In the first half of 2020, Finland's GDP declined by 5%, reaching a historic low, while showing one of the most moderate indicators among OECD member countries, thanks to timely measures taken to isolate, restrict movement and provide financial support to SMEs.
According to the OECD survey, Finland's GDP will decline by 3.3% by the end of 2020, and in 2021 and 2022 a gradual recovery is projected due to the growth of private consumption and exports by 2.1% and 1.8%, respectively.
In accordance with international standards, Finland has long demonstrated a low level of income inequality and poverty. The layoff scheme applied in Finland has played a key role in preserving jobs and incomes.
Since the beginning of the pandemic, about 15% of workers between the ages of 15 and 74 have lost their jobs or been placed on leave without pay, about 25% of whom were not eligible for unemployment benefits because they were not members of the Unemployment Insurance Fund.
The service sector has been hit hard by the turmoil caused by the pandemic, with sales in the hospitality and tourism sectors falling by almost 90%, and in the restaurant business by 66% between February and May 2020. A significant decline was observed in the manufacturing industry, especially in the shipbuilding sector, with the exception of forestry.
Business support measures
The Government of Finland has provided significant financial support to SMEs and micro-enterprises to overcome the downturn in economic activity caused by the pandemic. The state-owned financial and export credit company Finnvera increased its funds by EUR 10 bln allocated as guarantees for business loans. Business associations of Finland together with the Center for Economic Development, Transport and the Environment have allocated funds in the amount of more than EUR 1 bln for the purpose of financing the development of new forms of business in the form of subsidies.
The need for investment in Finnish industry has led to the creation of a new investment fund that finances SMEs with high growth potential in the form of direct investment, while experiencing temporary liquidity difficulties.
The government has introduced a single measure to support SMEs that lost more than 30% of their cash turnover in April-May 2020, covering the cost of doing business for a period of two months in the amount of up to 500 thousand euros.
The Government has provided support to certain industries that have been severely affected by the pandemic:
• state credit guarantees were provided to companies engaged in air and sea transportation
• restaurants and cafes were compensated for turnover losses of up to 15% and subsidies were allocated in the amount of 1,000 euros for each re-hired previously dismissed employee.
Firms in financial difficulties could request a 24-month extension of the corporate income tax deadline. The interest rate for late payment of corporate income tax and real estate tax was reduced from 7% to 4%, while penalties for late filing of a value added tax (VAT) declaration could be canceled for a good reason.
The government reduced the percentage of employers ' pension contributions by 2.6% between May and December 2020 and allowed employers and the self-employed to delay the payment of pension contributions from the beginning of 2020 for three months without paying late payment penalties.
The government also amended the Finnish Bankruptcy Law, limiting the right of creditors to file for bankruptcy until October 31, 2020. The law has eliminated the point: the debtor will be considered bankrupt if it fails to repay the claim within a week from the date of receipt of the notification from the creditor about the filing of the bankruptcy application.
Such a measure made it possible to avoid the occurrence of mass cases of bankruptcy. Guarantees for loans and subsidies were aimed at firms with development potential, and clear end dates were set for more general measures, such measures could not prevent the bankruptcy of firms that were not viable before the pandemic. In accordance with the OECD recommendation, the extension of these measures should not prevent the process of liquidation of non-viable firms and the reallocation of labor and capital for more productive use.
Table 1.1. Macroeconomic indicators and forecasts
| 2017 | 2018 | 2019 | 2020 | 2021 | 2022 |
| Current prices EUR bln | Percentage changes, volume (prices in 2010) |
GDP at market prices | 225.9 | 1.5 | 1.1 | -3.3 | 2.1 | 1.8 |
Private consumption | 120.3 | 1.8 | 0.8. | -4.4 | 3.0 | 2.1 |
Government consumption | 51.6 | 1.6 | 1.1 | -0.4 | -1.0 | -1.5 |
Gross fixed capital formation | 52.9 | 3.9 | -1.0 | -2.8 | -0.5 | 3.3 |
Final domestic demand | 224.7 | 2.3 | 0.5 | -3.1 | 1.2 | 1.5 |
Inventory accumulation1, 2 | 1.1 | 0.5 | -0.9 | 0.5 | -0.4 | 0.0 |
Total domestic demand | 225.8 | 2.9 | -0.4 | -2.5 | 0.7 | 1.5 |
Export of goods and services | 85.0 | 1.7 | 7.7 | -10.8 | 3.7 | 4.7 |
Import of goods and services | 84.9 | 5.4 | 3.3 | -7.5 | 3.8 | 3.7 |
Net export1 | 0.1 | -1.4 | 1.7 | -1.4 | -0.1 | 0.3 |
Memorandum items | |
Production deficit (% of potential GDP) | - | -0.1 | -0.1 | -4.2 | -3.0 | -2.0 |
GDP Deflator | - | 1.9 | 1.8 | 1.6 | 0.7 | 1.5 |
Consumer Price Index | - | 1.2 | 1.1 | 0.5 | 1.0 | 1.4 |
Core inflation index3 | - | 0.3 | 0.7 | 0.5 | 0.9 | 1.4 |
Unemployment rate (% of the labor force) | - | 7.4 | 6.7 | 7.9 | 8.3 | 7.7 |
Household savings ratio, net (% of disposable income) | - | -0.8 | 0.4 | 6.1 | 1.0 | 1.1 |
Financial balance of public administration (% of GDP) | - | -0.9 | -1.0 | -7.0 | -4.4 | -3.0 |
Public debt, Maastricht definition (% of GDP) | - | 59.6 | 59.3 | 63.8 | 68.7 | 72.5 |
Current account balance (% of GDP) | - | -1.7 | -0.2 | -0.4 | -0.6 | -0.3 |
1. Contributions to the change in real GDP, the actual amount in the first column |
2. Including statistical discrepancies |
3. Consumer price index excluding food, energy, alcohol and tobacco. |
Source: OECD Economic Outlook database 108. |
Fiscal policy
Assuming the economy shrinks by 4.5% in 2020, the Finance Ministry estimates that the government deficit will rise from 1.1% of GDP in 2019 to 7.7% in 2020, driven by rising spending. Three-quarters of the 3.4% of GDP in the form of discretionary measures taken by the Government, which increase the budget deficit for 2020, are the result of the COVID-19 pandemic, and the remainder reflects the consequences of decisions taken in 2019.
Among the support measures (EUR 6 bln) euro (2.6% of GDP)) provided in the context of the pandemic are the following:
• subsidizing enterprises and supporting the costs of enterprises (0.8% of GDP);
• temporarily reducing the pension contributions of private sector employers (0.4% of GDP);
• expanding the coverage of unemployment benefits and money transfers to parents of young children on unpaid leave (0.4% of GDP).
As support measures ease and the economy begins to recover, the budget deficit is projected to shrink by 2.7% of GDP in 2021.
The Ministry of Finance of Finland expects a significant increase in the volume of public debt in 2020, with subsequent annual growth not exceeding the forecast indicators.
The Finnish Government's support measures program will end in 2021-2022, as most of the one-time support measures will expire soon. In the case of a slow economic recovery, the Government will need to increase the amount of fiscal support in order to stabilize it. In this regard, the Government is considering issuing vouchers for the purchase of domestic services at the end of 2020 and 2021.
Further fiscal support will be provided through the use of grants in the amount of 3.1 billion rubles. the euro that Finland expects to receive under the newly created EU recovery instrument between 2021 and 2023; however, the downside of this support is that Finland will contribute a much larger amount (about EUR 6.6 bln) in repayment of the corresponding debt of the European Commission from 2028.
