In aggregate, the measures adopted by the government to date clearly strengthen public finances. Nevertheless, the public debt-to-GDP ratio is not stabilising in line with the objective set out in the government programme. In addition to weak cyclical conditions, this reflects certain inconsistencies in government policy.
The continuation of debt growth reflects cyclical conditions and policy choices
Finland’s economic performance has been weak during the current parliamentary term. The weak cyclical situation is due in particular to the sharp contraction in housing construction. In 2025, economic growth was also dampened by an increase in the household saving rate and by tighter fiscal policy.
Weak cyclical conditions are one reason why public debt continues to grow despite the government’s fiscal consolidation measures. For example, reductions in public sector employment and measures to boost labour supply, including social security cuts, are expected to strengthen public finances, but their positive effects are likely to materialise in full only once cyclical conditions have strengthened markedly.
Another reason for the continued growth of public debt is that government policy does not, in all respects, support a reversal of the debt trajectory. The government has reduced taxes that are not particularly harmful to overall economic output, while at the same time leaving pension benefits almost entirely outside the scope of social security cuts.
Not all tax cuts effectively increase labour supply or investment
In the mid-term budget review in spring 2025, the government slightly reduced income taxation for low- and middle-income earners, significantly lowered the top marginal income tax rate for high-income earners and decided to cut the corporate income tax rate by two percentage points from 2027 onwards. Although some tax increases were also adopted, the overall effect of the decisions is a substantial reduction in taxation.
The government justifies the tax cuts by its objective to strengthen work incentives and improve the conditions for economic growth. Lowering the top marginal tax rate can be well justified on these grounds. Reducing the corporate income tax rate may also be appropriate from the perspective of increasing overall output.
In aggregate, however, the tax decisions are not fully coherent, as the government has also reduced taxes with relatively limited distortionary effects on employment or investment. From the perspective of strengthening public finances, it would have been justified to implement more tax increases, for example by reforming the taxation of dividends in non-listed companies or by scaling back business subsidies provided in the form of tax relief.
The pension reform does not help to curb debt growth
The government has presented a preliminary proposal for a pension reform aimed at strengthening public finances, in particular by increasing the expected returns of pension funds through a higher allocation to equities and other higher-risk investments. Higher investment returns could, in the long run, allow the statutory earnings-related pension contribution to be lowered compared to a scenario without the reform and create scope for tightening other taxes without increasing the overall tax burden.
Finland’s statutory and partially funded pension system makes it possible to share investment-related risks even across generations, which may justify a higher level of risk-taking. However, the reform does not define rules for how increased investment risks would be shared between employees, pensioners and different generations.
The reform would reduce pension benefits only in situations where consumer prices rise faster than wages over a prolonged period. As a result, it does not allow for reductions in pension contributions or other social security contributions in the short term, nor does it help to reverse the growth of public debt within the timeframe required by EU fiscal rules.
The coherent development of social security would require pension benefits to be critically assessed alongside other benefits. For example, abolishing pension accrual during periods of earnings-related unemployment benefit receipt would have been a less harmful alternative for many unemployed individuals than the benefit cuts that have already been implemented.
The funding framework for wellbeing services counties should be simplified
In 2025, the aggregate financial position of wellbeing services counties turned slightly positive, but the financial situation varies considerably across counties.
One factor contributing to this divergence is variation across counties in the recording practices and coverage of morbidity data that affect funding allocations. This weakens the alignment of funding with actual service needs and increases uncertainty in county-level financing. Funding based on diagnosis data also creates financial incentives to record certain diagnoses at a low threshold and, conversely, to reduce spending on preventive services.
These problems could be mitigated by abandoning the use of morbidity data in the allocation of funding between counties. Although morbidity indicators predict individual-level service needs well, they do not appear to be very useful for assessing service needs at the regional level. County-level service needs could be assessed using a simpler approach based on population structure and selected socioeconomic factors.
Economic Policy Council Report 2025, pdf (in Finnish)
The Economic Policy Council Report 2025 was published in Finnish on 2 February 2026. An
English-language version of the report will be published in March 2026.
For more information:
Chair Niku Määttänen
niku.maattanen@helsinki.fi
+358 29 412 8721 / +358 41 545 6721
Secretary general Jenni Jaakkola
jenni.jaakkola@vatt.fi
+358 295 519 508