Fiscal Consolidation in Finland: Lessons from International Research and Preconditions for Success

Finland’s public finances are chronically in deficit, and the debt-to-GDP ratio continues to rise. The current government has already implemented substantial consolidation measures, and future governments will need to continue them. Research literature shows that fiscal consolidation weakens economic growth in the short term, but the magnitude of the effect depends crucially on the structure, timing, and composition of the measures. According to international evidence, public investment has large output effects, while the impacts of public consumption and transfers are smaller. The impact of taxation varies, but in high-tax countries such as Finland, it can be significant. In Finland’s case, euro area membership and a high tax burden amplify the negative short-term effects of consolidation, while demographic ageing partly mitigates them. The adverse effects can be reduced by emphasising expenditure-based adjustment, directing cuts to inefficient spending, protecting growth-supporting expenditures (such as education, R&D, and infrastructure), and pursuing gradual adjustment. Structural reforms that raise employment and wage policies that strengthen cost competitiveness further support the success of consolidation. The research provides strong evidence that the sustainability of public finances can be secured if well-designed fiscal adjustments, structural reforms, and wage policies that support competitiveness are implemented simultaneously.