Finland

The
Economic Freedom
Network

Finland

				Total Government Expenditures
Economic Freedom Rating				As a Percent of GDP


Part 1: The Economic Freedom Ratings for the Components and Various Area and
Summary Indexes: 1975, 1980, 1985, 1990 and 1995.
(The numbers in parentheses indicate the actual values for the components.)

Components of Economic Freedom	1975		1980		1985		1990		1995
I. Money and Inflation	3.6		7.0		6.4		9.1		9.4
(a) Annual Money Growth (last 5 yrs.)	1	(22.4)	7	(8.6)	5	(12.8)	7	(8.2)	8	(6.8)
(b) Inflation Variablity (last 5 yrs.)	4	(5.5)	9	(1.9)	9	(1.9)	10	(0.9)	10	(1.1)
(c) Ownership of Foreign Currency	10		10		10		10		10
(d) Maint.of Bank Account Abroad	0		0		0		10		10

II. Government Operation	4.5		4.9		4.9		5.2		6.9
(a) Gov't Consump. (% of Total Consump.)	3	(23.6)	2	(25.0)	1	(26.9)	1	(28.5)	1	(28.3)
(b) Government Enterprises	6		6		6		6		6
(c) Price Controls	-		-		-		6		9
(d) Entry Into Business	-		-		-		-		7.5
(e) Legal System	-		-		-		-		10.0
(f) Avoidance of Neg. Interest Rates	-		8		10		10		10

III. Takings	2.1		1.7		1.3		0.8		1.3
(a) Transfers and Subsidies (% of GDP)	3	(14.1)	3	(14.3)	2	(15.8)	2	(16.0)	1	(22.6)
(b) Marginal Tax Rates (Top Rate)	2	(61-68)	1	(65-71)	1	(64-70)	0	(63-69)	2	(55-61)
(c) Conscription	0		0		0		0		0

IV. International Sector	5.8		6.1		6.6		6.3		7.9
(a) Taxes on International Trade (Avg.)	8	(1.6)	9	(0.8)	9	(0.4)	9	(0.6)	9	(0.5)
(b) Black Market Exchange Rates (Prem.)	8	(1)	8	(1)	10	(0)	10	(0)	10	(0)
(c) Size of Trade Sector (% of GDP)	4	(27.0)	4	(33.6)	4	(29.1)	2	(23.8)	2	(33.7)
(d) Capital Transactions with Foreigners	2		2		2		2		8

Economic Freedom Rating	3.9		4.6		4.5		4.8		6.1
Ranking of Country	55		34		39		43		36

Part 2: Recent Economic Indicators:
Population 1996:	5.1		Real Per Capita GDP			:	1996=	$17,898
(in millions)			(in 1995 U.S. dollars)
Annual Rate of Change (1985-96):	0.4%			Avg. Growth Rate:			1980-90=	2.7%
							1990-96=	-0.6%

Economic Indicators:*	1988	1989	1990	1991	1992	1993	1994	1995	1996
Change in Real GDP: Aggregate	4.9	5.7	0.0	-7.1	-3.6	-1.2	4.4	4.2	1.6
: Per Capita	4.5	5.3	-0.4	-7.5	-4.0	-1.6	4.0	3.8	1.2
Inflation Rate (CPI)	5.1	6.6	6.1	4.1	2.6	2.1	1.1	1.0	0.7
Change in Money Supply: (M1)	18.4	15.4	7.2	-	3.2	5.1	8.9	14.0	17.9
: (M2)	23.0	9.5	5.0	7.7	-1.0	1.5	1.4	6.0	-
Investment/GDP Ratio	26.6	29.7	28.1	18.8	16.7	14.3	15.4	16.4	-
Size of Trade Sector (% of GDP)	25.2	24.8	23.8	22.6	26.3	30.4	32.6	33.7	-
Total Gov't Exp./GDP Ratio	45.3	43.3	46.8	55.5	60.6	61.8	61.0	59.6	58.7	p
Central Government Budget
Deficit (-) or Surplus (+)
As a Percent of GDP	+4.1	+6.3	+5.4	-1.5	-5.8	-8.0	-6.2	-5.4	-2.9
Unemployment Rate	4.5	3.4	3.4	7.5	13.0	17.6	17.9	16.6	15.0	a

* The figures in this table are in percent form.
a October, 1996.
p Preliminary.

Finland’s 6.1 rating in 1995 placed it 36th among the 115 economies of our study. Even though its rating is higher in 1995 than 1990, this is a little deceptive. The higher rating was primarily because of the inclusion of the "entry into business" and "legal system" components into our index for the first time in 1995. The figures on government expenditures do not indicate that this economy has been moving toward economic freedom. Total government expenditures were almost 60% of GDP in 1995, up from only 36% in 1975 (and 45% in 1985).

This is a troubled economy. Like several other "big government" European nations, Finland is caught in the vicious cycle of large government expenditures, budget deficits (the government deficit has averaged 5% of GDP during the last 5 years), and rising interest costs that fuel still more government spending. Higher taxes will not solve this problem. Finland’s current top marginal tax rate of approximately 60% is already one of the highest in the world. Weak private investment and high unemployment are typically side effects of large government expenditures, rising interest costs, and high taxes. Changing trade patterns associated with the collapse of the former Soviet Union created an additional transition problem that drove the Finnish unemployment rate to record levels (nearly 20%) in 1994. The situation is now improving a little—the budget deficit shrank and the unemployment rate fell to 15% in 1996. Sustainable improvement, however, is dependent on other factors, particularly a reduction in the size of government and increased reliance on markets to coordinate economic activity.

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Last Modified: Wednesday, October 20, 1999.