Economy and Trade
After hundreds of years of Swedish rule, Finland gained independence in 1917, only to face the threat of domination by another neighbor, the Soviet Union. Following the collapse of the Soviet regime, Finland escaped from the shadow cast by the Cold War and joined the European Union in 1995. In 2002, Finland became the only Nordic country to adopt the euro in place of its national currency, the Finnish mark. Around two-thirds of the country is covered in forest and about a tenth in water, and the forestry industry has been the backbone of Finnish industry. However, Finland has also had success in telecommunications—the Finnish firm Nokia is a household name around the world. One of the main economic problems facing the country is the aging population—the working-age population will begin to decrease in 2010. The country also has a comprehensive welfare program that has resulted in higher-than-average taxes.
Economic Policy over 12 Months
Finland recorded large budget surpluses until the global economic downturn, with the budget surplus surging to 5.25% in 2007, for example—buoyed by economic expansion, strong property revenues, and moderate spending. The level of state debt was also low (equivalent to 29% of GDP at the end of 2008). However, the economic downturn had a negative impact on the government’s finances. Not only did revenues fall as a result of the economic downturn, the government boosted spending to try to stimulate growth.
However, in an April 2010 report, the OECD warned that the strong stimulus the Finnish government used to counter the recession, including tax cuts, had revealed structural weaknesses in the economy and was eroding its fiscal position rapidly. The organization urged the government to draw up a plan—including lengthening working careers, cutting government spending, and hiking taxes—to restore its finances to order. The OECD put the general government financial deficit at 4.8% of GDP in 2009, and 5.2% in 2010.
Economic Performance over 12 Months
Finland enjoyed several years of strong growth up until 2008. The economy expanded by 4.6% in 2006, and 4.2% in 2007, but by just 0.9% in 2008. As a small, export-oriented country (Finnish exports account for 35% of GDP), Finland is vulnerable to external events, and was thus inevitably affected deeply by the global downturn, with GDP contracting by 8% in 2009 as exports fell away. The deterioration of the global economy in 2009 appears to have surprised officials. In January 2009, the government forecast that GDP would shrink by just 2% in 2009, and that recovery would follow in 2010.
The decline in GDP in 2009 amounted to the sharpest contraction since Finland gained independence from Russia in 1917. Exports declined 32%, and unemployment climbed to 8.2%. Inflation, which went to zero in the depths of the downturn, began to pick up in 2010 and by mid 2011 the IMF was forecasting 3–4% inflation for Finland on the back of high food and energy prices.
On the positive side, the economy began to recover in 2010. The OECD forecast that Finnish GDP would climb by a slight 0.4% in 2010, and a further 2.4% in 2011. In fact it appears to be doing better than that, with Finland’s government reporting GDP growth of 3.2% in 2010 and the IMF predicting 3% GDP growth for Finland in 2011.
In its 2011 budget the Finnish government warned that new job creation would lag behind the return of economic growth. Work input measured in working hours began to improve in 2010 and this improvement continued through 2011. At the same time, the government has warned that Finland is going through adverse demographic changes with the number of 15–64-year-olds in the economy set to decline from 2010 onwards, by up to 20,000 people a year. The government expects employment to reach 69% by 2011 with unemployment falling to under 8%.
Finland expects to tackle the weaknesses in public finances by structural reforms, including extending working careers and improving the productivity of public services. Fiscal policy will also be tightened. The deficit in general government finances exceeded the European Union’s permitted 3% deficit, as specified in the Stability and Growth Pact. In 2011 Finland expects to reduce the deficit to just 1.3% of GDP.
The government raised VAT rates in July 2010 and brought in additional tax increases in the 2011 budget. The VAT increase alone is worth some €430 million annually to the government.
Support for Inward Investment and Imports
The Finnish government has a liberal attitude toward foreign investment, and the country offers many advantages to investors. Finland is the sixth-most competitive country in the world, according to the World Economic Forum, and the World Bank ranks Finland in 13th place in terms of the ease of doing business. Invest in Finland provides information and support to investors.
Finland is part of the EU customs union. Decisions regarding quotas or customs suspensions to be applied to goods imported into Finland are currently taken at the Community level. Information on the EU’s trade policies can be found on its website.
Few tax exemptions are available in Finland. More information can be found on the website of the Finnish tax authorities, which publishes a comprehensive guide to the Finnish tax system.
GDP growth: 3.1% (IMF, 2011)
GDP per capita: US$35,400 (2009 est.)
Inflation: 3.0% (IMF, 2011)
Key interest rate: 1.25% (official, July 2011); 10-year bond rate 3.3% (official, July 2011)
Exchange rate versus US dollar: €0.755 (2010)
Unemployment: 7.8% (official, 2011)
FDI: US$85.34 billion (December 31, 2009 est.)
Current account surplus: US$4.696 billion (2010 est.)
Population: 5,259,250 (July 2011 est.)
Source: CIA World Factbook except where stated