Economic growth ensures welfare funding

17.10.2011 7.50
News item N5-58466

At the beginning of this year the MSAH finalised its current strategy for social and health policy, titled Socially Sustainable Finland 2020. "With the threat of recession it is important to strengthen the basis of welfare by supporting employment and at the same time ensuring that everyone gets a fair slice of the cake," says Marja-Liisa Parjanne, Ministerial Counsellor for Finance.

"Economic growth strengthens the basis for funding welfare," Parjanne stresses. "We can't live on idealism."

When the economy started to slip into recession, at the turn of 2008-2009, Finland was able to borrow and so was in a position to secure its level of welfare. But if there is a new recession it will no longer have the same leeway to borrow more, as the growing weight of debt would be too much for future generations to be able to repay. Debt is not intrinsically bad, and borrowing provides an option for the public sector to carry out its tasks, but there are limits to this.

"What's important is the rate at which the debt grows. You cannot constantly borrow at a faster rate than economic growth. There has to be a balance in the responsibility borne between the generations," observes Parjanne.

If the state is unable to borrow more, then there is pressure to cut spending, and if such cuts are carried out in a formulaic manner, it can result in a weakening of social protection and services. This in turn undermines social sustainability and cohesion.

"It's harder to achieve fairness when there is less to go round," says Parjanne.

Rising ratios

The MSAH strategy Socially Sustainable Finland 2020 depicts what has happened with the development of social expenditure in light of the recent recession, and the impact this could have on future ratios of expenditure to gross domestic product (GDP), assuming there is not a new downturn in the economy. The document notes that the ratio of spending to GDP is expected to approach 30% until 2013 on an anyway rising trajectory.

The strategy points out that recession particularly results in a spike in unemployment benefits and income support, but that the "increase in the ratio of social expenditure to GDP is primarily due to a decrease in GDP", which is brought about by recession.

The upward trajectory of spending that the strategy document predicts, where we see expenditure rising to about 32% of GDP is for the most part anticipated according to the rate of population ageing and the resulting expenditure on employment pensions, health care and long-term care.

This upward trend would amount to an increase in about six percentage points between 2008 and 2030. But if there is another economic recession, and coming hard on the back of the last one, the impact on the expenditure to GDP ration would be severe.

As the strategy shows, the pressures on the financing of social spending "are transmitted through earnings-related pensions contributions to employers and the people insured." The proportion of funds contributed by the central government drops "as the ratio of national pensions and many other social security benefits to GDP decreases. Meanwhile, local government spending on health and welfare rises as service costs increase.

The vulnerability of welfare in times of recession is therefore clearly spelt out by the strategy, and so are the ways to try to maintain a robust basis of welfare.

Work and health

The main strengths of the Finnish welfare system are those aspects that it serves to uphold - people's ability to work and their health.

Parjanne stresses that at present the economic situation does not threaten to undermine the Finnish welfare system as long as we ensure that people are employed and remain in good health. It is also necessary to reform the organisation and production base of social and health services to bring them into line with current realities and requirements.

"Social sustainability is just as important as economic sustainability. They are linked to one another and are mutually supportive."

Providing support for employment is crucial in responding to the economic situation and resisting the impacts of recession. The same formula applied when preparing for the effects of demographic change, when significantly more of the population are closer to retirement or on pension.

As the current MSAH strategy stresses "health, functional capacity and the prevention of social problems ... improve the quality of life and increase employment, boost productivity and business success while restraining the growth of social expenditure."

Health and functional capacity in particular have a key impact on the sustainability of the public economy. "If the improvement in people's health continues in the future, so that the majority of additional years resulting from increased longevity, the sustainability gap will diminish significantly," says Parjanne.

There has been some confusion in the public mind about the sustainability gap and competing calculations on what it comprises. Parjanne explains: "The sustainability gap is an estimate of whether the public debt can be managed in the long term. It can be calculated in various ways, and different calculations result in different sets of figures. The main thing is not so much to offer a definite figure but to indicate what factors affect the sustainability of public finances."

New measurements

GDP describes society's overall financial wellbeing and economic possibilities. As the MSAH strategy points out, there is a need for indicators that go beyond those suggested by GDP: "measurements must be extended from economic sustainability to social sustainability." The strategy emphasises the need for decision-makers to "define target levels concretely enough [so that] the indicators are well defined, and that there is a limited number of them."

The strategy explains that such indicators are being monitored at four levels: social and economic sustainability, economic welfare and growth, the implementation of the Government Programme, policy programmes and action plans; and the effectiveness and efficiency of social protection.

Multiple dimensions

"Measuring the average level of wellbeing will not show the increase in inequality, for example." Parjanne points out. "It is important also to measure the other dimensions of welfare and quality of life. Indicators that depict the different facets of welfare are currently being developed in Finland and other countries."

Parjanne also stresses the need to ensure that economic growth should not be pursued at the expense of the environment. This is a key assertion of the MSAH strategy, which posits the strong interrelationship between social and ecological sustainability and the need for broad-based cooperation across the spheres of government to achieve improvements in the living environment.

"The condition of the living environment affects people's welfare and quality of life," she explains. "A good quality of life entails a high quality and healthy environment."

Irma Heiskanen-Haarala and Mark Waller