Pro-cyclical fiscal policy threatens sustainable growth

An emerging economic upswing should be given sufficient space and time to establish the foundations for sustained growth.

• The economy’s labour input and other productive capacity are currently underutilised.
• Economic growth is initially driven by demand.
• Productivity growth is accelerating, but improvements in employment lag behind.
• Firms’ earlier productivity investments and structural changes in the economy have created conditions for a prolonged upswing.
• The effects of previous fiscal consolidation measures, as well as any additional adjustment needs, can be assessed more reliably once the cyclical situation has normalised.

The Finnish economy is in the early phase of recovery, and it is important to ensure that it is given sufficient time and room to strengthen. The recovery is gradual, and premature additional fiscal tightening may jeopardise the consolidation of growth. At present, key resources in the economy—particularly labour input and production capacity—are clearly underutilised. This implies that there is room for growth without immediate supply-side constraints or inflationary pressures.

Growth is initially demand-driven, meaning that the recovery of consumption and investment acts as the primary engine of expansion. This is typical in a situation where external demand remains uncertain, but domestic confidence is gradually improving. At the same time, there are signs that productivity growth is beginning to strengthen, which supports firms’ cost competitiveness. However, even as productivity improves, employment growth tends to lag. This reflects the fact that more efficient production does not immediately translate into higher labour demand.

The upcoming upswing may differ from previous cycles. Firms’ investments in areas such as digitalisation, automation, and organisational development in recent years may now begin to yield results. In addition, structural changes in the economy—such as the green transition and a shift towards higher value-added production—support a more prolonged and stable growth path. These factors suggest that the recovery could prove longer-lasting than usual, provided it is supported by well-designed policies, including investments in education, research and development, and measures to facilitate immigration.

Previously implemented fiscal consolidation measures will only become fully visible over time. It is important that these measures are evaluated once the cyclical situation has stabilised and growth has normalised. Only then can robust conclusions be drawn about their effects and the need for any additional fiscal adjustment. This temporal distance improves the basis for economically and socially sustainable decision-making, without short-term fluctuations distorting the overall picture. (AI translation)

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