Finland Needs to Defuse a Demographic Time Bomb

(Bloomberg) --

Juha Sipila resurrected the economy and drove employment to a record during his almost four years as Finland’s prime minister, but efforts to revamp the health care system proved to be his undoing.

Unless he stages a major comeback ahead of an election on April 14, that problem will now fall to his successor. One of the biggest challenges facing the next government will be how to squeeze more out of a health-care system that’s already one of the best in the world and costs less than half of its U.S. equivalent.

Like much of Europe, the country needs to come to grips with the growing pressures of an aging and shrinking population. In Finland’s case, the issue assumes even greater importance because of its generous welfare state, relatively low immigration and the constraints of euro membership.

According to the country’s statistics agency, a quarter of the population will be older than 65 by 2030. The number of octogenarians is predicted to almost double by 2040 to 460,000, while the number of nonagenarians is expected to triple to 140,000.

Tiina Helenius, Svenska Handelsbanken AB’s chief economist in Helsinki, said the projected “massive increase in health-care related expenditure is the most severe risk for the Finnish welfare model.”

Finland Needs to Defuse a Demographic Time Bomb

A failure to reform health care—an issue that’s been discussed for more than a decade by policy makers—was what prompted Sipila to resign just weeks before the election. That challenge will now be passed on to the next government, which is likely to be led by Social Democrats, according to the latest polls.

Sustainability Gap

Finland’s public finances already face a sustainability gap—the difference between projected revenue and spending—of nearly 4 percent of gross domestic product. And with Finland’s public debt levels already close to or above the limits set by the EU, the next government will have to find new ways of boosting revenue or cutting public spending.

Neither option is easy.

Finland already has a highly cost-effective health care. According to the Organization for Economic Cooperation and Development, it costs just $4,170 per capita per year, compared with $10,210 in the U.S. But even the OECD insists that an overhaul is necessary.

Finland Needs to Defuse a Demographic Time Bomb

Economists argue that the next government will need to create at least 100,000 new jobs and boost employment levels to 75 percent of the working-age population in order to keep public finances in check. Sipila became deeply unpopular because of his efforts to get people to work more for less in a successful bid to raise the ratio to 72 percent, a level that was considered highly optimistic only a few years ago.

Campaign Promises

While Nordic politics is traditionally consensus-driven, the Sipila government has widened the ideological divide.

His center-right coalition attempted to tackle the health-care conundrum by seeking a greater role for the private sector while drastically cutting the number of local authorities involved in administering services.

Antti Rinne, the leader of the opposition SDP, has said he won’t accept a market-driven approach. The party has instead published rather vague plans in which it says it intends to work with the parliament in order to find a solution.

All parties agree that many of the country’s shrinking rural municipalities already struggle to pay for their health services, and that people who rely on the most basic level of publicly-funded care often face long delays to see a doctor.

Whatever the result of the April 14 vote, postponing such difficult decisions may come at a cost.

S&P Global Ratings warned Friday that it “could consider a negative rating action if structural reforms don’t succeed, leading to weaker growth or a substantial deterioration in Finland’s fiscal performance, in turn leading to sharply increasing debt.”

©2019 Bloomberg L.P.