Growth over the past decade has been among the strongest in the OECD. Finland also ranks highly as regards innovation performance and educational attainment, both of which are key drivers of productivity. However, there has been a marked weakening in growth performance since the turn of the millennium; the contribution from the ICT sector to aggregate productivity has been much smaller and increases in the employment rate have been meagre, though the employment rate among the old has been increasing rapidly from a low level.

After assessing Finland’s recent performance, this chapter discusses the key challenges of ensuring the sustainability of the public finances, of raising the employment rate and of enhancing growth potential. In addition, the challenges facing policy in respect of housing, the subject of the in-depth chapter, are considered from the perspective of macroeconomic stability and whether the current generous level of public support should be reduced and better targeted.

Past tax cuts, expenditure slippage and imminent fiscal pressures from ageing have exhausted the scope for further income tax cuts, even though the latter would help to improve labour market performance. The key to long-run fiscal sustainability and reducing future tax pressures is containment of public spending pressures. This will require improved productivity in public services, re-organising municipal finances and allowing private funding for some of the growth in non-core welfare services.

A wide-ranging pension reform was introduced at the beginning of 2005. A central objective is to extend working lives by 2-3 years. However, success is likely to depend on further curtailment of early retirement pathways which will otherwise blunt the improved financial incentives to work longer in the reformed old-age pension system. The “unemployment pipeline” whereby the unemployed can effectively retire at age 57 should be abolished and activation measures for the older unemployed increased.

The centralised wage agreements have helped to contain inflation. There is evidence that wage increases were more moderate when a central agreement was concluded than in periods when no central agreement was reached. Nevertheless, there is also evidence that centralised wage setting has had some drawbacks in terms of reducing employment among low-skilled and younger workers because of high minimum wage floors.

The government is planning a substantial expansion of active labour market policies (ALMPs) as an important component of its strategy to meet the employment target. However, it is not clear on the basis of current evaluations that such an expansion will have a significant effect on regular employment. More important is to change the mix of existing measures towards those that are most effective, in particular to cut back on wage subsidies for public sector employment and expand private sector wage subsidies.

While pronounced cycles in house prices have been a major cause of macroeconomic instability in the past, current house price developments do not yet suggest an overheating of the housing market. However, several important concerns are related to both direct effects of housing markets on overall activity and to more structural and regional issues. A factor making housing markets and the macroeconomy vulnerable to interest-rate shocks is the high share of mortgage loans linked to variable interest rates.