The coming end of the Finnish welfare system

Author: Max Stucki

At the time of writing this, the negotiations to form the next Finnish government are in full swing. Currently, a red-green coalition, aided by either the liberal conservative National Coalition Party or the centrist-agrarian Center Party, seems a likely option. However, nothing is certain since the elections produced no clear winner. The three largest parties all gathered around 17% of the votes indicating a fractured electoral base.¹⁾Vaalitulos ratkesi äärimmäisen niukasti: Sdp suurin, vaali­päivän äänivyöry toi perus­suomalaiset lähes tasoihin – lue HS:n analyysit tuloksesta Source: Helsingin SanomatThe negotiations might actually continue for some time to come.

The elections campaigns and debates were characterized by two things. First, there was much speculation regarding the popularity of the national conservative Finns Party, which changed its leadership in 2017 causing a split within the party.²⁾ Second, the climate change was a major issue, which was extensively discussed and gained much visibility during the campaigning.²⁾Tekivätkö kampanjat eduskuntavaaleista ilmastovaalit vai jotkin muut? Tutkijat arvioivat, mitä teemoja puolueet korostivat Source: Helsingin Sanomat

Both themes become understandable when considering the largely leftist-green discourse within the Finnish media. The rise of the Finns Party was feared, as its success could undermine the visions of the idealists inhabiting the larger cities, especially Helsinki and its surroundings. The climate change, on the other hand, was shamelessly utilized as a political tool to win votes of those struck by the climate anxiety.

It is telling, that the politicians were discussing with straight faces how Finland could work to stop the climate change. The notion that Finland with its puny population of 5,5 million could affect the climate in any meaningful way is demonstrably absurd, even insane. So, either the Finnish politicians have utterly lost their touch with the reality, or become mad, or are cynically lying. Given the track record of politicians in general, the last option is the likeliest one, which just proves the fact that in order to be a successful politician, one needs an utter and condescending contempt towards the voters. Otherwise the talk about the climate change remains incomprehensible.

There should have been a third theme also, however. That theme was one that was largely absent from the debates but very much present in the minds of those contemplating the economic and political future of Finland. That theme was demographics.

Since 2010, the Finnish total fertility rate has plummeted from its comparable low level of 1,87, to an all-time rock bottom of 1,41 in 2018,³⁾Jyrkkä käyrä näyttää Suomen poikkeuksellisen vauvakadon – ”Lapsia ei tehdä valtiota varten” Source: findikaattor and there is no reason to assume that the trend will be reversed. Finland was hit quite badly by the financial crisis, and its economy really started to recover only in 2015,⁴⁾Taloudellinen kasvu (BKT) Souce: which can be seen as one major cause behind the low number of births. There has been some talk about the low fertility rate in the Finnish media in the recent years. However, there has been little political action to alleviate the situation. And, truth be told, the political actions to boost the fertility seem to be doomed anyway.⁵⁾Influence of women’s workforce participation and pensions on total fertility rate: a theoretical and econometric study. Source: Researchgate

In Finland, there is a large and growing elderly population, but the number of tax payers is not increasing, but actually decreasing.⁶⁾Väestöennuste 2018–2070 Source: Tilastokeskus The much-touted panacea, immigration, is of little help in the case of Finland. As shown by Professor Emeritus Matti Viren, immigrants do not help to correct the dependency ratio, as their employment levels tend to be far lower than those of the native population.⁷⁾Maahanmuutto-Talouden Ongelma Vai Ongelmien Ratkaisu?In fact, Viren has observed that in Finland, only the two highest earning deciles pay more in taxes than they receive in benefits.⁸⁾Professori: Suomeen on syntynyt mittava tulonsiirtojen varassa elävä uusi luokka – ”Mihin helvettiin olemme menossa?” Source: IltalehtiThe immigrant population is overrepresented in the lowest deciles, which shows that they do not add to the common pool of resources, but mostly receive from it.

All this means, that the long-term prospects of keeping up a vast welfare system seem bleak. Even now, in the middle of an economic upturn, that is finally coming to an end, the Finnish state is getting deeper into debt.⁹⁾Yksi asia on sentään varma: Suomen valtio velkaantuu lisää – ”Profiili on stabiili” Source: kauppalehtiThe next recession will further exacerbate the situation, as those laid off will start to receive the unemployment benefits.

In a recent interview, Heikki Hiilamo, professor of social policy at the University of Helsinki, brought up the possibility of dismantling the welfare state in a systematic and controlled fashion, since low fertility will make financing it impossible.¹⁰⁾Jyrkkä käyrä näyttää Suomen poikkeuksellisen vauvakadon – ”Lapsia ei tehdä valtiota varten” Source: Ilta SanomatThis view represents the other of the two probable scenarios facing the Finnish welfare system in the coming years. An orderly dismantling of the social system, dispersed over several years, would mean gradual abandoning of many public services and drastic reduction in the public spending. However, all this would take place slowly, letting the society and the labor market adjust to the new situation. However, thanks to the unfavorable demographics, taxation would decrease rather slowly.

This scenario, although reasonable, is not likely to take place. Cutting the public spending is a political suicide in a social democracy like Finland. And if one government would be willing to do it, what stops the next government reversing what has been done? Too many in Finland depend on the state, either directly or indirectly, to be willing to cut from anything. In a democracy this means that the spending will not be reformed to fit the means of state, but will continue until the state can no longer get any money from the financial markets.¹¹⁾Admittedly, with the current low interest rates the debt can accumulate a long time without problems.Then the system crashes, causing misery and political instability.

The question of demographics, directly responsible for the coming demise of the Finnish model, will not be addressed by the politicians. First of all, there is little they can do besides promising some extra spending for child-related services, financed, of course, by debt. Second, discussing fertility seems to be perceived as an assault on the women’s rights. This means that a politician speaking about the lack of babies is branded as a henchman of the (imagined) patriarchy, whatever that means.

The next economic downturn will show the way the Finnish politicians will choose regarding the future of the welfare system. The road of a controlled demolition is unlikely but desirable. It is probable that we will witness some cuts, but in general everything will likely continue as before.

What this means for the Finnish economy, is that the companies will have to prepare for heavier taxation, which will slowly but surely strangle some of them to death. Furthermore, the brain drain, which has plagued Finland for years,¹²⁾Brain drain of Finnish researchers continues into second decade Source: Yle Muuallawill likely speed up due to increasing taxation and declining economy, depriving the companies of valuable and much needed professionals, which further worsens the economic situation.

Politically, all this will initially benefit those ready to promise more spending. However, as the population realizes that none of the parties actually deliver anything else than misery, the trust in the public institutions is likely to erode, and the support for the radical political parties is likely to increase. Needless to say, all this will also weaken the democratic system, making it more susceptible to external influences¹³⁾Russia’s Threat to Finland Source: Warsaw Instituteand corruption.

In the long run, the Finnish welfare model has absolute zero chances of surviving. The question regarding the way in which it will come to an end, however, is still open. There is an option of slow and steady dismantlement, and also one of a more violent, crash-like scenario. Whichever option comes to pass, the days of the welfare state are numbered. And it may have fewer days left than we might think.