Finland Economy

Finland Economy

Subchapters:

  • Basic data
  • Public finances and the state budget
  • Banking system
  • Tax system

Basic data

With its economic performance, Finland ranks among the top in the world – the country’s GDP per capita is comparable to Canada, Japan, France or Great Britain. Finland recovered from the economic recession for 10 years: the country reached the GDP level of 2009 thanks to economic reforms only in 2019. Finland must continue to face pressure on the sustainability of public finances, mainly due to unfavorable demographic developments and increasing indebtedness. Finland’s economy performed surprisingly well during the coronavirus pandemic compared to the results of other EU countries. The reason was, in particular, minimal trade restrictions, massive digitization of society, a specific system of temporary layoffs, or less dependence on tourism. In 2021, GDP grew at the level of 3.5%, while in 2022 it is expected to grow by about 0.5-2%, depending on the effects of the war in Ukraine. Growth this year will again be driven by private consumption and public and private investments, especially in the area of ​​green transformation, infrastructure and innovation. The war in Ukraine, combined with the geopolitical situation of Finland, has made foreign investors a bit uncertain, but possible accession to NATO should once again strengthen investment confidence. The ratio of national debt to GDP rose relatively sharply to 70% in 2020, then stabilized at 69% in 2021. However, the expected gradual decline this year and the following years is unlikely to materialize due to increased spending on defense, security and other areas related to the response to the crisis in Ukraine. Unemployment had an increasing trend even at the beginning of 2021, when the unemployment rate rose to 8.7% in January, but by the end of the year, this trend was reversed and unemployment fell below 7% in December. where it remained in February 2022. There are approx. 30,000 long-term unemployed in FI, in 2021 there was an almost three-fold year-on-year increase in the number of temporarily dismissed persons. However, due to the gradual recovery of the service sector, the situation can also be expected to improve in the future. Finland continues to face some chronic problems (e.g. long-term low growth potential of around 1.5%, low labor productivity, difficult sustainability of public finances, insufficient investment, inefficient labor market), which the pandemic has only exacerbated. Check ebizdir for economical facts of Finland.

Finland belongs to the internal market of the European Union and ranks among highly developed, industrialized and competitive economies (11th position in the world) with a free market. The Finnish economy is heavily dependent on exports: approx. 40% of GDP is generated by exports, of which 40% goes to EU member states. The key economic sectors are: telecommunications, electronics, industrial production (wood and metal processing) and engineering. The fundamental economic denominator is a strong orientation towards innovation, green technological transformation and digitization. Finland’s most important export earnings come from the timber industry, in which a significant part of the rural population works. The country is also successful in exporting engineering products, ICT services, cars, mineral fuels and oils, electronics and transport services. Export-oriented industry is under considerable pressure, because they have to face both international competition and high wage levels. The Finnish economy is heavily dependent on the import of raw materials and part of energy.

Pointer 2019 2020 2021 2022 2023
GDP growth (%) 1.1 -2.3 3.5 2.0 1.5
GDP/population (USD/PPP) 53,041.00 50,514.00 53,880.00 57,600.00 59,880.0
Inflation (%) 1.1 0.3 2.2 2.2 1.5
Unemployment (%) 6,7 7.7 7.7 6.6 6.5
Export of goods (billion USD) 72.7 68.2 83.5 84.6 85.5
Import of goods (billion USD) 70.1 64.8 80.6 81.3 82.0
Trade Balance (Billion USD) 2.6 3.4 2.9 3.3 3.5
Industrial production (% change) 1.9 -3.2 3.4 3.6 2.2
Population (millions) 5.5 5.5 5.5 5.6 5.6
Competitiveness 15/63 13/63 XI.64 ON ON
OECD export risk ON ON ON ON ON

Source: EIU, OECD, IMD, Statistics of Finland, Bank of Finland

Public finance and state budget

Public finance 2021
State budget balance (% of GDP) -4.4
Public debt (% of GDP) 69
Current account balance (billion USD) 2.6
Taxes 2022
AFTER 20%
F.O 1- 57%
VAT 24%, 14%, 10%

The pressure on the sustainability of public finances is quite high in Finland, with demographic reasons and the effects of the COVID 19 pandemic mainly due to low growth potential, low productivity, fragmented investment and a growing lack of skilled labor. Since 2009, Finnish public finances have shown a deficit, which was reduced to 1.1% in 2019. In 2020, the deficit due to the COVID 19 pandemic increased by leaps and bounds to 5.5% of GDP, a budget with a deficit of EUR 1 billion was approved for 2021 (4.4% of GDP, the long-term sustainable deficit is approx. 3% of GDP). In the approved budget for 2022, the deficit was reduced to EUR billion, i.e. approx. 2.4% of GDP, however, it can be expected to increase as a result of increasing government spending associated with the crisis in Ukraine.

In 2020, as a result of the pandemic, public debt jumped from around 60% of GDP to a record 70%, in 2021 it fell only slightly to 69%. In view of the growing defense and security spending, further debt growth can probably be expected. Finland’s external debt has grown more significantly since mid-2018, reaching its peak (€580 billion) in the second half of 2020, before falling to €530 billion in early 2021. At the end of 2021, external debt increased again to a record, even up to EUR 608 billion.

The current account balance maintained a positive balance in 2021 at the same level as in 2020, which was preceded by a number of years of negative balance. The balance of the trade balance remained positive in 2021, although it saw a slight decrease compared to the previous year, mainly due to an increase in the negative balance of trade in services. Both primary and secondary incomes developed favorably (however, these still remained in negative values). In 2022, we can most likely expect a more noticeable decrease in the current account balance, which will once again reach negative values.

In response to the pandemic in 2020, the central bank resorted to some emergency and non-standard monetary solutions, buying more government bonds and private sector securities, spending almost €2 billion. The program associated with these extraordinary purchases due to the pandemic ended in March 2022. International reserve assets were increased by the Central Bank to EUR 1billion in the second half of 2021.

Banking system

The Finnish financial and insurance sector is relatively small and accounts for only about 2.6% of GDP. Finland is part of the European Monetary Union, and its three largest banks are thus under the direct supervision of the European Central Bank. Other banks are regulated by the local central bank and the Financial Supervisory Authority.

The Finnish banking market is efficient, profitable, technologically advanced and with sophisticated and modern services. At the same time, it is a highly saturated market with little opportunity for new players to apply. Finland is third in the world in the use of online banking services. In international comparison, Finland has a large number of banking houses and individual branches (approx. 230), which is largely due to the existence of specific and independent cooperative and savings banks. The Finnish banking sector was in very solid condition at the beginning of the COVID 19 pandemic, and at the beginning of 2022, thanks to improving economic conditions, it was possible to increase weakened profitability again.

The three largest commercial banks on the market (Nordea, OP and Danske) have a dominant position within the business sector and private clientele with a 70% share of loans and 80% of deposits. The largest bank Nordea moved its management from Stockholm to Helsinki in October 2018, it is a bank that operates in all Nordic countries and worldwide. OP Group, which is the largest purely Finnish provider of banking and insurance services, is owned by approximately 150 independent smaller cooperative banks. The third largest bank MuniFin (Kuntarahoitus) is not a commercial bank, but it is one of the largest Finnish credit institutions focused on financing the public sector and housing cooperatives, owned by the government, municipalities and the public pension fund Keva. A number of Finnish savings banks are part of a wider group that focuses on banking services,

Tax system

The Finnish tax system is transparent, especially consumption taxes (alcohol, fossil fuels, etc.), however, for foreign entities, they can be subject to a certain lack of understanding and instability, often in the interest of protecting domestic consumers or producers. In addition to taxes on the income of natural and legal persons and VAT, taxes are levied on capital income (30-34%), on the income of short-term working foreigners (35%), on real estate (determined by the municipality), on inheritance and on gifts (up to 33%), from dividends (7.5 – 28%), from the transfer of real estate (4%), from the transfer of shares in housing cooperatives (2%), from the transfer of securities (1.%), etc.

Incomes of natural persons are taxed progressively (maximum rate up to 56.95%) and taxes are paid to the state (up to 31.25%), municipalities (up to 23.5%) and in certain cases to the church. Contributions to basic pension insurance (7.15 – 8.65%), unemployment insurance (1.4%) and health insurance (2.04%) are deducted from earned income at the same time as income tax. The uniform corporate income tax of 20% is distributed by the tax administration between the state, municipalities and churches. The basic VAT rate is set at 24%, the reduced rate at 14% (food, feed and restaurant services), the lowest rate at 10% (books, newspapers, medicines, personal transport, sports activities, accommodation services, cultural events, etc.) . Entrepreneurs must register for VAT payment with an annual turnover of 15,000 or more. EUR.

A relatively predictable development of the tax system can be expected in the future. The main changes will take place in the area of ​​green transformation (tax incentives and a higher burden on less ecological activities, an example can be the recently approved abolition of motor vehicle tax for electric cars). The government will probably try to at least slightly reduce the high taxation of personal income, but the pressure will be on increasing insurance payments and state payments to the public health system. With increasing defense and security spending and rising costs of health, social and other public services, it will be very difficult to reduce the tax burden.

Finland Economy