COVID-19 and Finland: Not good news for fiscal sustainability
Authored by Jouko Vilmunen
COVID-19 is, apart from being a frightening source of a shock, a highly interesting and special source of a shock, at least from an economic point of view. It combines supply and demand shocks. When it enters an economy, it is the supply side of the economy that takes the initial hit. This is particularly so given the restrictions, such as lockdowns, shutdowns and social distancing measures, imposed by the government on, in particular, those sectors of the economy, where humans are in close connection. Demand effects start to emerge once firms start to adjust their operations to these restrictions. The effects of the virus transmutes into an aggregate demand shock, which may be larger in magnitude than the initial effect on the supply side. Hence, the literature has come to call this type of a shock as Keynesian supply shock. This type of a shock poses severe challenges to, in particular, fiscal policy. This report discusses these challenges in the case of Finland from the particular perspective of how the response of the government to contain the economic effects of the pandemic has affected and will affect, given current estimates, fiscal sustainability in Finland. Finland is almost a laboratory example of an economy that faces headwinds to growth that would sustain the welfare state, namely aging population, shrinking labour force, low labour productivity and, I would add, difficulties in transforming internationally acknowledged top research into profitable business ideas.
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