Finnish Economy and SocietyVisit of Headteachers 07.03.2007

Penna Urrila, Senior Economist

Confederation of Finnish Industries EK

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Main Topics

1. Presentation of EK

2. Finnish Economy• history and background• Economic Structures• Outlook for the Future

3. Finnish Society and Political Situation

Finnish Economy

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Finland in the Global Economy

Population

GDP

Industial production

Exports

Exports of pulp and paper

Exports of electronics industry

Production of mobile phones

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GDP by Sector, (%)

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Employment by Sector, %

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Finnish Exports

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GDP, index 1995 = 100

Source: OECD

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Industrial production, index 1990 = 100

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Industrial production, index 1990 = 100

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Growth of Telecommunications Industry

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Stock of Direct Investments, EUR billion

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Finnish Exports of Goods in 2005 (total 52,4 bill. EUR)

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Finnish Exports by Country

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3-month Interest Rates

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Consumer Prices

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Unemployment

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Public Sector Balance, % of GDP

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R&D expenditure, EUR billion

0,0

0,5

1,0

1,5

2,0

2,5

3,0

3,5

4,0

4,5

5,0

1985 1987 1989 1991 1993 1995 1997 1998 1999 2000 2001 2002 2003 2004

Public sector Universities Companies

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R&D investments in some countries

0,5

1,0

1,5

2,0

2,5

3,0

3,5

4,0

4,5

5,0

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05

Percentage of GDP

5.0

4.5

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

IsraelSwedenFINLANDJapanIcelandSouth KoreaUSADenmarkGermanyAustriaOECDFranceSingaporeCanadaGreat BritainNorwayChina

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Main Economic Forecasts (ETLA)

Some structural challenges for the future

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High taxation

• Finland is a country with high overall taxation

• Tax revenues rely heavily on direct taxation – share of direct taxes (incl. social security contributions) is the highest

in EU-25 countries

• Some tax changes have been made in the last few years:– State income tax has gradually been lowered in all income groups

– Tax on net wealth was abolished from 1.1.2006

– Corporate tax reform in 2004: corporate tax rate down from 29 % to

26 % but dividends are subject to double taxation

• Will the international tax competition become more severe

and how can Finland respond to it?

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Source: OECD

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Tax Rates on Wage Income 2006

Taxes, social security contributions of employees and basic tax allowances.

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Ageing population

• Finnish population is growing slowly: population estimate 5,25

million in 2005 (+ 16 000 persons compared to 2004)– About 50 % natural increase, 50 % net immigration

• ”Baby-boom generation” (born in 1946-1950) is soon retiring– Current age structure relatively good but it will deteriorate dramatically

– Finland will face the problem 10-15 years earlier than many other countries

– Workforce will turn down before 2010: serious economic implications

• Solutions??– Reducing unemployment, longer working time, increasing immigration?

– Pension reform in 2004 not enough in the long run, public sector balance in

danger

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Summary

• Finnish economic development has been a success story in the 20th century– Late but rapid structural change from agriculture into industry and services– Fast recovery from the deep crisis in the early 1990s: electronics industry!– GDP/capita above EU-15 average

• Current economic situation is relatively good– Despite a slowdown in early 2000s, Finnish growth figures are above EU

average– Public sector in balance, low inflation but unemployment still a problem– Also the short-term outlook is favourable: positive expectations

• Long-term growth potential still uncertain– Ageing population will be a big challenge– Can Finland match the global competition in the future, too?