The government increased available funding for pay subsidies by €17 million in the 2020 budget. Moreover, measures to simplify the use of pay subsidies by employers are in the pipeline. These changes have a potential to improve the targeting of the subsidies to the private sector and increase their effectiveness in terms of sustainable employment results (Asplund et al., 2018). However, if the pay subsidies are used as an all-around support, it may lead to negative effects, because many unemployed could have been employed even without the subsidy. More concrete proposals are expected over the course of 2020. Measures to increase employment of those with partial work ability are in the pipeline. The previous government launched a ‘work ability programme’ targeting people with partial work ability (see European Commission, 2019b). The reform aims to integrate and clarify the responsibilities of all the relevant services for those with partial or reduced work ability. Moreover, legislative work on a reform of the disability pension has started. It seeks to incentivise people on part-time disability pensions to come back to the labour market. The aim of the reform is to increase the beneficiary’s net income with the uptake of work. To achieve this, the reform would introduce an ‘earnings disregard’ of 50% of the pension. The earnings that exceed the disregard would reduce the pension by 50% of each euro earned (Knuuti et al., 2019). Policy measures to facilitate access to finance for social enterprises are considered. Social enterprises in Finland play an important role in actively including marginalised groups. However, many of these organisations have difficulty finding financial support. In addition, most financial tools are designed either for conventional business or not-for-profit associations and therefore do not cater specifically for social enterprises. The Finnish government’s 2019 programme aims to improve the operating environment for social enterprises, which may improve their potential further. Skills and future of work Skills mismatches at macroeconomic level are below the EU average. The level of disparities in the labour market outcomes of the different skill groups (low-, medium-, and high-skilled) is below the EU average and has decreased since 2010 (see Graph 3.3.4). The vertical skills mismatch, i.e. when people are over-qualified, remained largely constant in Finland between 2008 and 2018, with a rate below 20%. In recent years, Finland has experienced an increase in high-skilled tasks relative to middle-skilled tasks and a decline in routine tasks. This indicates that in the short term the adult workforce needs to be reskilled and upskilled so it can better match labour market demand. The recent vocational education and training (VET) reform and reform of higher education funding increase incentives to provide more upskilling and reskilling training to adults (see education section below). Graph 3.3.4:Relative dispersion of employment rates by education level (2010, 2015, 2018) Source: European Commission calculations based on Eurostat There is only a low risk of jobs in Finland being squeezed out by automation. The exposure to automation poses a challenge to about 5 – 8% of jobs depending on the region (Gonzalez et al., 2019). These figures are the lowest in the EU. However, job profiles are changing due to digitalisation, robotics and artificial intelligence. The labour market will have higher demand for non-cognitive and digital skills. Finland scores well in digital skills (Box 3.3.3; Gonzalez et al., 2019) with around 50% of the population having above-basic digital skills (see also Section 3.4.2). Despite good availability of digital skills, labour shortages risk becoming a drag on the development of the information and communication services (ICT) sector. (see Graph 3.3.5). While Finland has the best availability of scientists and engineers in the world (World Economic Forum, 2016), the percentage of companies reporting hard-to-fill vacancies for jobs requiring ICT specialist skills is above the EU average (6.9% compared to 4.6%) (European Commission,2019d). Intense shortages were found in several knowledge areas such as computers, electronics and mathematical knowledge. The proportion of ICT graduates remains well above the EU average, but shortages still exist. Moreover, costly residence permit processes limit possibilities for foreign students to stay in Finland after graduating. Furthermore, Finnish companies face administrative difficulties in hiring foreign experts. A softening of the relatively stringent immigration policies is being considered, in particular extending working permits after graduation to 2 years. Graph 3.3.5:Job vacancy rates in the whole economy and in the information and communication services sector in Sweden and Finland Source: European Commission

Finland has an effective ‘skills anticipation’ system to deal with future challenges. Skills anticipation activities are linked to policy-making and are aligned with labour market needs (European Centre for the Development of Vocational Training, 2017). Finland launched its ‘Skills Anticipation Forum’ in 2017. It organised its activities around two main pillars: one provides skills forecasts based on the economic developments until 2025, and the second is focused on anticipating education and training needs. In addition, many regional anticipation and foresight projects are ongoing. Regional anticipation activities have developed rapidly in recent years, involving local authorities and educational establishments. Skills anticipation feeds into a range of government educational policies from vocational training to higher education. Reskilling and upskilling are key to maintaining the employability of the labour force and ensure the right supply for future skills needs. Participation in adult learning is already high in Finland. In 2018, 28.5% of adults aged 25-64 reported in a survey that they took part in a learning course during the previous 4 weeks (EU average 11.1%). Despite the high uptake in adult learning, the government will put forward a continuous learning reform starting in 2020. Time constraints have been one of the reasons for workers not to join training (European Commission, 2019b). The reform aims to increase the possibilities for people of a working age to participate in ‘continuous learning’ courses, combining work and study in a flexible manner and supporting learning at the work place. There will also be improvements to the anticipation of individual skills’ needs and guidance services for adult learners (Ministry of Education 2019a). In 2020, €7.5 million of extra funding will be allocated to educating adults with a low level of basic skills. 3.3.2.Social policies and healthcare The risk of poverty or social exclusion has been rising slightly but remains well below the EU average. Material and social deprivation (MSD) () is at a low level in Finland compared to the EU average. Finland also has one of the EU’s lowest rates of population at risk of poverty or social exclusion (AROPE) and child poverty. However, in the context of a general decrease in other Member States, the MSD has stabilised and the AROPE rate increased slightly in 2018. Elevated risk of poverty and social exclusion remains an issue for specific vulnerable groups, such as self-employed people, children of low-skilled parents and people with a migrant background. Social transfers play a major role in reducing poverty, in particular unemployment benefits, sickness and disability benefits (). Income inequality remains among the lowest in Europe (see Section 1). Relative spending on social protection is among the highest in the EU and has increased over recent years. In 2018, social transfers reduced the at-risk-of-poverty rate by 53.7% (compared to an EU average of 33.2%). On average, unemployment benefits have the largest impact on the at-risk-of-poverty rate, followed by family benefits, sickness and disability benefits, and housing benefits. The recent increase in social benefits could address slowly growing poverty. As part of its economy of well-being strategy and in line with the UN Sustainable Development Goals 1 (No poverty) and 10 (Reduced inequalities), the government has announced measures to reduce income inequality. The level of different social security benefits was increased in early 2020. The level of increase varies between benefits. These benefits include minimum rehabilitation allowance, sickness and parental allowance, basic unemployment allowance and labour market subsidy. In addition, the level of the lowest pensions will be increased. These reforms should reduce beneficiaries’ dependency on social assistance (the ‘last resort’ benefit). Box 3.3.1: Monitoring performance in light of the European Pillar of Social Rights The European Pillar of Social Rights is a compass for a renewed process of upward convergence towards better working and living conditions in the European Union. It sets out twenty essential principles and rights in the areas of equal opportunities and access to the labour market; fair working conditions; and social protection and inclusion. The Social Scoreboard supporting the European Pillar of Social Rights points to the overall good performance of Finland. The employment rate is now higher than before the crisis, at 76.3% in 2018, and the gender employment gap is the second lowest in the EU at 3.7 pps. Income inequalities are among the lowest in the EU. In 2018, the income of the richest 20% was stable at 3.6 times that of the poorest 20% and low compared to the EU average of 5.2 times. The risk of poverty or social exclusion remains also low (16.5% in 2018), although it has been rising slightly, especially due to the non-indexation of unemployment benefits. This also explains the slight decrease in the impact of social transfers on poverty reduction, though Finland remains the best perform er in the EU with 53.6% (versus an EU average of 33.2%). The risk of poverty and social exclusion remains an issue for specific vulnerable groups, such as people with a migrant background and children of low-skilled parents. Self-reported unmet needs for medical care have increased from 3.6% of the population in 2017 to 4.7% in 2018. This is particularly the case for the lowest income group (6.6% of the lowest income group (Q1) reported unmet needs compared to 2.9% of the richest income group (Q5)) and for the unemployed (8.8% reported unmet needs in 2018). Access to care remains an issue in Finland, mainly due to long waiting times for primary health care and specialised services for those not covered by occupational or private healthcare insurance. It is being addressed by a reform of the healthcare and social services that has faced multiple delays. Finland performs well in upskilling and reskilling, particularly for digital skills. Finland has the highest uptake in adult learning in the EU with 28.5% of adults aged 25-64 having had a learning experience in the last 4 weeks (the EU average is 11.1%). Time constraints are considered as a main reason for not joining a training programme in 2019. The government will roll out a continuous learning reform in 2020 to enable people to combine work and studies in a flexible manner. Furthermore, Finland has a well-performing skills forecasting system to inform policies. This is reflected in the good results obtained in digital skills, with 76% of 16-74 years-olds having basic or above basic digital skills in 2017. The final results of the basic income experiment will be published in 2020. The experiment, which attracted worldwide attention, ran in 2017 and 2018. Its primary objective was to find out whether introducing basic income could reduce the relatively high unemployment and help eliminate inactivity traps. According to the preliminary results published in early 2019, the employment level of the participants in the first year of the experiment had not changed compared to the control group. However, the participants reported higher level of well-being. This result may have been driven by the specific setup of the experiment, in which basic income replaced the unemployment benefits only in a very limited way. A comprehensive reform of the social security system is being prepared. To meet the long-term challenges posed by the changing world of work and the ageing population, the government has launched a reform of the social security system. The previous government started a reform by carrying out a project to provide different proposals for the future social security system. In order to give all political parties a sense of ownership over the project, the preparatory work has been carried out in a parliamentary working group and the reform will be prepared in a parliamentary committee. The aim of the reform is to streamline the complex social security system to make it more adaptable. The focus is on the basic social security, earnings-based benefits and social assistance. Another main objective is to address inactivity and unemployment traps. Due to the magnitude of the reform, it will be implemented in parts. The reform should be ready by 2027. Although this is a lengthy schedule, the experience with the regional, healthcare and social care reform, which has suffered a setback due to constitutional concerns, suggests that careful preparation could be an advantage when designing such a large-scale reform. Ensuring the long-term integration of refugees and other migrants into the Finnish labour market and society remains a challenge. In particular, non-EU born continue to face integration challenges (see also the paragraph on incentives above). The employment rates are improving along with the general employment situation, but the employment gap between non-EU born and native-born people is still high (17.5 pps in 2018). The poverty gap is high, but slightly improving (17.9 pps. in 2018 from 19.5 pps in 2017). The gap between non-EU born and native people for severe material deprivation was above the EU average in 2018 (FI: 7 pps; EU: 5.9 pps). Finland has reformed its integration policies since 2015 to address these challenges. The policy focus has shifted from language training towards swifter labour market integration (European Commission, 2018 & 2019). The reforms are showing some positive results in terms of increased employment rate for migrants, although it may be difficult to disentangle the impact of reforms from the general increased labour demand. However, som