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# 52013SC0376

**COMMISSION STAFF WORKING DOCUMENT Assessment of the 2013 national reform programme and stability programme for FINLAND Accompanying the document Recommendation for a COUNCIL RECOMMENDATION on Finland’s 2013 national reform programme and delivering a Council Opinion on Finland’s 2013 stability programme for 2012-2017 /\* SWD/2013/0376 final \*/**

  

Contents

Executive summary. 3

1........... Introduction. 5

2........... Economic developments and challenges. 6

2.1........ Recent economic developments and outlook. 6

2.2........ Challenges. 6

3........... Assessment of policy agenda. 9

3.1........ Fiscal policy and taxation. 9

3.2........ Financial sector 15

3.3........ Labour market, education and social policies. 15

3.4........ Structural measures promoting growth and competitiveness. 18

3.5........ Modernisation of public administration. 19

4........... Overview table. 26

5........... Annex. 29

Executive summary

Economic Outlook

The Finnish economy recovered rapidly after the crisis
of 2009, but contracted by 0.2 % again in 2012. According to the Commission’s
2013 spring forecast, growth will remain sluggish also in 2013, at 0.3%, but
increase to 1% in 2014.
The labour market is generally healthy, with unemployment at 7.7 % in 2012,
though this is forecast to rise above 8% in 2013 and 2014. Being a small open
economy with exports accounting for about 40% of GDP, Finland is very sensitive to developments in world markets. Unit labour cost growth reached
3.6% in 2012, and while it is expected to be more moderate in 2013 and 2014
according to current trends it will still outpace productivity growth.

The headline budget deficit was 1.9% of GDP in 2012,
and is projected to improve steadily to 1.8% in 2013 and to 1.5% 2014. Finland’s structural deficit (excluding one-off and temporary measures) was -0.7
% in 2012, and is projected to improve to -0.6% in 2013 and -0.5% in 2014. Finland's medium-term objective (MTO), as set in the stability programme 2013, is a
structural deficit of 0.5% of GDP. In 2012, the MTO was a structural surplus of
0.5%, which it failed to meet. According to the assessment, the new MTO is
expected to be met by 2014.

Key Issues

Finland has made substantial progress on measures
taken to address the 2012 CSRs, including by implementing the planned fiscal
consolidation measures.
Comprehensive reforms of the municipal structure, healthcare and social
services have been prepared, the youth guarantee has been extended, access to
early retirement has been reduced, the national competition authority has been
reformed and temporary tax incentives have been offered to support research and
investments. All of these reforms must now be effectively implemented.

One of Finland’s main policy challenges is the loss in
competitiveness over the
course of the last decade, during which its current account went from a surplus
into a deficit. Over the past five years it lost 23% of its share in world
exports. In April 2013 the Commission's in-depth review of Finland found that the country was experiencing macroeconomic imbalances.

In the short term, the main challenge is to attract
new investments to the Finnish economy, in order to improve employment and
productivity and to replace the industries that have declined over recent
years. The economy should
take more advantage of the country’s excellent research system to create
innovative products and services and diversify towards less energy intensive
sectors. Agreement between social partners on wage developments should also
take due account of recent and prospective competitiveness developments.

A longer term challenge is presented by Finland's ageing population. To
address this it will be important to improve labour market participation
(particularly of older workers, long-term unemployed and the young) and the
sustainability of pension and healthcare systems. In the case of healthcare
systems, efficiency could be strengthened by continuing to pursue the
restructuring of the municipal system.

·
Public finances: Although Finland has strong public
finances, age-related costs have forced expenditure upwards (the Commission
forecasts healthcare spending will grow by 1% of GDP and spending on long-term
care will double by 2060). The challenge is to limit the growth of pension,
long-term care and healthcare spending without undermining the adequacy of
pensions or the quality of healthcare and long-term care. Reforms to the
municipal authorities and social and healthcare service should help to improve
productivity and efficiency of spending in these areas.

·
Labour market: Finland's ageing population poses
important challenges and remedial action is required sooner rather than later,
especially as the effects of structural reforms take time to materialise. Finland should take steps to improve the employability of older workers, reduce early exit
pathways and align the statutory retirement age with life expectancy.  Youth
unemployment (18.8 %) and long-term unemployment (a quarter of all unemployed)
are not particularly high in Finland compared with other Member States, but are
significant because of the shrinking working-age population. The mismatch
between the skills of workers leaving shrinking sectors and the skills required
in expanding ones is likely to induce longer periods of unemployment.

·
Competition in
product and service markets: Regulatory barriers in Finland's product and service markets are limiting
competition in some sectors and keeping prices high. The Finnish Government has
made some positive changes to competition legislation and institutions in the
past year, but to improve the situation for businesses and consumers, more
action is still needed, particularly to strengthen competition law fines.

·
Competitiveness and
innovation: While Finland invests a high proportion of its GDP in research and development (3.78 % of GDP in
2011), it results in fewer than expected marketable products, while corporate
R&D expenditure is concentrated in a few sectors and companies, leaving the
country vulnerable to shocks in these sectors. The system as a whole lacks does
not support research in new or emerging technologies, or in areas beyond the
scope of current strategies and support schemes.

·
Wages and energy
represent significant costs for businesses and have impact on their
competitiveness. Real wage
increases have exceeded productivity growth and are projected to also outstrip
productivity growth in 2013 and 2014. Finland's energy intensity in industry is
high compared to its Nordic neighbours and other euro area Member States.
Improving energy efficiency could enhance the competitive position of these
industries.

1.
Introduction

In May
2012, the Commission proposed a set of country-specific recommendations (CSRs)
for economic and structural reform policies for Finland. On the basis of these
recommendations, the Council of the European Union adopted five CSRs in the
form of a Council Recommendation in July 2012. These CSRs concerned public
finances, administrative reform, labour market, competition and
competitiveness. This Staff Working Document assesses the state of
implementation of these recommendations in Finland.

The document
assesses policy measures in light of the findings of the Commission’s Annual
Growth Survey 2013 (AGS)[1] and the second annual Alert Mechanism Report (AMR),[2] which were published in November 2012. The AGS sets out the
Commission’s proposals for building the necessary common understanding of the
priorities for action at national and EU level in 2013. It identifies five
priorities to guide Member States to renewed growth: pursuing differentiated,
growth-friendly fiscal consolidation; restoring normal lending to the economy;
promoting growth and competitiveness for today and tomorrow; tackling
unemployment and the social consequences of the crisis; and modernising public
administration. The AMR serves as an initial screening device to determine
whether macroeconomic imbalances exist or risk emerging in Member States. The AMR
found positive signs that macroeconomic imbalances in Europe are being
corrected. To ensure that a complete and durable rebalancing is achieved, Finland and 13 other Member States were selected for a review of developments in the accumulation
and unwinding of imbalances.[3]

Against
the background of the 2012 Council Recommendation, the AGS and the AMR, Finland presented updates of its national reform programme (NRP) and of its stability
programme on 18 April 2013. These programmes provide detailed information on
progress made since July 2012 and on the future plans of the government. The
information contained in these programmes provides the basis for the assessment
made in this Staff Working Document.

The
programmes submitted went through a consultation process involving the national
parliament’s Grand Committee and presentation to the social partners.

Overall
assessment

The
analysis in the Staff Working Document leads to the conclusion that Finland has made substantial progress
on measures taken to address the Council’s CSRs.

Finland has implemented the planned fiscal
consolidation measures. Nevertheless, the worsening economic climate made it
difficult to achieve the expected results in terms of moving towards Finland’s medium-term budgetary objective (MTO).

Comprehensive
reforms of the municipal structure, healthcare and social services have been
prepared, the youth guarantee[4]
has been extended, early exit pathways from the labour market have been
reduced, the national competition authority has been reformed and tax
incentives have been temporarily offered to support R&D and investments.

Challenges
identified in July 2012 and reflected in the AGS remain valid. In the short
term, the main challenge is to attract new investments to the Finnish economy,
in order to improve employment and productivity and to replace the industries
that have declined over recent years. The economy should take more advantage of
the country’s excellent R&D system to create innovative products and
services.

Considering
the ageing population, it is important to take steps soon to improve the supply
of labour and the sustainability of pension and healthcare systems. Agreement
between social partners on wage developments should take due account of recent
and prospective competitiveness developments.

The
policy plans submitted by Finland address most of the challenges identified in
last year’s Staff Working Document, and broad coherence between the two programmes
has been ensured. The national reform programme confirms Finland’s commitment to address challenges in competitiveness, the labour market and
product markets. The stability programme demonstrates Finland’s commitment to improve the budgetary position towards the medium-term objective
and ensure the long-term sustainability of public finances in line with the
Stability and Growth Pact.

2.
Economic developments and challenges
2.1.
Recent economic developments and outlook

Recent
economic developments

In
2012 and early 2013, growth and employment in Finland were strongly affected by
the general weakening of the European economy and the ongoing restructuring of
the main Finnish export industries. The government
has pressed ahead with budgetary consolidation, increasing taxes from 2013 onwards
and announcing additional tax measures from 2014.

The
Finnish economy recovered rapidly after the crises of 2009, but contracted by 0.2 %
again in 2012. While private consumption, supported
by a healthy labour market, remained strong, public consumption and exports
were slightly down. Gross fixed capital formation contracted due to a decline
in construction and investment in equipment. Being a small open economy with
exports accounting for about 40 % of GDP, Finland is very sensitive to developments
in world markets.

While
the labour market remained generally strong in 2012, sluggish growth caused
unemployment to increase slightly during the second half of the year. Employers have made less use of the temporary layoff support schemes
and permanent payroll cuts are more common. The unemployment rate was 7.7 %
in 2012. The labour force will remain stable overall, with a small
ageing-related decline in the working age population being offset by an
increase in the activity rate. While the collective wage agreement for 2012 and
2013 provides for moderate real wage growth, unit labour costs still appear to increase
faster than in competing countries with a similar product mix on the same
export markets.

Economic
outlook

According to the Commission’s 2013 spring
forecast, Finnish economic growth will remain sluggish also in the first half
of 2013, followed by a gradual upturn in 2014.
Consumption suffers from rising unemployment, slow real wage increases and
increased taxation. While investment is expected to improve compared to the low
level recorded in 2012, it will nevertheless remain weak, particularly in
construction. Along with the improving European economic situation, Finnish
exports are forecast to increase during the second half of 2013 and 2014. The current collective wage agreement lasts until the end of 2013. While
unit labour cost growth reached 3.6 % in 2012, it is expected to be more
moderate in 2013 and 2014.

The
macroeconomic scenarios presented in the stability programme and in the
national reform programme are broadly similar to the Commission’s spring forecast.
For 2014, the national macroeconomic scenario forecasts 0.6 pps higher real GDP
growth than the Commission’s forecast, which generally reflects expectations of
a faster recovery in exports and gross fixed capital formation. Reforms to
extend the effective retirement age and the municipal, social and healthcare
reforms can be expected to have a macroeconomic impact. Similarly, reforms to
the taxation of corporate income and dividends are expected to result in
significant macroeconomic impact. However, the programmes do not quantify the
impact of these measures.

2.2.
Challenges

Finland faces important challenges as
regards its ageing population. While being mainly
long-term in nature, remedial action is required sooner rather than later
especially as the effects of structural reforms take time to materialise. As
the current duration of working careers is insufficient to cope with the
growing demographic burden, it would be important to speed up entry to the
labour market and to prevent early exit. At the same time, the structural
change causes increased skill mismatches and increases the risk of unemployment
becoming more long-term in nature. While youth unemployment and long-term
unemployment are not particularly high in Finland compared with the other Member
States, the challenges are of particular significance owing to the shrinking
working-age population. The long-term unemployed represent one quarter of all
unemployed persons and of these, over 40 % have only basic education. The
mismatch between the skills of workers leaving shrinking sectors and the skills
required in expanding ones is likely to induce longer periods of unemployment. While
the overall unemployment rate was 7.7 % in 2012, youth unemployment was
18.8 %.[5]

Although
Finland has had strong public finances, ageing-related costs have forced
expenditure upwards. Commission analysis and
national studies have identified a substantial sustainability gap, although their
conclusions on the exact size differ due to different assessments of the impact
of ageing-related expenditure — pensions, long-term care and healthcare. The challenge
facing the society is to limit the growth of expenditure in these areas without
undermining the adequacy of pensions or the service level in healthcare and
long-term care.

Productivity
growth has not returned to its previous growth path following the economic crisis. Possible reasons for this include the lack of investment into the
commercialisation of new technologies but also low competition in product and
service markets. While reforms are currently being planned for municipal
governance and social and healthcare sectors, efficiency gains in public
services such as healthcare, education and public administration have been
limited. The Finnish higher education and public research system is somewhat
fragmented, which makes it more difficult to focus resources.

While
Finland invests a high proportion of its GDP in R&D, the R&D effort
results in fewer than expected marketable products.
As also discussed in the in-depth review (see Box 1), corporate R&D
expenditure is concentrated in a few sectors and companies, which makes the
country vulnerable to shocks in these sectors. In an otherwise excellent
business environment, it appears that it is relatively time-consuming to
establish a business in Finland.[6]
The efficiency of R&D investments and the ability of the system to produce
new innovative breakthroughs contributing to growth and jobs have not been
evident. This is reflected in the Innovation Union Scorecard where, of all sub-dimensions,
Finland’s score is lowest (in 15th place, just above the EU27 average) on ‘innovators’,
which encompasses SMEs introducing product or process innovations and SMEs
introducing marketing or organisational innovations[7] The research
and innovation system has relied mostly on the supply of various support
schemes and programmes, lacking the necessary dynamism to support research and
innovation in areas that are new, emerging or beyond the scope of current
strategies. While large firms and leading research and innovation institutions are
highly internationalised, the overall level of internationalisation of the
research and innovation system is quite low and the system could gain from
attracting foreign talent.

Over
the last decade, Finland’s current account went from a surplus to a deficit, as
the country has lost 23 % of its share in world exports over the past five
years. According to the in-depth review, the loss
of export market shares can partly be attributed to the restructuring of the
electronics and forestry industries, but also coincided with strong unit labour
cost increases in 2008 and 2009. Real wage increases have exceeded productivity
growth also in subsequent years and are projected to also outstrip productivity
growth in 2013 and 2014 according to the Commission’s spring forecast. This would
have a potentially negative impact on Finland’s external competitiveness. The
non-tradable sectors, whose goods and services are partly used as inputs for
the tradable sector, experienced lower productivity growth than the tradable
sectors. An important factor in trade developments is also energy dependence. Finland is characterised by the dominance of energy-intensive industries which produces an
overall high energy intensity.

Box 1 — Summary of the 2013
in-depth review (IDR) under the Macroeconomic Imbalance Procedure (MIP)

The main
observations and findings from the analysis published on 10 April 2013 are:

·
The loss in
competitiveness is one of Finland’s main policy challenges. Over the course of a decade Finland’s current account went from a surplus into a deficit. The country lost 23% in world
export market shares over the past five years, and saw its unit labour cost
increase significantly in 2008 and 2009 and more moderately in the following
years.

·
The loss of export
market shares is partly due to the ongoing restructuring of the electronics and
forestry industries. In
electronics, Nokia lost its dominant position and closed down all assembly
factories in Finland, which affected both its own employees and its
subcontractors. The forest industry is relocating its paper and pulp
manufacturing business to Asia and Latin America, where demand is growing and
resources are available. The other main industries – metals, machinery and
minerals – were not able to make up for the loss in exports from these two
important industries.

·
Energy dependence will continue to affect Finland’s external balance through oil and gas price movements. Energy imports, mostly
crude oil, accounted for as much as 20% of Finland’s total imports in 2011,
partly due to the increased oil price. The overall high energy intensity stems
from the dominance of energy-intensive industries in Finland, which would
benefit from a reduction in energy usage.

·
Finland’s declining competitiveness is also
related to a relatively low translation of R&D into marketable products.
Despite high R&D spending and a well-educated workforce, the forestry
and electronics industry still account for a large part of the business
structure and the number of high-growth companies remains low.

·
The loss in cost
competitiveness is another factor at play. The wage increases of the past
five years exceed productivity growth and have damaged Finland’s competitive position, especially compared to major competitors such as Germany and Sweden.

·
Debt levels have
increased over the last decade. The private sector, excluding the financial sector, accumulated debt
of up to 179% of GDP in 2011 (non-consolidated). Public debt remains modest
despite having increased over the last decade and is expected to stay below the
60% ceiling, at least until 2014.

·
The level of household
debt is a cause for concern, although no sudden deleveraging or instability
of the financial sector is in sight. Based on the current health of the
financial sector and on the still rather low housing cost overburden rates for
households, no sudden deleveraging is expected in the near future.

·
The year-on-year growth
of the non-consolidated financial liabilities of the financial sector stood
at 30.8% in 2011, the most rapid in the EU. The changes appear to have largely
technical causes but close monitoring is warranted going forward. Other
potential risks for the Finnish financial sector stem from the high
concentration within the sector and the funding structure.

3. Assessment
of policy agenda
3.1.
Fiscal policy and taxation

Budgetary
developments and debt dynamics

The stability
programme objectives are to balance central government finances and bring the
central government debt-to-GDP ratio on a declining path by the end of this
parliamentary term. The stability programme sets a
medium-term objective (MTO) of -0.5 % of GDP for the general government
structural balance, which reflects the objectives of the Stability and Growth Pact.
In the 2012 stability programme, the MTO was set at +0.5 % of GDP, which
was more ambitious than required by the Stability and Growth Pact. According to
the forecast presented in this stability programme, the general government
financial position will strengthen but remain in deficit in the programme
period. Central government and general government debt relative to GDP will,
however, start to decline at the end of the programme period. The deficit
target set for central government finances will not be achieved.

The
target year for achieving the MTO in the stability programme, 2014, does not
correspond to the target year set in the previous stability programme. Last year, the then-applicable MTO of +0.5 % of GDP was
projected to be reached in 2013 but this will not happen. The Finnish
government’s medium-term budgetary strategy intends to improve the structural
balance[8]
from -0.9 % of GDP in 2013 to -0.6 % of GDP in 2014, -0.6 % of
GDP in 2015, -0.7 % of GDP in 2016 and -0.6 % of GDP in 2017. Given
that the deviation from the MTO is just 0.1 % of GDP and that the Commission’s
spring forecast estimates that Finland should achieve a structural deficit of -0.5 %,
it is indeed likely that the MTO will be reached by 2014.

The
main reason for missing the 2012 stability programme targets was lower-than-expected
economic growth. The 2012 stability programme predicted
a deficit of -1.1 % of GDP in 2012 and of -0.5 % of GDP in 2013. This
was reliant on achieving 0.8% GDP growth in 2012 and 1.5% GDP growth in 2013.
The year 2012 resulted in a deficit of -1.9% of GDP, as real GDP declined by
0.2%. Consequently, tax revenues turned out lower than forecast while
expenditures occurred as foreseen. The 2013 stability programme fiscal scenario
is in line with the Commission’s spring forecast. For 2014, the spring forecast
projects somewhat higher expenditure, mainly in the areas of employee
compensation and social payments. The Finnish programme does not rely on
temporary or one-off measures to generate revenue or cut expenditure.

The
general government headline balance is projected to improve steadily over the
forecast period. The biggest improvement, 0.6 %
of GDP, will occur between 2013 and 2014, after which it will continue at a slower
pace. Finland’s primary balance was -0.8 % in 2012, and is projected to
decline to -0.9 % in 2013 before gradually improving over the programme
horizon. Primary surplus will be achieved in 2015 and the programme aims at a 0.8 %
primary surplus in 2017. Improvement in the general government balance will be
achieved by means of general expenditure controls through a system of central
government expenditure ceilings and specific tax measures announced in March
2013. Central government is the main driving force in efforts to improve the
general government balance. Local government shows a relatively stable deficit
(fluctuating between -1.0 % of GDP and -1.2 % of GDP over the
forecast horizon) and social security funds are in surplus. The surplus will decline
from 2.1 % of GDP in 2013 to 1.8 % of GDP in 2017 as outflows from
the funds increase over the forecast period.

Box 2. Main measures

|| Main budgetary measures ||

|| Revenue || Expenditure ||

|| 2012 ||

|| · || · ||

|| 2013 ||

|| · Increase in VAT rate by 1pp (+) · Effective increase in income tax rates (+) · Introduction of YLE tax (=) · Introduction of a bank tax (+) Total +0.75 % of GDP || · Use of expenditure ceilings to ensure that the central government expenditure does not grow in real terms ||

|| 2014 ||

|| · Decrease in corporate income tax rate (-) · Increased taxation of dividends (+) · Increased excise taxes on alcohol, tobacco and sweets (+) · Total +0.5 % of GDP || · Use of expenditure ceilings to ensure that the central government expenditure does not grow in real terms ||

|| 2015 ||

|| · || · Early withdrawal of tax deductions on R&D and increased depreciation rates, anticipated to last until 2016 (-) ||

|| 2016 ||

|| · || · ||

|| Note: The budgetary impact in this table is the impact reported in the programme, i.e. by the national authorities. A plus sign indicates that revenue/expenditure increases as a consequence of the measure. The degree of detail reflects the information made available in the stability programme and, where available, in a multiannual budget. ||

·

Risks
to the scenario stem mainly from risks to the growth forecast. As the economy is in the process of being restructured and ICT and
forestry sectors, which are suffering diminished exports, are being replaced by
other sectors, developments in industrial production and exports over the
coming years are difficult to forecast. The government has announced a reduction
in the corporate income tax rate from 2014, which is expected to lead to
stronger investment and wage growth, partially offsetting the loss in tax revenues
through the dynamic effects. The extent and timing of these effects is
similarly difficult to forecast. If the economy takes longer than anticipated to
respond to the tax cut, revenues might fall short of the 2014-2015 expectations.

The
ex-post assessment shows that the (recalculated) structural balance deteriorated
from 2011 to 2012. Regarding the expenditure
benchmark, since Finland did not reach its MTO in 2011, net expenditure growth
in 2012 needs to be at or below the lower reference rate of 0.5 %for 2012.
Finland’s net expenditure increased by 0.4 %, which remains below the
lower reference rate. Considering that Finland posted negative real GDP growth
in 2012, it can
be considered to be overall compliant with
the provisions of the preventive arm of the
SGP.

In 2013, Finland’s (recalculated) structural balance is forecast to
improve by 0.1pps from -1 % to -0.9 %. In
light of Finland’s large negative output gap, this small improvement is deemed adequate.
Because Finland is not predicted to reach its MTO in 2012, net expenditure
growth from 2012 to 2013 needs to be at or below the lower reference rate of 0.5 %
for 2013. Finland’s net expenditure is projected to increase by 0.6 %,
corresponding to a deviation of the expenditure benchmark of only 0.1 % of
GDP. Overall for 2013, the programme anticipates compliance with the preventive
arm of the Stability and Growth Pact, as the structural balance is forecast to
improve.

In
2014, Finland’s (recalculated) structural balance is forecast to move from -0.9 %
of GDP in 2013 to -0.6 % of GDP in 2014.
According to the information provided in the programme, the growth rate of
government expenditure, net of discretionary measures, deviates by 0.3 %
of GDP from the lower reference rate under the expenditure benchmark. Taking
into account that the deviation from the MTO is just 0.1 % of GDP and that
the Commission’s spring forecast estimates that Finland should achieve a
structural deficit of 0.5 %, it is likely that the MTO will be reached by
2014.

In
2015 and 2016, Finland’s (recalculated) structural balance is projected to remain
close to Finland’s medium-term objective for the structural balance of -0.5 %
of GDP. The overall assessment of Finland’s budgetary developments, with the structural balance as a reference, including an analysis
of expenditure net of discretionary revenue measures, shows that Finland complies with the required adjustment towards the MTO over the programme period.

The
general government gross consolidated debt will continue to grow over the
coming years and, consequently, government debt is expected to reach 57.5 %
of GDP by 2015 according to the programme, which is close to the 60 % reference
value. According to the Commission’s forecast,
general government debt will be slightly higher in 2013 and 2014 compared with
the programme, but the difference is small (0.4 % of GDP in 2014). The
programme anticipates subsequent reductions in the relative debt level — of 0.5 %
of GDP in 2016 and 2017. Since the debt-to-GDP ratio is
below the reference rate, the debt reduction benchmark does not apply.
Medium-term debt projections (see Graph below Table V in annex) indicate that
full implementation of the programme debt would first lead to decreasing, then
increasing debt, remaining however below the 60% reference value by 2020.

Long-term
sustainability

Finland
is at medium sustainability risk in the medium term and at high risk in the long
term due to the budgetary impact of the cost of ageing, but appears not to be
at risk of fiscal stress in the short term. Risks
would be lower if the structural primary balance were to revert to the higher
values of the past, such as the average for the period 1998-2012. The focus,
therefore, should be on containing age-related expenditure growth further so as
to contribute to the sustainability of public finances in the medium and long
term.

An independent
study of the Finnish pension system[9]
concludes that if the present system remains unchanged, either pension benefits
will become inadequate or the system will become unsustainable. Problems in the pension system include making inadequate adjustment
for a delayed start to drawing a pension and taking inadequate account of
changes in family structure. Improving life expectancy should translate into
longer working careers, but although the current system provides incentives to
work longer, the majority of workers choose not to use them. Proposed policies
include reducing pensions at the earliest eligibility age, gradually increasing
the earliest eligibility age and possibly indexing the eligibility age to life
expectancy.

According
to the 2012 Ageing Report 2012 reference scenario, Finland’s public healthcare
expenditure is set to increase significantly from 6.0% of GDP to 7.0%[10]
of GDP by 2060. Among the many measures being proposed is the consolidation of reform
efforts already being made by, for example, increasing hospital efficiency,
enhancing the supply of follow-up care for long-term care patients so as to
reduce the unnecessary use of acute care settings for these patients, improving
the organisation and management of health care or introducing medical best
practices systematically.[11]

Long-term
care accounted for 2.5 % of GDP in 2010.[12] Based on the 2012 Ageing Report reference
scenario, the expenditure could increase to 5.1%[13] by 2060. The
current and projected levels of spending can be explained by the focus on
relatively costly institutional care, high coverage rates in terms of
population and relatively high unit costs in institutional care. A stronger
focus on independent living and cost-control would help reduce the need for institutional
care and help continue to alleviate future spending pressures in long-term
care.

Fiscal framework

Finland ratified the Fiscal Compact at
the end of 2012 and has adopted the structural budget balance rule in its
legislation. Finland’s
fiscal framework is currently tied to multiannual expenditure ceilings. The
system is linked to parliamentary terms, and experience with the framework
suggests that governments abide by the rules. Every year the government decides
on central-government spending limits for the remaining years of its term, defining
the multiannual financial framework. Subsequent yearly decisions on annual
ceilings are taken on the basis of this framework.

Spending
limit decisions are taken in late March each year.[14] The fiscal rule sets annual limits to government expenditure for
the remainder of the parliamentary period. However, neither balanced budget
requirements nor limits to annual deficits are set by the rule. According to
the decision, central government expenditure included in the spending limits
should decrease in real terms in 2014 and 2015. This policy undertaken by the
government is in line with the growth-friendly fiscal consolidation
recommendation of the Annual Growth Survey. It provides an ambitious target to
control the costs of the budget while maintaining enough flexibility to respond
to changes in the economic environment. The framework includes built-in
automatic stabilisers, as some expenditure falls outside the scope of the
limits.

Social
security funds and municipalities currently operate outside the system of
expenditure limits, except for the fact that government transfers to the
municipalities are subject to central government expenditure limits. Municipalities are subject to a rule that requires a balanced
budget over a four-year period but are free to decide on expenditure growth that
can be financed by increasing local taxes. However, municipalities are the most
affected by the increasing ageing-related expenditure, as the majority of
medical and social services are provided by them. Thus it appears necessary to encourage
better integration of all expenditure (including local expenditure) to ensure coherence
between the plans of all sub-levels of government and their compatibility with
the medium-term objectives. A civil service working group has been established to
analyse ways of improving the macroeconomic steering of local government,
including setting the spending limits of local government finances.

Tax
system

In
2011, the overall tax burden in Finland was 43.4 % of GDP, the 5th highest
in the EU after Denmark, Sweden, Belgium, and France. Direct taxes, in particular on personal income, represent the most significant
category of revenue. As of 2013, VAT rates were increased across the board by
one percentage point without changing the structure of the system (standard
rate and two reduced rates).[15]
The expected additional annual tax revenue from the rate increases is EUR 750
million. Further increases of excise taxes will be introduced in the beginning
of 2014.

The
prevailing trend in labour taxation in relation to GDP has been modestly
downward for over a decade until 2011. The drop in
the implicit tax rate on labour has indeed been quite significant, from 44.1 %
in 2001 to 39.6 % in 2011. Yet, the proportion of labour taxes of GDP
remains among the six highest in the EU. In 2012, however, the government
decided to forego the index adjustments to the progressive state income tax
scales in 2013 and 2014. It also introduced a new top income class to the scale,
thus raising the highest marginal tax rate from 29.75 % to 31.75 %
applicable from 2013. At the same time, there have been increases in a number
of social contributions and the municipal income tax rates have continued to
increase, bringing the average rate to 19.38 % in 2013 (up from 19.25 %
in 2012). Thus, although the government has taken measures to ease the labour
tax burden of low-income earners by increasing allowances, the declining trend
of labour taxation seems to have come to an end as the effective tax rate on
labour is increasing.

From
the beginning of 2014, corporate income tax will be lowered from 24.5 % to
20 %. At the same time, taxation of dividends will
be tightened. It is expected that the reform will provide additional incentives
for investment, as the reduction in tax rate is significant.

The
taxable values of real estate are out-dated and disconnected from real prices. In 2012 the government decided to increase asset transfer taxation
of real estate from 1.6 % to 2.0 % as of March 2013. Although this measure
will contribute to consolidation needs, the asset transfer tax has drawbacks in
that it is deemed to be quite distortive and raises the cost of labour mobility.
A recurrent tax on property is considered to be less detrimental to growth and
preferable to transaction taxes on immovable property. The recurring property
tax revenues, in relation to GDP are currently low in Finland. In March 2013 the government announced its intention to bring the tax valuations
of real estate better in line with real prices, thus increasing property
taxation in the coming years. The impact and details of this measure remain to
be seen.

In
2011, environmental taxes accounted for 7.2 % of all taxes. In GDP terms, revenues are higher than the EU average (FI: 3.1 %,
EU: 2.4 % in 2011). There could be further opportunities to increase the
environmental benefits of these taxes and to phase out environmentally harmful
subsidies still in existence.

3.2.
Financial sector

The
financial sector remains resilient relative to many other national financial
sectors in the euro area. The banking sector did
not need government support during the crisis and has been seen as stable (the ’safe
haven’ phenomenon). Exposure to risks in countries undergoing the crisis is
limited, as are non-performing loans. Furthermore, the banking system has
remained profitable overall with an average return on equity of around 10 %,
resulting in improved solvency — the average capital adequacy ratio is around
14 %. Since the mid-1990s, housing has become significantly more expensive
in inflation-adjusted terms. Analysis suggests[16]
that house prices for Finland are close to, but above, the long-term average.
However, house price increases seem to be levelling off. Although still
rising in 2010, deflated house prices fell slightly in 2011 and remained stable
in the first half of 2012. Led by the increases in housing loans, the private
sector accumulated gross debt of 179 % of GDP (non-consolidated) in 2011.
The year-on-year growth of the non-consolidated financial liabilities of the
financial sector amounted to 30.8 %, by far the highest growth rate among
EU Member States. The high growth resulted mainly from the safe-haven effect
leading to inflows of foreign banks’ deposits, re-deposited with the Bank of
Finland.

In
2012, the Council Recommendation for Finland did not contain a CSR as regards
the financial sector policies. As the sector is healthy, no substantial reforms
have been undertaken.

The Finnish
government has decided to reduce gradually the incentives encouraging
debt-financed house purchases by lowering the share of mortgage interest
payments that can be deducted from taxable income. This
should help to reduce upward pressures on housing prices. A working group
considered macro-prudential measures to limit the growing indebtedness and
ensure a high quality of lending, and proposed binding loan-to-value ratios for
the banks. However, the proposal has been disregarded and will not be implemented
by the government. Potential issues that could warrant analysis and measures
that have not yet been addressed include the structural features of the Finnish
banking sector (dominant position of one foreign-owned bank; a relatively large
derivative portfolio) and the trends observed recently (important inflows of
foreign bank deposits).

Access to finance

The
Finnish government has taken steps to improve the access to finance for small
and medium‑sized enterprises (SMEs) and high growth companies. This has been done through the injection of additional funds into
Finnvera.[17] For high-growth firms, public sector involvement in the venture
capital markets is again being reorganised, with all public venture capital
financing being channelled through the Finnish Funding Agency for Technology
and Innovation (Tekes). Finland has also introduced the accelerator programme (Vigo) to provide funding and other support for high-growth firms. This
programme has been able to direct EUR 60 million of private risk capital to new
enterprises.[18] In 2013, the government also introduced a tax-credit scheme for
business angel investors that invest in start-up enterprises. The measure is
expected to have a positive impact on the formation of new enterprises.

3.3.
Labour market, education and social policies

The labour
market generally performs well in Finland and the most pressing challenges relate
to the ageing of the population. The number of
people leaving the labour force annually exceeds the number of people entering
the labour market. To maintain the supply of labour, it is important to speed
up entry[19]
and to prevent early exit of workers. The policy agenda is now focused on
retirement issues, and on long-term and youth unemployment.

The 2012
Council recommendations to Finland contained a CSR to improve the employment
rate of older workers, including by reducing early exit pathways, and to
increase the effective retirement age taking into account the improved life
expectancy. The Commission concludes that Finland has made some progress on measures taken to address this. Steps taken in 2012 are
in the right direction overall, but no breakthrough has been achieved. In the
period 2013-15 Finland will take relevant measures to reduce early exit
pathways. However, some pathways such as the ’unemployment pathway[20]’ to
retirement still remain. The employment rate of the 60–64 age group was a mere 41.8 %
in 2011.[21]
Moreover, despite the flexible retirement age of 63–68 years introduced in the
2005 pension reform, the number of people retiring in 2011 on a statutory
earnings-related pension at 63 was almost twice as high as those who retired at
64 or 65 combined. Recent report by the Prime Minister's Office concludes that
the objectives of the 2005 reform were not met in terms of the increased
expected retirement age[22].
The life-expectancy coefficient in pension calculations is a strong economic
incentive to work longer to earn a higher pension. However, since life
expectancy is increasing faster than was anticipated in 2005, the coefficient
also has a strong impact on the adequacy of pensions. Linking the pensionable
age to life expectancy would cover both the adequacy and sustainability side of
the pension equation.

Discussions
are on-going in relation to the pension reform planned for 2017. They cover survivor’s pensions, the starting age for pension
accrual, early retirement schemes and retirement ages. In addition, the government
has set up a high-level group to assess the results of the 2005 reform to serve
as a basis for the discussions. Initiating the discussions on new pension
reform is a relevant measure, but its anticipated implementation by 2017 seems
insufficiently ambitious, as this deadline extends beyond the current
parliamentary term and thus the proposals by the outgoing government could be
subject to review or reversal.

Disability
is still the most important factor shortening working careers in Finland. In order to tackle the issue and to extend working
careers by improving the quality of working life, Finland introduced a new
National Working Life Development Strategy at the beginning of 2013. Although
the strategy is relevant and ambitious, underpinning it with implementing
measures in work places and labour markets remains a challenge. This is also an
issue for the employment of older workers: unemployment is again increasing in
the over-50s age group, after having fallen for many years.

The 2012
Council recommendations for Finland also contained a CSR to implement the
on-going measures to improve the labour market position of young people and the
long-term unemployed, with a particular focus on
skills development. The Commission comes to the conclusion that Finland has made substantial progress on measures taken to address this CSR. However, the
underlying policy challenges remain. A pilot programme to address long-term
unemployment was launched in September 2012. Primary responsibility for
managing an individual’s employment support will be transferred to the
municipality once a person has been unemployed for 12 months. Their chances of
employment will be assessed, their progress monitored, and participation in
wage-subsidised work and training increased. In addition, Finland introduced a strategy on structural change and the functionality of the labour
market to ensure that, as major structural changes continue, employees will be
able to transfer quickly from one job to another.

In
2013 Finland introduced a stronger youth guarantee: all young people under 25
and all recent graduates under 30 would be provided with a job or training,
study place, workshop placement or rehabilitation within three months of unemployment. In 2012 and 2013, 1 700 study places are being introduced in
vocational training in regions where there have been fewer study places for
this age group. The guarantee is complemented by a skills programme in 2013-16,
which creates additional study places for those 20-29 year olds who have only the
basic school education, and are very often not in employment, education or
training. The guarantee is an ambitious partnership with shared responsibility
between the authorities, labour market partners and young people.

The
measures on long-term and youth unemployment conform to the priorities of the
2013 Annual Growth Survey and are reaffirmed in the 2013 national reform
programme. They are relevant and ambitious. As
regards credibility, it remains to be seen whether the budget of the youth
guarantee is indeed sufficient in relation with the measures that are planned. In
addition, the key actors responsible for implementing the two measures — Public
Employment Services and municipalities — are going through a major reform that
could affect the implementation. Permanent improvement in job-relevant skills
and labour market position of the target groups will be achieved only if both measures
are rigorously implemented.

The 2012
Council recommendations for Finland also contained a CSR to continue to align wage and productivity developments, whilst fully
respecting the role of social partners and being in line with national
practices. The Commission comes to the conclusion that Finland has made limited progress on measures taken to address this CSR. The current labour market agreement comes to an end in 2013 but the
labour market partners have not yet reached an agreement on its follow-up. If
the new agreement continues along the same lines as the current one, wage
growth will still exceed productivity growth. Without measures to trigger
productivity growth or wage moderation, compensation per employee is forecast
to continue outpacing productivity growth in 2013 and 2014. In conclusion, thus
far the response to the recommendation has not been ambitious, relevant or credible,
but it should be recognised that the key to finding a solution rests with the
employer and employee organisations in Finland.

Social
exclusion

In-work
poverty in Finland is the lowest in the EU. The government’s
overall policy objective is to reduce social exclusion through labour market
integration. There are however people at risk of social exclusion, such as
elderly women with low pension earnings and those on disability pensions, for
whom labour market inclusion is not an option to reduce the risk of poverty.
The risk is also higher among young people and people with migrant background —
groups for which labour market integration is an option. In this context, the
persistent gender pay gap (at 19.4 % above the EU average of 16.4 %) has
a negative impact on the income of female pensioners.
Long-term unemployment also increases the risk of exclusion. The
government has announced a programme to prevent exclusion, poverty and health
problems.

Education
and training

Finland has less early school leavers
than the EU on average. Nevertheless, Finland is above its Europe2020 target and no improvement has been achieved for over a
decade. Early school leaving increases the risk of labour market exclusion,
which can further translate into social exclusion, in particular for disadvantaged
people, such as those with a migrant background.

Participation
in lifelong learning in Finland was 23.8 % in 2011, the 3rd highest in the
EU. However, for 55-64 year olds it was only 13.5 %
and for the low-skilled, only 10.7 %. Given the demographic challenges,
older and low-skilled workers would benefit from targeted measures aimed at
keeping them active longer on the labour market. Moreover, retraining policies
in traditional industries may need to pay special attention to older incumbent
workers, also so as to prevent skills shortages in a climate of changing
production processes. As regards the tertiary attainment rate, Finland has reached both its national and the EU headline target for 2020, with 45.4 % in Finland as against an EU average of 35.5 % in 2012.

3.4.
Structural measures promoting
growth and competitiveness

Finland
has continued to lose export market share, indicating potential problems in
competitiveness. The situation is puzzling, as the
business environment in Finland is reputed to be among the best in the world[23] and R&D
expenditure (3.78 % of GDP in 2011) is still the highest in the EU and remains
close to Finland’s national 4 % target for 2020. With regard to the
business environment, there may be room for further improvement in specific
areas, for instance by reducing the length of start-up procedures. According to
the ‘Doing Business 2013[24]’
report, Finland ranks 49th regarding the ease of starting a business while it
is 11th in the overall ranking. The efficiency of the Finnish research and
innovation system in turning investments in R&D into scientific and
technological excellence is a critical issue as is the system’s ability to convert
R&D investment into new innovative products and services. Although Finland is an innovation leader showing an above average innovation performance in the EU,[25] its capacity
to generate high-growth innovative enterprises is weaker than the majority of
other EU Member States.

The
2012 Council Recommendations for Finland contained CSRs to continue the efforts
to diversify the business structure, broaden the innovation base and to
continue to improve competition in product and service markets in the retail
sector, as well as increasing the competition neutrality between private and
public undertakings. Finland was recommended to
take further steps to ensure that competition law fines have a sufficiently
deterrent effect. Finland received no CSRs on environment protection, transport
or in relation to energy.

The
Commission concludes that Finland has made substantial progress on measures
taken to address this CSR. Finland has undertaken ambitious measures in these areas, but taking into account the scope
of the measures and their slow effect, efforts need to be continued. The 2013
budget includes a new temporary initiative for tax incentives for R&D
investment and a new temporary initiative for investors in start-up
enterprises. Industrial enterprises can increase the depreciation rates of
their investments for tax purposes until 2015. However, the tax incentives will
be withdrawn already from 2015 and replaced with a generally lower corporate
income tax rate. Such rapid shifts in tax policy can undermine the credibility
of the policy. Additional resources have been made available for Finnvera. In
the area of competition, the government has proposed an amendment to the
Competition Act regarding the dominant market position in the food retail trade
(if the market share exceeds 30 %). Other objectives are to maintain a level-playing
field between the public and private sector, and reduce legislative obstacles to
competition in various fronts. Efforts should now be directed towards fully implementing
the agreed programme for healthy competition. The sooner the new Competition
and Consumer Authority becomes integrated and fully operational the better. The
Commission will continue to monitor these reforms and their implementation.

Research and innovation

The
structural competitiveness problems of the Finnish economy have been widely
recognised and in 2012 the Council recommended that Finland continue its efforts
to diversify its business structure, and to strengthen productivity growth and
external competitiveness. The policy response has
been relevant, as it seeks to benefit more from high-value-added parts of the
value chains, in particular services and ICT. Besides making the most of the
extensive ICT know-how throughout the economy, the renewal of the industrial
landscape can be speeded up through policy measures designed to attract more
foreign direct investment. The government has undertaken several actions to
achieve the goals outlined, but it is too early to say whether these are
sufficient to turn the economy around. A temporary R&D tax incentive for
SMEs and cooperatives aimed at improving the leverage effect of public
investment is the most significant measure taken in financial terms.

The Team
Finland network promotes Finland and its interests abroad: Finland’s external economic relations, the internationalisation of Finnish businesses, the
country’s brand, and inward investments. At the
heart of the Team Finland network are three Ministries (the Ministry of
Employment and the Economy, the Ministry for Foreign Affairs and the Ministry
of Education and Culture) together with publicly-funded bodies and Finnish
offices abroad (including diplomatic missions, the offices of Finpro and Tekes,
and national culture and science institutes), all operating under the
ministries’ guidance. A total of 72 teams have been set up in different
countries and they bring together all Finnish authorities, publicly-funded
organisations and other key parties with ties to Finland. Each team has its own
work programme and coordinator with information on the network’s local
activities and services. An evaluation of the success of the effort has not
been carried out.

Several
policy objectives have been introduced to
improve the research and innovation system, in line with the government’s
research and innovation guidelines for 2011-2015.
At the end of 2012, the government published an action programme for research
and innovation policy ‘Growth through Expertise’ that aims to enhance the
quality and impact as well as the internationalisation of the Finnish research
and innovation system. The need to increase the number of high-growth
innovative firms was recognised. The digital service economy is expected to
provide Finland with opportunities for growth: all renewal opportunities for
structural change that the ICT sector offers have to be exploited. The extent
to which service firms and the public sector will be capable of exploiting
innovations from the ICT sector — and highly skilled human resources that are
available due to layoffs — will determine their effectiveness and growth. In
spring 2013 the government made a decision to launch a new research and
innovation action programme. The Academy of Finland will fund the programme to
the tune of EUR 10 million annually. The programme measures will for their part
support the implementation of the European Research Area. On the whole, the short-term
impact of the actions taken is very difficult to identify and to measure.

In
2012, a series of evaluations of the Finnish research and innovation system were
carried out providing valuable information for further reforms.[26] The report on the Strategic Centres for Science, Technology and
Innovation (SHOKs) concludes that the concept of these centres needs further
improvement, e.g. the interests of small companies could be better taken into
account and the centres should compete to maintain their status. The position
of the centres in the innovation system needs to be better defined and the
external peer review processes at project level should be extended across the
SHOKs.[27] A report on long-term perspectives is also under preparation and is
expected to be submitted to the Finnish parliament in 2013. The practical
impact of the strategic programmes on clean technology, the bioeconomy, forestry
sector and the welfare sector will need to be closely monitored and the
necessary adjustments made, but the ambitions are significant. For example, the
Finnish Strategic Programme for the Cleantech Business aims to create at least
40 000 new jobs by 2020 and to double the turnover of the sector.[28] Ultimately the policy measures can be deemed successful only if
they result in a positive current account balance, improving terms of trade,
growth and jobs.

The
government has introduced a range of other measures to improve the performance
of the system. It has recently made non-sensitive
data gathered by public authorities freely available with the aim of promoting
the emergence of innovative start-ups. Several measures have also been
introduced to enhance the efficiency of the public research sector. According
to a recent evaluation, the university reform that took effect in 2010 has had
a positive impact especially on the strategic management of universities. The
ongoing reforms of polytechnics and public research institutions as well as the
revised funding model for universities should raise the quality and impact of
the work of the public research performers. The reforms should also provide the
actors with the necessary incentives to increase the internationalisation of
the Finnish public research sector and to specialise in key research fields
where the country can compete internationally. These reforms together with
further efforts in areas such as research infrastructures and knowledge
transfer between the public and private sector will be critical to raising the quality,
impact and the international profile of the Finnish public research system. In
2012 a research infrastructure policy was launch and additional funding was
granted. The national road map of research infrastructures will be updated in
2013.

In
2012, the government introduced new measures that will enhance the role of
large metropolitan regions in implementing the national innovation strategy. The measures should promote the coordinated use of private and
public resources in the metropolitan regions. Research and innovation (R&I)
continue to be the priorities for the next period of the EU Structural and
Investment Funds (2014-20). Based on the preparatory documents, in the next
period Finland intends to focus on improving R&I infrastructure and
capacity, promoting business R&I investment and a range of innovative
actions, through smart specialisation,[29] as well as on supporting technological and applied research, pilot
lines and early product validation.

Overall,
in order for Finland to maintain its strong research and innovation
performance, a continuous policy commitment will be needed to carry out the
reforms, monitor their impact, and make the necessary adjustments in a rapidly
changing environment. Measures such as the government’s
‘ICT 2015 working group’ report point in the right direction. The report identified
four critical directions that should be followed to re-establish Finland’s technological lead in ICT. These included the rapid development of a common
architecture for all public services; a 10-year programme on ICT-related
research, development and innovation; a funding programme for high-growth
enterprises; and a governmental expert group to ensure long-term development.
The government has established a steering group under the Prime Minister to
ensure the implementation of these proposals, and concrete actions are already
being taken on the national service architecture and financing of growing firms
(EUR 55-70 million for 2014-2017).[30]

Competition
policy

The
retail grocery sector is particularly concentrated and its structure enables the
largest players to further strengthen their position. The retail sector in Finland contributes 3.9 % to the GDP and
employs 6.6 % of the workforce (over 160 000 people). Given the
economic importance of the sector, the smooth functioning of its regulatory
framework is essential. In September 2012, a new, broad-based programme on
promoting healthy competition was launched. According to the programme, the
supervision of the grocery sector, which is concentrated, should be sharpened
so that practices in this sector can be assessed under the rules in the
competition act which prohibit abuses of a dominant position. It is proposed
that a new section, 7a, be added to the Competition Act (948/2011), according
to which a grocery trade operator would be considered to occupy a dominant
market position if its market share in Finland exceeded 30 %.The Finnish
competition authority, while supporting measures to strengthen competition in
the retail sector, has raised concerns about automatically finding an operator
to have a dominant position once they exceed a specified threshold, a practice
that differs substantially from the assessment of the other sectors. One
interesting aspect in competition policy is the issue of the location of the
stores of the state-owned retail alcohol monopoly, as their presence can
increase retail turnover of supermarkets by 30 %. There have been some
signs that the locations of the Alko outlets have tended to favour the retail
grocery duopoly. The government has declared that it will influence, through
its ownership position, the location decisions of sales outlets of Alko.

Concerns
have been raised that the municipal zoning rules and procedures make it very
difficult to open new large stores, in particular as the two dominant players
have acquired most of the potential sites. The
programme on healthy competition includes objectives for the removal of
unnecessary and disproportionate restrictions on competition in legislation,
but this should be achieved without undermining the environmental objectives.
Legislation on city planning and construction and its practical application by
authorities is a key area, in particular in the capital and other densely
populated regions, given the importance of location for a number of activities
such as the retail grocery trade combined with the scarcity of such locations
in these regions. Measures to increase competition in this area include an
action programme on construction and changes to the land use and construction
act. Pharmacies and waste management are also targeted under the programme.

At the
institutional level, the Competition Authority was merged with the Consumer
Agency in January 2013. This measure should help
increase the impact of competition and consumer policies in Finland. However, it could also bring benefits in terms of efficiency, although merging the
different cultures could take some time and effort to complete.

In
response to the recommendation to increase competition neutrality, an amendment
to the competition act is under preparation to ensure greater neutrality of
competition between private firms that compete with public undertakings in
selling goods and providing services. According to
the programme on healthy competition, the Competition and Consumer Authority’s
scope of jurisdiction will be extended to cover the supervision of competition
neutrality related to the supply of goods and services that can be considered
economic activity within the public sector. The Authority should attempt, via
negotiation in the first instance, to eliminate practices and structures that
jeopardise competition neutrality. If results are not achieved through negotiation,
the Authority should have the power to ban certain activities or impose
obligations to ensure equitable operating preconditions in the market. The
government will regularly assess the progress of the programme, deciding on
additional measures as necessary. Quarterly progress reports will be submitted
to the to the Cabinet Committee on Economic Policy The government announced
that the Competition and Consumer Authority’s budget will be strengthened
accordingly. In this context, an amendment of the local government act is also
in preparation. It would require municipalities to incorporate their commercial
activities to remove the privileges that these activities benefit from (tax
exemption and protection from bankruptcy) to achieve greater competition
neutrality between private and public undertakings. These initiatives are
ambitious and credible and are likely to have a significant, positive impact
over the coming years.

The
general level of competition law fines in Finland is not sufficiently
deterrent. This may influence the success of the Finnish leniency programme.[31] This is recognised by the government that has declared its
intention to launch a survey in 2013 on means to strengthen the competition
enforcement regime. This is a relevant, but not yet sufficiently ambitious
response to the recommendation to take further steps to ensure that competition
law fines are sufficiently deterrent.

These
measures seem to go some way to address the recommendations of 2012, even
though it is still too early to assess the full impact of the reforms.

Environment

Under
the Europe 2020 Strategy, Finland has committed itself to reduce its emissions
not covered by the EU’s Emission Trading System (ETS) by 16 % between 2005
and 2020. Based on the latest inventory data, in
2011 Finland reduced its (non-ETS) greenhouse gas emission by 9 % compared
with 2005. The updated national energy and climate strategy concludes that Finland will meet its 2020 target with existing measures.

Finland has engaged upon a strategy
consisting of increasing the taxation on environmental pollution and increasing
the statutory requirements for energy efficiency. The
country has put in place a number of greenhouse gas reduction measures, laid
out in its long-term National Climate and Energy Strategy, and is continuously
updating most of them through legislation, making them progressively more
stringent. An update of the National Energy and Climate Strategy was submitted
in late March 2013. The strategy focuses on improving energy efficiency and increasing
the share of renewables to reduce greenhouse gas emissions by 80 % by
2050. Measures include the tightening of building energy efficiency
requirements, support for renewable energy, increasing the energy efficiency of
road transport and decreasing oil consumption by 20 % by horizon 2020,
mainly from road transport and heating. In some areas additional measures could
be foreseen: there is currently no disincentive for incineration, potentially
leading to lost opportunities in recycling and the re-use of materials. The energy
tax on peat is taxed at much lower rate (on a per-unit-of-energy basis) compared
to coal or natural gas, thus favouring this fuel despite the negative impacts
of burning and harvesting it,[32],[33].[34] Environmental taxes are not indexed in Finland. The government is
committed to phasing out environmentally harmful subsidies, but contrary to
this objective, the refund system on energy tax payments for industry was
extended in 2011 so that 85 % of energy taxes paid are refunded when the
taxes paid exceed 0.5 % of the value added (previously 3.7 %) The
subsidy could amount to EUR 120 million in 2012.[35]

Energy
policy

Finnish
energy policy is broadly in line with the main European policy guidelines and
no recommendations were issued in 2012. Energy
policy highlights the security of supply issues from a national perspective.
The new Energy and Climate strategy aims to create a carbon-neutral country by
2050, building on energy efficiency and renewable energy but also nuclear
energy.

The
electricity market in Finland is integrated into the wholesale electricity
market within the Nordic countries and also interconnected with the Russian Federation and Estonia. For gas, Finland is connected only to
the Russian transmission system. Diversification of its natural gas supply
options through an LNG terminal or a pipeline interconnection with the Baltic
States could make Finland less dependent on gas imports from Russia. Electricity self-sufficiency is only expected to be achieved after the much-delayed
Olkiluoto 3 nuclear reactor is completed.

Finland has committed to reaching a
target of 38 % of renewable energy sources in its final energy consumption
and a 20 % share of renewable energy in the transport sector by 2020. Due to the high reliance on biomass to achieve its targets, the
country needs to give special attention to sustainable biomass mobilisation.
Also, Finland should complete the legal obligations under the Renewable Energy
Directive. Finland has adopted new renewable energy measures since the adoption
of the Renewable Energy Directive. Most importantly, it has adopted a feed-in
premium, the Act on Production Support to Electricity from Renewable Energy
Sources, which provides financial support to wind power, hydro power, biogas,
other biomass sources, and CHP (combined heat and power). However, Finland still lacks effective measures to increase the use of renewable energy in the heating
sector such as a measure that obliges buildings to use renewable energy
sources.

Finland’s energy intensity is high
compared to its Nordic neighbours and other euro area members. The industry accounts for almost half of the final energy
consumption. Within the manufacturing sector, the forestry industry is by far
the largest energy consumer, followed by the metal and the chemical industry. High
energy intensity means that rising energy prices translate into increased
production costs for Finnish industries. Although the overall high energy
intensity stems from the dominance of energy-intensive industries in Finland, an improvement in the energy efficiency could enhance the competitive position of
these industries by lowering the cost of inputs. Finland has set a national
energy efficiency target to lower the consumption of energy from 323 TWh in
2010 to 310 TWh in 2020.

3.5.
Modernisation of public administration

Finland has continued to make progress
in developing its public administration. Building
on the success of the central government’s regional administration,[36] progress has been made in preparing the reform of the
municipalities, social and healthcare services. While Finland scores well on the quality of public administration, the number of independent municipalities
still appears large compared to the population, leading to possible
inefficiencies in administration and service provision. Central government is
implementing an efficiency and productivity programme and preparing to launch a
network of citizen service points by 2014 in the framework of  the ‘Customer
service 2014’ project.

The
2012 Council Recommendations for Finland contained a CSR concerning taking
measures to achieve productivity gains and cost savings in public service
provision, including structural changes and efficiency-enhancing territorial
administrative reforms, also in order to respond to the challenges arising from
an ageing population. The Commission has concluded
that Finland has made some progress on measures taken to address the CSR.

Ageing-related
expenditure falls mainly under the auspices of the local municipalities.[37] It has been acknowledged that the municipalities should be large
enough for services to be efficiently organised.
The government has prepared a reform proposal on the municipal sector and also
social and healthcare sectors. This is an ambitious and credible measure, as
the draft law has already been submitted to the national parliament. The
government has decided to improve the efficiency of municipal authorities by
providing financial incentives for voluntary mergers, possibly resorting to
forced mergers in the case of financially-troubled municipalities. All
municipalities not fulfilling certain criteria for a ‘healthy’ municipality
have to assess the costs and benefits of the mergers by July 2014. The minimum
size of the new emerging municipalities is set at 20 000 inhabitants with
certain exceptions. The impact of the municipal reform on productivity and
costs in public service provision will only be revealed over time. The goal is
to have stronger and more efficient structures for public service provision in
order to improve the productivity of these services. It remains to be seen
whether the voluntary nature of the reforms is enough to bring about the change.

The
preparatory work on the reform of the social and healthcare service structure
has been completed by a special working group. This
group recommended the creation on 20-30 social and health care districts.
Municipalities with at least 20 000 inhabitants would be allowed to
continue to independently organise their provision of basic services. However,
municipalities with less than 20 000 inhabitants would lose this right. In
order to guarantee equal level of services, some of the social and healthcare
services currently provided by the municipalities would instead be provided by
the social and healthcare districts responsible of providing all statutory
services. Municipalities with a minimum of 50 000 inhabitants would
guarantee these statutory services. In addition, every social and health care
district belongs to one of the five special responsibility areas which aims to
ensure an equal level of centralised services and an efficient use of
resources. These recommendations are being turned into legislative proposals
during 2015. The social and health care districts should be operational by 1
January 2017. Assessment of the ambitiousness of the reform can be delivered
after draft legislation is published.

The
Finnish government has implemented an action plan to reduce the administrative
burden on businesses by 25 % by 2012, but an external evaluation[38] has indicated that not much progress beyond the starting point has
been made (except in public procurement). The
effect of the proposed municipal reorganisation on public procurement remains
to be seen, but one danger is that the larger municipalities will put bigger
lots out to tender, thus favouring bigger firms and disadvantaging SMEs.
Furthermore, the complexity of the public procurement legislation can also lead
to municipalities favouring as few lots as possible. There are no incentives
for the municipalities to refer any observed collusive behaviour among
tenderers to the Competition and Consumer Authority either. The public sector
could benefit from more efficient investments in IT, as so far there have been
few productivity improvements, indicating a need for increased efficiency in
deployment and additional structural and managerial changes.

Overall,
the progress in reforming the public administration has been limited and,
taking into account the challenges of an ageing population and diminishing
labour force, more ambitious measures might be needed.

4.
Overview table

2012 commitments || Summary assessment

Country-specific recommendations (CSRs)

CSR 1: Preserve a sound fiscal position in 2012 and beyond by correcting any departure from the MTO that ensures the long-term sustainability of public finances. To this end, reinforce and rigorously implement the budgetary strategy, supported by sufficiently specified measures, for the year 2013 and beyond, including meeting the expenditure benchmark. Continue to carry out annual assessments of the size of the ageing-related sustainability gap and adjust public revenue and expenditure in accordance with the long- term objectives and needs. Integrate the local government sector better in the system of multi-annual fiscal framework including through measures to control expenditure. || The Commission comes to the conclusion that Finland has made some progress on measures taken to address the CSR. The general government deficit reached 1.9 % of GDP in 2012 and in its spring forecast the Commission predicts a 1.8 % deficit for 2013. The structural balance was -0.7 % in 2012 and is forecast to be -0.6 % in 2013 and -0.5 % in 2014. Finland did not meet its MTO (0.5 %) in 2012, but due to the negative growth, the improvement in structural balance was not achievable. Finland is carrying out an assessment of the sustainability gap. No measures to establish expenditure ceilings have been proposed at general government level, but local government expenditure is being adjusted through the adjustment of central government transfer payments to the municipalities which are subject to central government expenditure ceilings.

CSR 2: Take further measures to achieve productivity gains and cost savings in public service provision, including structural changes and efficiency-enhancing territorial administrative reforms, also in order to respond to the challenges arising from an ageing population. || The Commission comes to the conclusion that Finland has made some progress on measures taken to address the CSR. Reform on the number and structure of municipalities is progressing. Legislation currently being proposed for adoption in July 2013 establishes criteria for municipalities that should consider and analyse mergers. There will be financial incentives for mergers but no forced mergers are envisaged. Merging municipalities will have interim periods during which the number of staff will not be reduced, etc. The reform is not expected to produce immediate results. Furthermore, reform on health and social services being planned.

CSR 3: Implement the ongoing measures to improve the labour market position of young people and the long-term unemployed, with a particular focus on skills development. || The Commission comes to the conclusion that Finland has made substantial progress on measures taken to address the CSR. The measures to reduce long-term and youth unemployment (the latter undertaken under a fully-fledged Youth Guarantee) are relevant, ambitious and credible. However, the underlying policy challenges remain. As regards older workers, it is not clear what measures are being envisaged either in the National Working Life Development Strategy or outside it. Since no concrete initiatives or numbers have been set, it is difficult to assess relevance, ambition or credibility. Early exit pathways, such as the ‘unemployment pathway’, remain.

CSR 4: Continue enhancing competition in product and service markets, especially in the retail sector, by ensuring the effective implementation of the new Competition Act and the new programme on promoting healthy competition. Continue to further opening the municipal procurement of services to competitive bidding and by ensuring competition neutrality between private and public undertakings. Take further steps to ensure that competition law fines are sufficiently deterrent. || The Commission comes to the conclusion that Finland has made some progress on measures taken to address the CSR. To improve competition, a programme to promote healthy competition was set up, aimed at increasing competition on the domestic market. Furthermore, on 1 January 2013 the Finnish Competition and Consumer Authority came into operation. Furthermore, a legislative proposal on dominant market position has been under discussion at government level since September 2012.

CSR 5: In order to strengthen productivity growth and external competitiveness, continue efforts to diversify the business structure, in particular by hastening the introduction of planned measures to broaden the innovation base while continuing to align wage and productivity developments fully respecting the role of social partners and in line with national practices. || The Commission comes to the conclusion that Finland has made some progress on measures taken to address the CSR. The government’s measures are in the right direction in relation to diversification of the business structure. The adequacy of the response can be measured and evaluated once there is more data available (e.g. on the impact on exports and export market share). The problem of competitiveness and the need to facilitate the restructuring in the ICT sector are ongoing issues in the public policy debate. The current wage agreement comes to an end in 2013, but the labour market partners have not yet reached an agreement on its follow-on. There has not been an ambitious, relevant or credible response to the recommendation as regards the wage component.

||

Europe 2020 (national targets and progress)

Employment rate target: 78 % || 73.8 % (2011) 74.0 % (2012) The average annual employment growth required to reach the target is 0.2 % in 2011-2020. This will depend on economic climate but will also require national efforts. The NRP provides a target until 2015: 74.5 %.

R&D target: 4.0% || 3.87% (2010) 3.78% (2011)

Greenhouse gas (GHG) emissions target: -16 % (compared to 2005 emissions, ETS emissions not covered by this national target) || Change in non-ETS greenhouse gas emissions between 2005 and 2011: -9%. According to the latest national projections submitted to the Commission and when existing measures are taken into account, the target is expected to be achieved by a narrow margin: -16 % in 2020 compared to 2005.

Renewable energy target: 38 % Share of renewable energy in the transport sector: 10 % || Share of total renewable energy in gross final energy consumption was 31.8 % in 2011 and 0.4 % in the transport sector.

Energy efficiency - reduction of energy consumption in Mtoe: 310 TWh in final energy consumption in 2020. This implies reaching the level of 35.86 Mtoe primary consumption and 26.66 Mtoe final energy consumption. || Finland has set a national energy efficiency target to lower the consumption of energy from 323 TWh in 2010 to 310 TWh in 2020. 2011 level was 320 TWh

Early school leaving target: 8 % || Finland performs significantly better than the EU average for the early school-leaving rate. In Finland it was 8.9 % v. an EU average of 12.8 % in 2012. However, it tends to be significantly higher among people with migrant background and the trend is moving upwards. The overall rate of ESL has remained fairly stable for the last decade. For the period 2011-2012 the early school-leaving rate has decreased by 0.9 pps.

Tertiary education target: (42 %, narrow national definition) || The same applies to the tertiary attainment rate, with 45.8 % in Finland as against an EU average of 35.8 % in 2012. Finland has reached both its national and the EU headline target for 2020. For the period 2011-12 the tertiary attainment rate has decreased by 0.2 pps.

Risk of poverty or social exclusion target: Reduction the number of persons at risk to 770 000 || 920 000 (2011) According to the NRP, achieving the target requires reducing the number of people at risk of poverty or social exclusion by around 150 000. The NRP 2013 acknowledges that this will be challenging as poverty is increasing, in particular in urban areas.

5.
Annex

Table I. Macroeconomic indicators

Table II. Comparison of macroeconomic
developments and forecasts

Table III. Composition of the budgetary adjustment

Table IV. Debt dynamics

 Table V. Sustainability indicators

Table VI. Taxation indicators

Table VII. Financial markets indicators

Table VIII. Labour market and social indicators

Table IX. Product markets performance
and policy indicators

Table X. Green Growth

[1] COM(2012) 750 final.

[2] COM(2012) 751 final.

[3] 13 in-depth reviews were published on 10 April 2013. While selected
for an in-depth review in the AMR, Cyprus was ultimately not reviewed under the
Macroeconomic Imbalance Procedure in view of the advanced preparations for a
financial assistance programme.

[4] See labour market section for details on the guarantee.

[5] According to the Labour Force Survey, only 9.5 % of the 15-24
age group were unemployed. In Finland full-time students can be classified as
unemployed and thus the difference between figures.

[6] Doing Business 2013, The World Bank, International Bank for the
Reconstruction and Development.

[7] Innovation Union Scoreboard 2011, European Commission.

[8] Cyclically adjusted balance net of one-off and temporary measures,
recalculated by the Commission on the basis of the information provided in the
programme, using the commonly agreed methodology.

[9] Barr, N, The pension system in Finland: Adequacy, sustainability
and system design, 2013.

[10] If the non-demographic drivers are considered i.e. Ageing Working
Group (AWG) risk scenario is considered, then public expenditure on healthcare
is projected to increase to 7.5% of GDP

[11] ASISP (2012), Annual National Report 2012 –— Pensions, Health Care
and Long-term Care –— Finland.

[12] Lipszyc, B;, Etienne, S;, Xavier, A., '‘Long-term care: need, use
and expenditure in the EU-27'’, Economic Papers 469,   2012.

[13] If the AWG risk scenario is considered, then public expenditure on
long-term care is projected to increase to 5.4% of GDP

[14] The most recent decision is from 27 March 2013.      
 http://www.vm.fi/vm/fi/04\_julkaisut\_ja\_asiakirjat/03\_muut\_asiakirjat/20130327Valtio/name.jsp

[15] The standard VAT rate is 24 % since 1 January 2013. A reduced
rate of 14 % is applied to food and restaurant services. A reduced rate
of 10 % applies to hotels, medicines, books, newspapers and tickets to
cultural events.

[16] European Commission (2012a), ’Assessing the dynamics of house
prices in the euro area’, in Quarterly report on the euro area, vol. 11, No
4.

[17] Finnvera is the state-owned financial institution for SMEs, providing
loans, loan guarantees, equity investments and export-credit guarantees.

[18] http://www.tem.fi/files/35626/TEMrap\_4\_2013.pdf
.

[19] Entry into the labour market is delayed by the long duration of
studies.

[20] Under certain conditions, older unemployed persons will receive
unemployment allowances beyond the normal 500 day period, until retirement.

[21] The employment rate of people aged 55–64 rose by 15 pps, from 42 %
to 57 % between 2000 and 2011.

[22] Uusitalo, R; Nivalainen, S 'Vuoden 2005
eläkeuudistuksen vaikutus eläkkeellesiirtymisikään' Valtioneuvoston Kanslian
raporttisarja 5/2013

[23] IMD World Competitiveness Yearbook 2012, World Economic Forum,
Global competitiveness report 2012.

[24] Doing Business 2013 —– Smarter Regulation for Small and Medium
Sized Enterprises. A co-publication of the World Bank and the International
Finance Corporation.

[25] Innovation Union Scoreboard 2012.

[26] The assessment of the Strategic Centres of Science, Technology and
Innovation (SHOKs), the reform of the central government’s research institutes
as well as the evaluations of TEKES and Finnvera (Export Credit Agency of
Finland).

[27] Licence to SHOK, p. 27, http://www.tekes.fi/u/Licence\_to\_SHOK.pdf.

[28] Europe 2020 Strategy — Finland’s National Programme, Spring 2013,
p. 36.

[29] Smart specialisation means identifying the unique characteristics
and assets of each country and region, highlighting each region’s competitive
advantages, and rallying regional stakeholders and resources around an
excellence-driven vision of their future.

[30] NRP p. 33.

[31] Under this, participants in a cartel may obtain immunity from or
reduction fines provided that they reveal their participation in the cartel to
the competition authority in a timely manner.

[32] http://www.oecd.org/site/tadffss/FIN.pdf .

[33] For instance, see http://www.stat.fi/tup/khkinv/nir\_2008\_un\_20080418.pdf,
Table 3.2\_6, p. 57-58.

[34] According to the Finnish River Basin Management Plans.

[35] Source: http://www.tem.fi/?s=2686&xmid=4787&C=97986.

[36] Assessment report provided by the government to the Parliament in
February 2013, NRP p. 22.

[37] Municipalities are responsible for healthcare services and services
provided to elderly persons, such as nursing homes and daycare.

[38] Deloitte 2012, https://www.tem.fi/files/32917/TEMrap\_15\_2012.pdf

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