Recommendation for a COUNCIL RECOMMENDATION on the 2018 National Reform Programme of Finland and delivering a Council opinion on the 2018 Stability Programme of Finland
Date: 2018-05-23
Institutions: European Commission, Secretariat-General
Subjects: Finland, administrative reform, credit policy, economic policy, economic reform, employment policy, organisation of health care, pay policy, population ageing, stability programme

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   EUROPEAN COMMISSION  Brussels, 23.5.2018 COM(2018) 425 final  Recommendation for a COUNCIL RECOMMENDATION on the 2018 National Reform Programme of Finland  and delivering a Council opinion on the 2018 Stability Programme of Finland  
 
 
Recommendation for a 

COUNCIL RECOMMENDATION 

on the 2018 National Reform Programme of Finland 

and delivering a Council opinion on the 2018 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 
policies1, and in particular Article 5(2) thereof, 
Having regard to the recommendation of the European Commission2, 
Having regard to the resolutions of the European Parliament3, 

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 22 November 2017, the Commission adopted the Annual Growth Survey, marking 
the start of the 2018 European Semester of economic policy coordination. It took due 
account  of  the  European  Pillar  of  Social  Rights,  proclaimed  by  the  European 
Parliament, the Council and the Commission on 17 November 2017. The priorities of 
the  Annual  Growth  Survey  were  endorsed  by  the  European  Council  on  22  March 
2018.  On  22  November  2017,  on  the  basis  of  Regulation  (EU)  No  1176/2011,  the 
Commission  also  adopted  the  Alert  Mechanism  Report,  in  which  it  did  not  identify 
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, which was endorsed by the 
European  Council  on  22  March  2018.  On  14  May  2018,  the  Council  adopted  the 
recommendation  on  the  economic  policy  of  the  euro  area  (‘recommendation  for  the 
euro area’). 

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OJ L 209, 2.8.1997, p. 1. 
COM(2018) 425 final. 
P8_TA(2018)0077 and P8_TA(2018)0078.  

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(2) 

(3) 

(4) 

(5) 

(6) 

As a Member State 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 on the economic policy for 
the euro area, as reflected in the recommendations below, in particular (3). 
The  2018  country  report  for  Finland4  was  published  on  7  March  2018.  It  assessed 
Finland’s progress in addressing the country-specific recommendations adopted by the 
Council  on  11  July  2017,  the  follow-up  given  to  the  recommendations  adopted  in 
previous years and Finland’s progress towards its national Europe 2020 targets.  

On  13  April  2018,  Finland  submitted  its  2018  National  Reform  Programme  and  its 
2018 Stability Programme. To take account of their interlinkages, the two programmes 
have been assessed at the same time. 

Relevant country-specific recommendations have been addressed in the programming 
of  the  European  Structural  and  Investment  Funds  for  the  2014-2020  period.  As 
foreseen in Article 23 of Regulation (EU) No 1303/2013 of the European Parliament 
and  of  the  Council5,  where  it  is  necessary  to  support  the  implementation  of  relevant 
Council  recommendations,  the  Commission  may  request  a  Member  State  to  review 
and propose amendments to its Partnership Agreement and relevant programmes. The 
Commission has provided further details on how it would make use of that provision 
in  guidelines  on  the  application  of  the  measures  linking  the  effectiveness  of  the 
European Structural and Investment Funds to sound economic governance6.  

Finland is currently in the preventive arm of the Stability and Growth Pact and subject 
to  the  debt  rule.  In  its  2018  Stability  Programme,  the  government  plans  a  headline 
balance of -0.6 % of GDP in 2018, unchanged from the previous year. According to 
the  government,  the  balance  is  projected  to  improve  in  2019  and,  thereafter,  reach  a 
small surplus in 2020 and 2021. The medium-term budgetary objective — a deficit of 
0.5 % of GDP in structural terms — was achieved in 2017. However, the recalculated 
structural deficit7 is projected to be marginally larger, at 0.6 % of GDP, in 2018-2019 
and  to  decrease  thereafter.  The  general  government  debt-to-GDP  ratio  peaked  at 
63.6 %  in  2015  and  declined  to  61.4  %  in  2017.  According  to  the  2018  Stability 
Programme, the debt ratio will continue to decrease and reach 56.7 % of GDP in 2021. 
The  macroeconomic  scenario  underpinning  the  budgetary  projections  appears  to  be 
broadly  plausible.  The  main  risks  to  the  budgetary  projections  relate  to  the  possible 
larger-than-expected  upfront  costs  of  the  planned  social  and  healthcare  services 
reform.  

(7) 

The 2018 Stability Programme recalls that the costs related to the exceptional inflow 
of  refugees  increased  and  that  this  budgetary  impact  was  significant  in  2015-2016. 
According to the 2017 Stability Programme, the costs were  projected to  decrease by 
0.15  %  of  GDP  in  2017.  This  figure  was  not  confirmed  in  the  2018  Stability 
Programme  and  has  therefore  not  been  taken  into  account  by  the  Commission.  In 

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SWD(2018) 224 final. 
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. 

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addition, in 2017, Finland was granted a temporary deviation of 0.5 % of GDP from 
the  required  adjustment  path  towards  the  medium-term  budgetary  objective  to  take 
account  of  major  structural  reforms,  in  particular,  the  2017  pension  reform  and  the 
Competitiveness Pact, with a positive impact on the long-term sustainability of public 
finances. In 2017, Finland was also granted a temporary deviation of 0.1 % of GDP to 
take account of national investment expenditure in projects co-financed by the Union. 
As  regards  the  latter  deviation,  one  of  the  eligibility  criteria  is  that  total  public 
investment  does  not  decrease.  Outturn  data  for  2017  showed  a  decline  in  public 
investment in 2017 compared to the previous year, while investment linked to Union 
funds is estimated to have remained stable. Thereby, Finland is no longer considered 
eligible for a temporary deviation of 0.1 % of GDP in relation to national investment 
expenditure  in  projects  co-financed  by  the  Union  in  2017.  The  remaining  temporary 
deviations from the adjustment path towards the medium-term budgetary objective are 
carried  forward  so  that  they  cover  a  period  of  three  years.  Therefore,  the  temporary 
deviations under the unusual events and structural reform clauses amount to 0.67 % of 
GDP in 2018 and 0.5 % of GDP in 2019. 

On 11 July 2017, the Council recommended Finland to ensure that the deviation from 
the medium-term budgetary objective in 2018 is limited to the allowance linked to the 
budgetary impact of unusual events (granted in 2016) as well as the allowances related 
to the implementation of structural reforms and investments (granted in 2017). This is 
consistent  with  a  maximum  nominal  growth  rate  of  net  primary  government 
expenditure  of  1.9  %  in  2018,  corresponding  to  an  allowed  deterioration  in  the 
structural balance by 0.1 % of GDP. Based on the Commission 2018 spring forecast, 
there  is  a  risk  of  some  deviation  from  the  recommended  fiscal  adjustment  in  2018. 
However, as a result of the better-than-expected outcome for 2017, the distance from 
the medium-term objective is currently forecast to be less than the granted allowances 
linked to the unusual events and the structural reform clauses. If confirmed, this shall 
be taken into account in the ex post assessment for 2018.  

In  2019,  based  on  the  Commission  2018  spring  forecast,  Finland  should  ensure  that 
the  deviation  from  the  medium-term  budgetary  objective  in  2019  is  limited  to  the 
allowance  linked  to  the  budgetary  impact  in  relation  to  the  implementation  of  the 
structural  reforms  for  which  a  temporary  deviation  was  granted  in  2017.  This  is 
consistent  with  a  maximum  nominal  growth  rate  of  net  primary  government 
expenditure  of  2.9  %,  corresponding  to  an  allowed  deterioration  in  the  structural 
balance  by  0.2  %  of  GDP.  Under  unchanged  policies,  Finland  is  forecast  to  comply 
with  the  requirement  for  2019.  Finland  is  also  forecast  to  comply  with  the  debt 
reduction  benchmark  in  2018  and  2019.  Overall,  the  Council  is  of  the  opinion  that 
Finland  needs  to  stand  ready  to  take  further  measures  to  ensure  compliance  in  2018 
and  is  projected  to  comply  with  the  provisions  of  the  Stability  and  Growth  Pact  in 
2019. 

(8) 

(9) 

(10)  Due  to  an  ageing  population  and  a  declining  workforce,  expenditure  on  pensions, 
health  and  long-term  care  is  projected  to  increase  from  24 % of GDP  in  2017  to 
27 % of GDP  by  2030.  The  administrative  reform  and  the  reform  of  the  social  and 
healthcare  services,  currently  under  discussion  in  the  Finnish  Parliament,  aim  at 
reducing  expenditure  growth  in  this  area.  Other  objectives  would  be  to  ensure  equal 
access to healthcare and reduce waiting times for patients, especially in less favoured 
or  remote  areas.  The  ratio  of  self-declared  unmet  medical  needs  is  above  the  EU 
average.  In  particular,  people  outside  the  workforce  are  experiencing  difficulties 
getting the necessary medical care. A new level of regional public administration, i.e. 

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counties,  will  take  care  of  Finland's  social  and  healthcare  services  from  2020.  The 
reform will pool resources to allow their more effective use at county level. Higher use 
of digital and electronic services should also increase productivity. Finally, social and 
primary healthcare services would be available from both public and private social and 
health  centres.  This  would  give  patients  more  freedom  of  choice,  while  competition 
between service providers is expected to yield cost savings. Achieving these ambitious 
objectives will also depend on the choices made during the implementation phase of 
the reform. 

(11)  At 74 % of the total 20-64 working-age population in 2017, the employment rate was 
relatively  low  in  Finland  compared  with  its  Nordic  peers. Participation  in  the  labour 
market  was  also  lower,  especially  for  women,  low-skilled  men  and  persons  with  a 
migrant background. At around 7.5 % of the total labour force in 2017, the structural 
unemployment  rate  was  high.  For  employment  growth,  and  despite  recent  measures 
adopted by the Finnish authorities, challenges remain in  adopting more incentives to 
accept work and more active labour market policies. 

(12) 

Inactivity and unemployment traps remain an obstacle to a more extensive use of the 
labour  force.  A  significant  inactivity  trap  results  from  the  benefits  system  and  the 
combination  of  its  different  types  of  allowances.  The  social  assistance  and  housing 
allowance  form  a  substantial  component  of  this  trap.  These  and  other  benefits  are 
phased  out  very  rapidly  as  income  increases,  which  creates  the  risk  that  taking  up 
work might not be sufficiently financially rewarding. The complexity of benefit rules 
combined with administrative practices is deemed to result in sizeable unemployment 
traps or 'bureaucratic traps'. Uncertainty surrounding the level of benefits and the time 
to  reinstate  them  reduces  the  attractiveness  of  short-term  or  part-time  work.  Finally, 
despite a recent pick-up in new home construction, the lack of affordable housing in 
growth  centres  could  be  an  additional  impediment  to  labour  mobility.  The  ongoing 
basic income experiment, whose first results are expected in 2019, is likely to provide 
some  information  for  revising  the  social  security  system.  A  reform  of  the  parental 
leave system has  been  explored to increase the employment  rate of women of child-
bearing age and to promote gender equality. A real-time income register is currently 
under preparation and could provide an opportunity to improve the efficiency of public 
services and level the benefits effectively. 

(13)  Wage  setting  practices  are  changing  and  moving  towards  sectoral  and  local  level 
bargaining.  Since  firms  often  face  very  different  constraints,  this  should  allow  more 
wage differentiation between firms, ensuring that real wage increases are in line with 
productivity  growth  while  supporting  better  employment  outcomes.  Under  the  most 
recent wage agreements concluded in late 2017 and early 2018, organised employers 
have  more  opportunities  to  carry  out  local  bargaining.  For  non-organised  employers 
some obstacles persist. Some first positive results have been observed, as the current 
status  of  the  recent  wage  negotiations  points  to  an  outcome  with  a  broadly  neutral 
impact on cost competitiveness. In practice, despite the absence of formal coordination 
on wage agreements, a Finnish model seems to be emerging, linking pay rises in the 
non-tradable sector with the increases agreed in the tradable sector. 

(14)  As  activity  and  employment  gradually  return  to  pre-crisis  levels,  the  lower 
employability of the unemployed and the inactive is likely to become a major concern 
that  could  slow  down  recovery  of  the  labour  market,  thereby  undermining  the  long-
term  sustainability  of  Finland's  welfare  society.  The  situation  requires  adequate  and 
integrated activation and rehabilitation services to the unemployed and the inactive. At 
the  same  time,  the  resources  devoted  to  public  employment  services,  in  particular to 

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counselling  activities,  are  below  the  EU  average.  Services  for  the  unemployed, 
especially for those with lower employment prospects, are dispersed among a number 
of  separate  providers.  Integration  or  better  coordination  would  help  produce  a 
seamless  services  chain  (a  one-stop-shop  for  the  unemployed/inactive).  Continued 
efforts  are  needed  to  ensure  the  re-entry  of  the  inactive  into  the  labour  market, 
especially those in the 25-49 age group and persons with a migrant background. The 
migrant  population  could  partly  offset  the  existing  decline  in  the  working-age 
population, provided that they are well integrated into the labour market and in Finnish 
society.  Finally,  labour  shortages  are  increasing,  likely  reflecting  ongoing  structural 
changes  in  the  economy,  such  as  population  ageing.  This  suggests  a  need  for 
continued investment in adult learning and vocational training to enable occupational 
mobility and reduce skills mismatches. 

(15)  The government has implemented measures to promote entrepreneurship and start-ups 
and it has also improved the availability of loans and export guarantees for small and 
medium-sized  enterprises.  Also,  the  unemployed  are  now  allowed  to  receive 
unemployment benefits during the first months when starting a business. This scheme 
is most likely to be successful if combined with training and coaching, while its short 
duration can limit its impact. Also, some weaknesses remain in the social protection of 
entrepreneurs  and  the  self-employed  and  the  relative  risk  of  poverty  for  the  self-
employed in Finland is high.  

(16)  Household debt remains at a historically high level (67 % of GDP in 2016). The debt 
is predominantly at a variable rate, which constitutes a risk should interest rates rise in 
the  medium  term.  Consumer  credit  is  increasing  rapidly  and  a  rising  share  of  this 
lending  is  granted  by  foreign  banks,  other  financial  institutions  (than  credit 
institutions),  small-loan  companies  and  peer-to-peer  lending.  The  Finnish  Financial 
Supervisory Authority has adopted a number of measures to contain the increase in the 
indebtedness  of  households.  However,  no  active  deleveraging  is  expected  soon, 
especially as interest rates remain low and consumer confidence is strong.  The lack of 
a  credit  registry  can  prevent  banks  from  having  a  clear  overview  of  households’ 
overall indebtedness. 

(17) 

In  the  context  of  the  2018  European  Semester,  the  Commission  has  carried  out  a 
comprehensive  analysis  of  Finland’s  economic  policy  and  published  it  in  the  2018 
country  report.  It  has  also  assessed  the  2018  Stability  Programme  and  the  2018 
National  Reform  Programme  and  the  follow-up  given  to  the  recommendations 
addressed  to  Finland  in  previous  years.  The  Commission  has  taken  into  account  not 
only  their  relevance  for  sustainable  fiscal  and  socioeconomic  policy  in  Finland  but 
also their compliance with Union rules and guidance, given the need to strengthen the 
Union’s  overall  economic  governance  by  providing  Union-level  input  into  future 
national decisions.  

(18) 

In  the  light  of  this  assessment,  the  Council  has  examined  the  2018  Stability 
Programme and its opinion8 is reflected in particular in recommendation 1 below. 

HEREBY RECOMMENDS that Finland takes action in 2018 and 2019 to: 

1. 

Achieve  the  medium-term  budgetary  objective  in  2019,  taking  into  account  the 
allowances  linked  to  the  implementation  of  the  structural  reforms  for  which  a 
temporary  deviation  is  granted.  Ensure  the  adoption  and  implementation  of  the 

8 

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

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administrative  reform  to  improve  cost-effectiveness  and  equal  access  to  social  and 
healthcare services. 

Improve incentives to accept work and ensure adequate and well-integrated services 
for the unemployed and the inactive. 

Strengthen the monitoring of household debt including by setting up a credit registry 
system. 

2. 

3. 

Done at Brussels, 

For the Council 
The President 

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