Presentation by professor Torben M. Andersen at Finland's Economic Policy Council 2017 report launch seminar. Launch was held in Helsinki on 23rd January, 2018. See also: http://www.talouspolitiikanarviointineuvosto.fi/en/reports/report-2017/

1. Economic Policy Council
Report
2017
Economic Policy Council Seminar
January 23rd 2018
Economicum
Recent economic developments, fiscal policy
and fiscal sustainability

2. Business cycle situation
• Swift change in the business cycle
situation – quicker/stronger than
anticipated
• High economic growth- above
trend growth
• Increasing employment, falling
unemployment
• Output gap is closed -6,0
-4,0
-2,0
0,0
2,0
4,0
6,0
8,0
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
%
OUTPUT GAP 2007-2019
European Commission Ministry of Finance
IMF OECD
-1,0
-0,5
0,0
0,5
1,0
1,5
2,0
2,5
3,0
3,5
4,0
2015Q1
2015Q2
2015Q3
2015Q4
2016Q1
2016Q2
2016Q3
2016Q4
2017Q1
2017Q2
2017Q3
%
GDP Growth 2015.1-2017.3

3. Structural problems and moderate long-
term growth
• Structural unemployment
remains high
• Mismatch problems – skills and
geographical
0,8
0,9
1,0
1,1
1,2
1,3
1,4
1,5
1,6
1,7
1,8
5 6 7 8 9 10
Vacancy rate, %
Unemployment
rate, %
2017
2015
2007
2012
2009
• Employment rate below the
target – 72%
• Long-term growth: 1.5%
0
2
4
6
8
10
12
14
1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019
Unemployment rate NAWRU NAIRU OECD
%

4. Fiscal policy
• Government consolidation plan
(2015)
• Mainly via expenditures cuts
• Expenditure targets largely met
• Discretionary changes have
reduced revenue
• Net effect: consolidation is 940
mill. euro less in 2020
-1 200
-1 000
-800
-600
-400
-200
0
2016 2017 2018 2019 2020 2021
2015 decisions 2015-2016 decisions
2015-2017 decisions
EURO million
Earned income tax
Competitiveness pact
Regional reform
Net effect on revenue:
Discretionary changes since 2015 plan

5. Public finances
• Budget deficit reduced
• Automatic stabilizers
• Consolidations
• Target 2016-2019: Balanced
budget
• Central government: -0.5% of GDP
• Local government: -0.5 % of GDP
• Pension Funds: 1.0 % of GDP
-5,0
-4,0
-3,0
-2,0
-1,0
0,0
1,0
2,0
3,0
2013 2014 2015 2016 2017 2018 2019
Central government, net lending
Local government, net lending
Social security and pension funds, net lending
Net lending, General government
%ofGDP
Budget balance

6. Fiscal policy targets
-3,5
-3
-2,5
-2
-1,5
-1
-0,5
0
2017 2018 2019 2020 2021
%ofGDP
Budget balance
MoF forecast Government target EU Limit
-1,8
-1,6
-1,4
-1,2
-1
-0,8
-0,6
-0,4
-0,2
0
2017 2018 2019 2020 2021
%ofGDP
Structural balance
MoF forecast Government target
EU limit EU limit*

7. Ficsal policy
• Fiscal policy not adapted to
business cycle situation
• Fiscal policy has been pro-cyclical
• Difficulty of fine-tuning policies
• Forecast uncertainty
• Policy planning
• Reporting
-6,0
-4,0
-2,0
0,0
2,0
4,0
6,0
-2
-1,5
-1
-0,5
0
0,5
1
1,5
2005
2007
2009
2011
2013
2015
2017
2019
Outputgap
Fiscalpolicy
Change general government, structural balance
Change primary balance, central and local government
Output gap (right hand scale)
Fiscal contraction
Fiscal expansion Low activity
High activity

8. Fiscal sustainability
• Ageing
• Increasing expenditures
on health, care, pensions
• Declining tax revenue
• Systematic deficits,
growing debt
• Fiscal sustainability:
permanent budget
improvement: 3 % of
GDP (2021)
0
20
40
60
80
100
120
140
160
180
200
2021
2026
2031
2036
2041
2046
2051
2056
% of GDP
General government debt
-12
-10
-8
-6
-4
-2
0
2
4
2021
2026
2031
2036
2041
2046
2051
2056
% of GDP
Structural balance
No adjustment
Full adjustment by 3.2% to GDP
Partial adjustment by 2.3% to GDP

9. Attaining fiscal sustainability
• Tax financing
- distortions
• Expenditure cuts
- Increasing needs/demand
- New possibilities
• Increased employment
- Double budget effect: higher
revenue lower expenditures
• Structural problems in the
labour market (72% target not
going to be met)
• Quantitative and qualitative
dimension of labour supply

10. Social and health care and fiscal
sustainability
• Health and care expenditures
• Ageing
• Income and new possibilities
• Importance of healthy ageing
• Age
• Terminal health/nearness to death
• Sustainability indicator very
sensitive to healthy ageing
• Assumptions are not justified, no
sensitivity analyses
0
1
1
2
2
3
3
4
4
5
Healthy ageing Baseline Non-healthy
ageing
%ofGDP
Growth in age-related expenses and
the sustainability gap

11. Health care funding plan
• Contribute 3 billion euros to close
the sustainability gap (50%)
• Government plan to 2030
• What happens after 2030?
• Permanent?
• Health care expenditures: 0.9%
• Income : 1.5%
0%
2%
4%
6%
8%
10%
12%
2014
2017
2020
2023
2026
2029
2032
2035
2038
2041
2044
2047
2050
2053
2056
2059
PercentofGDP
Baseline Return to baseline after 2029
Permanent level shift Counties' funding plan
Age related expenditures
1.2%
3%
<0.1%
Effect on
Sustainability
indicator

12. Health care reform
• Targets and instruments
• Target: Savings 3 bill. euro
• Will the instruments achieve
this?
• Here – only focus on public
finance effects
• Regional reform:
- Responsibilities shifted from
municipalities to 18 new counties
• Freedom of choice:
- Chooice of health care provider
- Increased role for private
providers
• Does this support expenditure
target??

13. Reform effects
• Expenditure cuts and a more
demand driven system with
improved access to health care
• Which instruments will achieve the
cost saving?
• Tight budget – risk of declining
quality or crowing out of other
activities.
• Efficient competition
- Number of suppliers
- Asymmetric information
• Incentive structure for providers
• ”excess” referral from primary to
specialized care (cost carried by
counties)
• Overlap to occupational health
care
• Default registration at nearest
health care centre
- Concentration in the large cities

14. Fiscal policy stance
• No longer a dilemma between short-run and medium-run objectives:
• Output gap closed – no case for expansionary policy
• Fiscal sustainability – significant unsolved problem
• Structural problems: labour market + low growth potential
• Government targets not to be reached
• Need for clear plan….