By Nick Mann | 3 September 2012
Finland faces a challenge to meet the needs of its ageing population while ensuring its long-term fiscal sustainability, the International Monetary Fund has warned.
At the end of its annual review of the country’s economy, the IMF urged action to mitigate expected rises in health and long-term care costs associated with population ageing. Finland should also tighten the way benefits are paid to the elderly and unemployed until early retirement, as well as increasing the legal minimum and maximum retirement ages.
Finland’s fiscal position improved ‘markedly’ last year, the IMF said, with the government’s deficit falling to less than 1% of gross domestic product and debt ending the year at below 50% of GDP.
‘Nonetheless, projected weak growth in 2012 will likely result in a renewed worsening of the headline deficit and population ageing remains a challenge for long-term fiscal sustainability,’ it said.
On the revenue side, Finland’s government should broaden the country’s tax base and move from taxes on labour to consumption and property-based taxation. It should also slow down increases in local government spending, the Fund added.
In general, the IMF praised the Scandinavian nation’s ‘strong economic fundamentals and continued sound policy management’.
But, they warned that Finland’s exposure to other countries’ economies through its deep trade and financial linkages meant it was sensitive to the worst effects of the eurozone crisis.
‘Economic activity has slowed and risks to the outlook are tilted to the downside. The economy also faces longer-term challenges arising from an ageing population and slowing productivity, which could impact competitiveness and growth,’ it said.
‘Against this backdrop, directors welcomed the authorities’ commitment to prudent policies aimed at improving internal and external imbalances, safeguarding financial sector stability, and ensuring long-term fiscal sustainability.’
On Friday the IMF also issued the results of its annual check-up of the Austrian economy, praising the country’s strong economic performance and highlighting the support domestic demand was receiving from wage growth and low unemployment rates.
However, it again warned of the potential impact of the eurozone crisis, which represents the ‘main risk’ to the central European country’s economy.
Austria should also introduce a comprehensive programme of ‘fiscal federalism’ to incentivise regional governments to comply with fiscal rules and to streamline the financial arrangements between different parts of the government.