Recommendation for a COUNCIL RECOMMENDATION on the 2017 National Reform Programme of Finland and delivering a Council opinion on the 2017 Stability Programme of Finland
Date: 2017-05-22
Institutions: European Commission, Secretariat-General
Subjects: EU investment, Finland, administrative reform, economic policy, economic reform, employment policy, fiscal policy, health care system, social services, stability programme

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   EUROPEAN COMMISSION  Brussels, 22.5.2017  COM(2017) 525 final   Recommendation for a COUNCIL RECOMMENDATION on the 2017 National Reform Programme of Finland  and delivering a Council opinion on the 2017 Stability Programme of Finland  
 
 
Recommendation for a 

COUNCIL RECOMMENDATION 

on the 2017 National Reform Programme of Finland 

and delivering a Council opinion on the 2017 Stability Programme of Finland 

THE COUNCIL OF THE EUROPEAN UNION, 

Having  regard  to  the  Treaty  on  the  Functioning  of  the  European  Union,  and  in  particular 
Articles 121(2) and 148(4) thereof, 

Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of 
the  surveillance  of  budgetary  positions  and  the  surveillance  and  coordination  of  economic 
policies,1 and in particular Article 5(2) thereof, 

Having  regard  to  Regulation  (EU)  No 1176/2011  of  the  European  Parliament  and  of  the 
Council  of  16 November  2011  on  the  prevention  and  correction  of  macroeconomic 
imbalances,2 and in particular Article 6(1) thereof, 
Having regard to the recommendation of the European Commission,3 
Having regard to the resolutions of the European Parliament,4 

Having regard to the conclusions of the European Council, 

Having regard to the opinion of the Employment Committee, 

Having regard to the opinion of the Economic and Financial Committee, 

Having regard to the opinion of the Social Protection Committee, 

Having regard to the opinion of the Economic Policy Committee, 

Whereas: 

(1) 

On  16 November  2016,  the  Commission  adopted  the  Annual  Growth  Survey,5 
marking  the  start  of  the  2017  European  Semester  of  economic  policy  coordination. 
The priorities of the Annual Growth Survey were endorsed by the European Council 
on  9-10 March  2017.  On  16 November  2016,  on  the  basis  of  Regulation  (EU) 
No 1176/2011,  the  Commission  adopted  the  Alert  Mechanism  Report,6  in  which  it 
identified Finland as one of the Member States for which an in-depth review would 
be carried out. On the same day, the Commission also adopted a recommendation for 
a  Council  Recommendation  on  the  economic  policy  of  the  euro  area.  That 

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OJ L 209, 2.8.1997, p. 1. 
OJ L 306, 23.11.2011, p. 25. 
COM(2017) 525 final. 
P8_ TA(2017)0038, P8_ TA(2017)0039, and P8_ TA(2017)0040. 
COM(2016) 725 final. 
COM(2016) 728 final. 

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Recommendation  was  endorsed  by  the  European  Council  on  9-10 March  2017  and 
adopted by the Council on 21 March7.  

As  a  country  whose  currency  is  the  euro  and  in  view  of  the  close  interlinkages 
between the economies in the economic and monetary union, Finland should ensure 
the full and timely implementation of the Recommendation for the euro area which is 
reflected in recommendations 1 to 2 below. 
The 2017 country report for Finland8 was published on 22 February 2017. It assessed 
Finland’s  progress  in  addressing  the  country-specific  recommendations  adopted  by 
the Council on 12 July 2016, the follow-up given to the recommendations adopted in 
previous  years  and  Finland’s  progress  towards  its  national  Europe  2020  targets.  It 
also included an in-depth review under Article 5 of Regulation (EU) No 1176/2011, 
the  results  of  which  were  also  published  on  22 February  2017.9  The  Commission’s 
analysis  leads  it  to  conclude  that  Finland  is  not  experiencing  macroeconomic 
imbalances.  

On  28  April  2017,  Finland  submitted  its  2017 National  Reform  Programme  and  its 
2017 Stability  Programme.  To  take  account  of  their  interlinkages,  the  two 
programmes have been assessed at the same time. 

The relevant country-specific recommendations have been taken into account in the 
Member States' programmes for the European Structural and Investment Funds (ESI 
Funds) covering the 2014-2020 period. As foreseen in the legislation governing the 
ESI Funds,10 where it is necessary to support the implementation of relevant country-
specific  recommendations,  the  Commission  may  request  a  Member  State  to  review 
and  amend  its  relevant  ESI  Funds  programmes.  The  Commission  has  provided 
further guidelines on the application of those rules.11 

Finland  is  currently  in  the  preventive  arm  of  the  Stability  and  Growth  Pact  and 
subject  to  the  debt  rule.  In  its  2017  Stability  Programme,  the  government  plans  a 
deterioration in the headline balance from -1.9% of GDP in 2016 to -2.3% in 2017, 
followed  by  steady  improvement  thereafter,  reaching  -0.2%  in  2020.  The  medium-
term  budgetary  objective  —  a  deficit  of  0.5%  of  GDP  in  structural  terms  —  is 
projected  to  be  met  from  2019  onwards.  However,  based  on  the  recalculated12 
structural balance, the medium-term budgetary objective will only be achieved as of 
2020.  According  to  the  Stability  Programme,  the  general  government  debt-to-GDP 
ratio  is  expected  to  peak  at  64.7%  in  2017  and  to  decline  to  62.7%  in  2020.  The 
macroeconomic  scenario  underpinning  these  budgetary  projections  appears  to  be 
favourable  especially  regarding  2018  and  2019.  The  scenario  is  based  on  an 
expectation  that  employment  would  expand  by  close  to  2%  per  year  in  2018-2019 

2017/C92/01. 
SWD(2017) 91 final. 
COM(2017) 90 final. 
Article  23  of  Regulation  (EU)  No  1303/2013  of  the  European  Parliament  and  of  the  Council  of  17 
December  2013  laying  down  common  provisions  on  the  European  Regional  Development  Fund,  the 
European Social Fund, the Cohesion Fund, the European Agricultural Fund for Rural Development and 
the  European  Maritime  and  Fisheries  Fund  and  laying  down  general  provisions  on  the  European 
Regional Development Fund, the European Social Fund, the Cohesion Fund and the European Maritime 
and  Fisheries  Fund  and  repealing  Council  Regulation  (EC)  No  1083/2006,  OJ  L  347,  20.12.2013,  p. 
320. 
COM(2014) 494 final. 
Cyclically-adjusted  balance  net  of  one-off  and  temporary  measures,  recalculated  by  the  Commission 
using the commonly agreed methodology. 

(2) 

(3) 

(4) 

(5) 

(6) 

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(7) 

(8) 

(9) 

(10) 

which is significantly more than the annual average increase over the past 10 years 
(+0.2%).  

On 22 May 2017, the Commission issued a report under Article 126(3) of the TFEU, 
as  Finland's  general  government  debt  exceeded  the  60%-of-GDP  reference  value. 
The  report  concluded,  following  an  assessment  of  all  the  relevant  factors,  that  the 
debt criterion should be considered as complied with. 

The 2017 Stability Programme indicates that the budgetary impact of the exceptional 
inflow  of  refugees  is  significant  and  provides  adequate  evidence  of  the  scope  and 
nature of these additional budgetary costs. According to the Stability Programme, the 
costs  were  0.34%  of  GDP  in  2016.  According  to  the  Commission,  the  eligible 
additional expenditure in 2016 amounted to 0.17% of GDP. The provisions set out in 
Article 5(1) and Article 6(3) of Regulation (EC) No 1466/97 cater for this additional 
expenditure, in that the inflow of refugees is an unusual event, its impact on Finland's 
public  finances  is  significant  and  sustainability  would  not  be  compromised  by 
allowing  for  a  temporary  deviation  from  the  adjustment  path  towards  the  medium-
term  budgetary  objective.  Therefore,  the  required  adjustment  towards  the  medium-
term budgetary objective for 2016 has been reduced to take into account these costs. 
According  to  the  2017  Stability  Programme,  the  costs  related  to  the  exceptional 
inflow  of  refugees  are  projected  to  decrease  by  0.15%  of  GDP  in  2017.  The 
Commission  will  make  a  final  assessment  on  2017,  including  on  the  eligible 
amounts, in spring 2018 on the basis of observed data as provided by the authorities. 
In its 2017 Draft Budgetary Plan,13 Finland requested to avail of the flexibility under 
the preventive arm pursuant to the "Commonly agreed position on Flexibility within 
the Stability and Growth Pact" endorsed by the ECOFIN Council in February 2016 
in  view  of  the  planned  implementation  of  major  structural  reforms  with  a  positive 
impact on the long-term sustainability of public finances (request for 0.5% of GDP 
flexibility)  and  national  expenditures  on  projects  co-financed  by  the  EU  under  the 
European Structural and Investment Funds (request for 0.1% of GDP flexibility).  

The  request  for  flexibility  for  structural  reforms  refers  to  reforms  in  the  labour 
market, in particular the Competitiveness Pact and the pension reform. For more than 
90% of employees, the Pact freezes wages for 12 months, and permanently increases 
the annual working time by 24 hours without compensation. In addition, employees 
will  permanently  pay  a  larger  proportion  of  the  contributions  to  social  security.  To 
compensate  for  the  wage  freeze  and  the  increased  cost  burden  for  employees,  the 
government  lowered  the  taxes  on  earned  income  permanently  as  from  2017.  The 
pension reform will raise the lowest statutory retirement age from 63 to 65 by 2027; 
thereafter,  the  retirement  age  will  be  linked  to  life  expectancy.  Both  reforms  came 
into  force  in  2017.  As  a  result  of  the  Competitiveness  Pact,  improved  cost 
competitiveness  could  lead  to  higher  employment  and  an  increase  in  real  GDP  of 
some 1.5%-2% as presented in the 2017 draft budgetary plan. Given the nature of the 
measure, there are uncertainties surrounding the estimates for employment or GDP, 
but they seem to be broadly plausible. Therefore, these reforms will have a positive 
impact  on  the  sustainability  of  public  finances.  Furthermore,  the  results  of  the 
detailed assessment of the output gap estimate for 2017 carried out on the basis of the 
Commission 2017 spring forecast imply that Finland meets the minimum benchmark 
in  2017.  As  an  additional  assurance  to  safeguard  the  3%-of-GDP  deficit  reference 
value,  Finland's  government  has  publicly  committed  to  take  additional  measures  in 

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Ministry of Finance publications 36c/2016. 

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(11) 

(12) 

2017,  if  necessary,  to  ensure  compliance  with  the  fiscal  rules,  including  the 
observance of the 3%-of-GDP reference value of the Treaty.14 On this basis, Finland 
can currently be assessed as qualifying for the requested temporary deviation of 0.5% 
of GDP in 2017, provided that it adequately implements the agreed reforms, which 
will be monitored under the European Semester.   

Regarding  the  request  for  flexibility  for  additional  investment,  the  information 
provided  by  the  2017  Stability  Programme  appears  to  confirm  that  Finland's 
temporary  deviation  from  the  adjustment  path  towards  the  medium-term  budgetary 
objective  in  2017  is  being  effectively  used  for  the  purposes  of  increasing 
investments. Therefore, and also taking into account the above-mentioned elements 
regarding the minimum benchmark and that the detailed assessment of the output gap 
estimate  confirms  that  Finland  is  experiencing  bad  economic  times,  Finland  can 
currently  be  assessed  as  qualifying  for  a  temporary  deviation  of  0.1%  of  GDP  in 
2017  to  take  account  of  national  investment  expenditure in  projects  co-financed  by 
the EU. The Commission will carry out an ex post assessment in order to verify the 
actual amount of the national expenditure in co-financed investment projects and of 
the related allowance. 

On  12  July  2016,  the  Council  recommended  Finland  to  achieve  an  annual  fiscal 
adjustment of at least 0.6% of GDP towards the medium-term budgetary objective in 
2017.  While  ensuring  a  continued  respect  of  the  minimum  benchmark  (i.e.  a 
structural  deficit  of  1.1%  of  GDP),  the  Commission  2017  spring  forecast  indicates 
scope  for  an  additional  temporary  deviation  of  0.6%  of  GDP  in  2017  under  the 
structural  and  investment  clauses.  On  that  basis,  the  structural  balance  would  be 
allowed  to  deteriorate  by  0.5%  of  GDP  in  2017.  Based  on  the  Commission  2017 
spring forecast, Finland would be compliant with the preventive arm requirements. If 
the  current  updated  estimate  of  the  decrease  of  the  budgetary  impact  in  2017 
stemming  from  the  exceptional  inflow  of  refugees  were  taken  into  account,  the 
conclusion  of  the  overall  assessment  would  not  change.  For  2018,  Finland  should 
achieve  its  MTO,  taking  into  account  the  allowance  in  relation  to  unusual  events 
(granted  for  2016)  as  well  as  the  allowances  related  to  the  implementation  of  the 
structural  reforms  and  investments  (granted  for  2017).15  Based  on  the  Commission 
2017 spring forecast, this is consistent with a maximum nominal growth rate of net 
primary  government  expenditure16  of  1.6%,  corresponding  to  an  annual  structural 
adjustment of 0.1% of GDP. Under unchanged policies, Finland would be compliant 
with the preventive arm requirements in 2018. If the current updated estimate of the 
decrease of the budgetary impact in 2017 stemming from the exceptional inflow of 
refugees were taken into account, the conclusion of the overall assessment would not 
change. At the same time, Finland is prima facie forecast not to comply with the debt 
reduction  benchmark  in  2017  and  2018.  Overall,  the  Council  is  of  the  opinion  that 
Finland needs to stand ready to take further measures to ensure compliance. 

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VM/712/04.00.05.01/2016. 
Finland  is  allowed  to  deviate  from  its  medium-term  budgetary  objective  in  2018  because  temporary 
deviations are carried forward for a period of three years. 
Net  government  expenditure  is  comprised  of  total  government  expenditure  excluding  interest 
expenditure,  expenditure  on  Union  programmes  fully  matched  by  Union  funds  revenue  and  non-
discretionary  changes  in  unemployment  benefit  expenditure.  Nationally  financed  gross  fixed  capital 
formation  is  smoothed  over  a  4-year  period.  Discretionary  revenue  measures  or  revenue  increases 
mandated by law are factored in. One-off measures on both the revenue and expenditure sides are netted 
out. 

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(13) 

Due  to  an  ageing  population  and  a  declining  workforce,  expenditure  on  pensions, 
health and long-term care is set to increase from 23 % of GDP in 2013 to 27 % by 
2030. In January 2017, a pension reform entered into force that will raise the lowest 
statutory retirement age from 63 to 65 by 2027 and will link the statutory retirement 
age  to  changes  in  life  expectancy.  The  costs  of  social  and  healthcare  services, 
currently a responsibility of the municipalities, amount to 10 % of GDP. Without a 
reform of the system, that expenditure is forecast to grow by 2.4 % annually in the 
coming years in nominal terms and increase as a share of GDP. The reforms’ main 
aims  include  the  reduction  of  the  long-run  sustainability  gap  in  public  finances 
through better control of the costs. This will be achieved through the integration of 
services, larger entities as providers of services and digitalisation. The first batch of 
legislative  proposals  for  the  social  and  healthcare  service  reforms  was  presented  to 
the parliament in March 2017. These laws will establish the legal framework for the 
18  new  counties  that  will  take  over  responsibility  for  the  social  and  healthcare 
services from the municipalities as from 2019. The legislative proposals for the most 
controversial  parts  of  the  reform,  in  particular  on  the  patients’  freedom  to  choose 
their  service  provider,  still  need  to  be  finalised  because  of  the  reform  being 
implemented from 2019 as planned.  

(14)  Wage  increases  have  been  moderate  over  recent  years.  The  average  year-on-year 
increase in negotiated wages was 0.7 % in 2014-2016. Due to weak growth of labour 
productivity,  cost  competitiveness  has  improved  only  gradually.  In  2016  the  social 
partners  signed  the  Competitiveness  Pact  aimed  at  improving  Finland’s  cost 
competitiveness in a stepwise manner in 2017. For more than 90 % of employees, the 
Pact freezes wages for 12 months and increases annual working time permanently by 
24 hours without additional compensation. In addition, employees will permanently 
pay  a  larger  proportion  of  social  contributions.  These  measures  are  expected  to 
support  the  expansion  of  exports  and  employment  in  the  coming  years.  The 
upcoming wage negotiation round in the latter half of 2017 will be crucial to secure 
these expected positive effects as the Pact did not fully close the cost competitiveness 
gap to peer economies. 

(15) 

The  labour  market  situation  started  to  improve  gradually  in  2016,  but  challenges 
remain.  Employment  in  the  manufacturing  sector  declined  by  21 %  between  2008 
and 2015. Other sectors such as construction, real estate and healthcare, are showing 
signs of labour shortages. This highlights the need for targeted active labour market 
policies  and  continued  investments  in  adult  learning  and  in  vocational  training  to 
enable occupational mobility. The open vacancies-to-employment ratio was in 2016 
almost as high as in 2007, while the unemployment rate was  two percentage points 
higher.  This  may  reflect  mismatches  between  labour  demand  and  supply,  low 
attractiveness of certain vacant jobs or limited incentives to take up work. Continued 
efforts  are  needed  to  ensure  better  labour  market  outcomes  for  the  inactive, 
especially  those  in  the  25-39  age  group,  the  long-term  unemployed  and  migrants. 
Ensuring  improved  social  and  labour  market  outcomes  of  people  with  migrant 
background will also require continued investments in their education. 

(16) 

In  terms  of  activation,  the  complex  benefits  system  with  its  different  types  of 
allowances  can  result  in  significant  inactivity  and  low  wage  traps,  as  well  as 
bureaucratic problems on reinstating of benefits. It would be crucial to address these 
traps.  To  increase  the  incentives  to  accept  job  offers,  the  obligation  for  the 
unemployed  to  accept  a  job  offer  and  the  obligation  to  participate  in  activation 
schemes  have  been  tightened.  In  addition,  the  duration  of  earnings-related 

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(17) 

(18) 

unemployment benefits was reduced. Positive incentives, such as allowing the use of 
basic  unemployment  benefit  as  mobility  and  wage  subsidies  to  activate  jobseekers, 
were introduced. Further increased incentives to accept work could be complemented 
with the elimination of existing bureaucratic barriers to take up a job or to become an 
entrepreneur. 

Non-cost  competitiveness  acts  as  a  drag  on  export  performance  and  may  limit  the 
attractiveness of Finland for foreign investors. Structural change is unfolding, but has 
slowed down recently. Progress has been made in opening up services sectors such 
as retail trade and transport to competition, and proposals have been put forward to 
increase  competition  in  other  domestic  service  sectors.  While  international 
comparisons  rank  Finland  among  the  leading  countries  in  the  world  in  terms  of  its 
business  environment  and  investment  appeal,  the  existing  stock  of  inward 
investments  in  Finland  is  below  the  EU  average  when  compared  to  the  size  of  the 
economy. 

In  the  context  of  the  European  Semester  the  Commission  has  carried  out  a 
comprehensive  analysis  of  Finland’s  economic  policy  and  published  it  in  the  2017 
country report. It has also assessed the Stability Programme and the National Reform 
Programme and the follow-up given to the recommendations addressed to Finland in 
previous years. It has taken into  account not  only  the relevance of the programmes 
and follow-up measures for sustainable fiscal and socioeconomic policy in Finland, 
but also their compliance with EU rules and guidance, given the need to strengthen 
the  EU’s  overall  economic  governance  by  providing  EU-level  input  into  future 
national decisions. 

(19) 

In  the  light  of  this  assessment,  the  Council  has  examined  the  Stability  Programme 
and its opinion17 is reflected in particular in recommendation 1 below, 

HEREBY RECOMMENDS that Finland take action in 2017 and 2018 to: 

1. 

2. 

3. 

Pursue  its  fiscal  policy  in  line  with  the  requirements  of  the  preventive  arm  of  the 
Stability  and  Growth  Pact,  which  implies  to  achieve  its  medium  term  budgetary 
objective  in  2018,  taking  into  account  the  allowances  linked  to  unusual  events,  the 
implementation  of  the  structural  reforms  and  investments  for  which  a  temporary 
deviation 
the 
administrative reform to improve cost-effectiveness of social and healthcare services. 

timely  adoption  and 

is  granted.  Ensure 

implementation  of 

Promote  the  further  alignment  of  wages  with  productivity  developments,  fully 
respecting  the  role  of  social  partners.  Take  targeted  active  labour  market  policy 
measures to address employment and social challenges, provide incentives to accept 
work and promote entrepreneurship.  

Continue to improve the regulatory framework and reduce the administrative burden 
to increase competition in services and to promote investment. 

Done at Brussels, 

For the Council 
The President 

17 

Under Article 5(2) of Council Regulation (EC) No 1466/97. 

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