In many societies, an expanding disparity exists between the official truth stated by the governmental apparatus and the reality that is experienced by the people. Current societal developments in Finland aptly epitomize such a phenomenon. Official government statements in Finland are constructed with data that is often dubious and politically motivated. In other words, such system is designed to appease nervous people, who are starting to doubt the sustainability and logic of the welfare system. Consequently, it is a matter of time before the people in Finland realize that the "King of Finnish Welfare" in fact had not clothes to begin with.
A troubling dichotomy between the bureaucratic and public domain in Finland is best exemplified in tax-payers' perceptions of the state as an effective generator of economic growth. More specifically, it is widely accepted that the public sector ought to be responsible to create jobs through higher state-led investments. An independent Finnish right-wing think tank Libera showed how since 1950 the quantity of public sector jobs has quadrupled. Reversely, the current share of private sector jobs is less than in 1950 even though the population in Finland has increased by 1.4 million people. Advocates of the public sector argue that the share of government jobs has in fact declined. However, they fail to note that a large fraction of government jobs have been moved to state-owned enterprises (SOE). Furthermore, it must be noted that public sector employment is largely financed through higher taxation of the private sector. This poses an important question: How can public sector employment be sustained if the tax-revenue for financing such jobs is dependent from the private-sector, which is diminishing? The obvious answer is that it can't be sustained. And this is a pivotal point that government bureaucrats are purposefully avoiding to admit.
The latest reports on unemployment show that the current unemployment rate in Finland stands at 7.6%. Such rate is an egregious fallacy. Even though the rate at first appears to be low, the bureaucratic apparatus does not elaborate on the current trends of labor participation. This particular rate is consistently decreasing on a monthly basis, suggesting that the real unemployment rate is much higher than the official 7.6% estimate. The unemployment statistics show how the quantity of people, who are capable of productive work, but not in the labor force, stands at 1,337,000. This particular group consists of people, who are recipients of unemployment benefits, early retirees, in education or simply discouraged people not looking for a job. Therefore, let us add another dimension to our original question: How can the government sustain an expensive welfare system with diminishing private-sector and aggressively declining labor participation rate accompanied by increasing number of entitlement recipients?
Again, the answer is simple: It can't. The only way to feed the Leviathan is to increase the tax-burden of the private sector businesses and entrepreneurs. In other words, larger share for financing the welfare system must be collected from the private manufacturing and service industries. Again, such strategy is stated as feasible only by government officials. The main problem of such approach is the fact that the service industry in Finland counts for 73.4% of all jobs. Furthermore, out of the 73.4% service industry, 37.3% is public-sector service jobs. Basic math concludes that increasing the tax-burden on private-sector will be detrimental due to the fact that service industries are not the main sources of wealth generating exports. Consequently, extracting larger tax-revenues from private (73.4%-37.3) sector service businesses is unfeasible. Obviously, increasing the tax-burden on service industry decreases the profitability of service-oriented businesses, which are forced to raise prices to maintain competitiveness. Therefore, should the narrowing manufacturing industry bear the burden instead?
The government bureaucrats see the narrowing manufacturing sector as a potential financier of the welfare-system. However, globalization has dramatically decreased Finland's export competitiveness. Another explanation on Finland's decline in exports can be traced to basic monetarist theory. Current production costs in Finnish manufacturing sector are high due to high wages, government monopolies and price-controls. Strong trade union power prevents flexible labor laws from lowering fixed production costs. Therefore, increasing the tax-burden on the narrowing manufacturing sector, which is already suffering from a lack of competitiveness, is bound to exacerbate the problem. Again, the government officials are reluctant to admit something that the public is clearly aware of.
Let us again modify our original question: How can the welfare-system be sustained if the employment in private-sector industry is gradually declining and leading to decreasing tax-revenues, manufacturing industry is perishing due to stringent labor costs and higher taxes, which lead to unemployment, hence increase social security costs?
Like all irresponsible governments, Finland decided to rely on debt and increased taxation in order to finance the cornerstone of the welfare system. Current government debt-to-GDP stands at 53% and is approaching the critical 60% limit. What must be noted, however, is the speed of debt accumulation, which has doubled over the past 5 years. Furthermore, the debt is largely in the hands of foreigners, which poses serious risks in balancing liabilities to the holders of Finland's debt. Even though Finland's credit-rating is still AAA, such fast growth of debt burden is likely going to change the rating's existing views. Increased taxation will put an enormous pressure on small and medium-size businesses, which must pass on the burden of adjustment to consumers through higher prices. Unfortunately, due to the direct and indirect influence of the growing public sector, a large share of consumers' incomes derive from public sector employment or finances. Such pernicious cycle is simply unsustainable.
Our prima facie point holds. To quote Milton Friedman, "[the bureaucrats] are seeing the hole in the barn door, but they are not looking at the door itself." What is more disturbing is the fact that these topics and observations are not discussed in the public domain. Any attempt to challenge such government inertia is labeled as populism. And as Hayek's "Road to Serfdom" profoundly argued, such silencing of critiques is one step closer to a controlled socialist society. It seems that Finland did not learn anything from the 1991 collapse of its neighboring regime.
Author: Henri Erti
The views of the author do not necessarily represent the views of the LVMI-Europe.
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