Finland is highly developed industrialized country with a mixed economy with per capita of 50000$ which is nearly the same as Austria, Belgium, the Netherlands, and Sweden. Finland was not one of the developed countries until 1990s as they have lack of resources. They had Central Planned Economy as the other socialist countries. In 1950s half of the population had been working for the primary productions and Finland was relatively poor country compared to their neighbors, but in the 1970s, there was an industrial boom led by government in Finland and strengthened its competitiveness. In 1980s, Finnish government deregulated financial market and opened it to the foreign capital; therefore lots of foreign capital flowed to the firms and households. As a result, investment and consumption increased rapidly and the prices of assets got expensive. At the beginning of 1990s, Finland had suffered a serious economic risk as the collapse of Soviet Union and the economic recession in Western Europe and America. Finnish financial authorities tried to fix the exchange rate and therefore the exports decreased dramatically. Finland faced financial crisis caused by debts, and reduction of exports until 1993 and started to recover in 1994. In the course of recession, the government has proceeded restructuring its economic system. The Finnish government focused on export promotion in ICT industries by investing more in Research & Development and education. Finland made dramatic changes in social and economical sectors and became one of the most competitive developed countries in the world. In the short period of time Finland has been transformed to the knowledge based economy with very high performance in the high-tech industries.
Finland is a country of forest and lake. 86% of the country’s area is covered with forest and so in the past the forestry played a major role in the Finnish economy. Because of climate, the agricultural development is limited and it takes only 1/12 of the GDP.
Now Finland has developed a modern, competitive economy. Export has a big impact on Finnish economy. Main exports are timber, pulp, glass ware, ceramics, stainless steel, engineering products and telecom equipments. Finland has a strong competitiveness in manufacturing – the wood, metal, engineering, telecommunication, and electronics. Finland is famous for its high-tech exports such as mobile phones. The Finnish company “Nokia” which has 40% of market shares of mobile phone is well known all over the world. As Finland has lack of natural resources the biggest sector of the economy is services at 66%, followed by manufacturing and refining at 31%. With respect to foreign trade, the key sector is manufacturing. Industries like electronics (22%), machinery, vehicles and other engineered metal products (21.1%), forestry (13%) and chemicals (11%) takes the major parts in the economy.
Finland has wood and several mineral and freshwater resources. Forestry, paper factories, and agricultural sectors are very important for rural population because they provide most of the jobs for rural residents. The Finnish government is paying attentions on these sectors because they are very important for controlling unemployment rates.
Finland is highly integrated in the global economy, and international trade takes a third of country’s GDP. The European Union makes 60% of the total trade. The major flows of trade are with Germany, Russia, Sweden, United Kingdom, United States, Netherlands and China. As Finland has been among the free trade supporters, The European Union manages the trade policy. Finland has joined European Union in 1995 and in 2002 it became the only Nordic country to adopt Euro as its national currency instead of Finnish Mark.
Employment rate in Finland was 68% and unemployment rate was 6.8% in early 2008. 18% of residents are outside job market at the age of 50 and less a third working at the age of 61.
Impact of Fiscal policy and Monetary Policy on the economy
There are some underlying economic factors that affect the major market trend. Factors like GDP growth rates, tax, interest rate, unemployment or threat of inflation, economic trends are the major determinants of what happens to the companies and their stock prices. Fiscal policy and monetary policy have widespread effects on the decisions and behavior of businesses and individual.
Fiscal policy
How the government gets the revenue, how to spend for the expenditure, how to deal with the national or public debt and how to budget are determined by the fiscal policy of the government. Fiscal policy consists of taxation, fees and fines, borrowings, government expenses on the expenditure and budgeting which affects directly to the national economy.
Taxation plays major role in fiscal policy because most of the governments in the world get their revenue from taxes. Tax is a sum of money that individuals and organizations have to pay to the government at a specified rate which is imposed by government.
There are two types of taxes which are direct tax and indirect tax. A direct tax is a tax that are imposed and collected on a specific group of people or organizations. For example, income tax would be a direct tax which is collected from the people who actually earn their income. On the other hand, indirect taxes are collected by intermediaries such as retailers from the consumers who actually take the economic burden. Sales tax is an indirect tax and merchants collect it from the customers and merchants actually don’t take any burden.
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The rising in direct tax reduces the post-tax income of general public. This could motivate individuals to work more hours to maintain their target income that can lead more productivity. But on the other hand, individuals could be de-motivated since their income has reduced. The government has to introduce a low level of direct taxes like income taxes for lower income earners in order to motivate people to work extra hours and keep more what they’ve earned. Changes to tax system can reduce the risk of unemployment and therefore increase the total GDP growth rate. For example, when the income tax is high, the households with low income are not trying to work extra hours as their net income is very low after the tax. If the income tax rate got lower, they can be motivated to work which increase the labor supply.
The changes to indirect taxes have a strong impact on the demand of general public for goods and services. Rising tariffs on foreign cars can reduce the demand for foreign cars and helps to protect and develop the national car manufacturing industry. In Finland they’ve imposed relatively high tariffs on some foods from abroad, in order to maintain stability of their agriculture. In contrast, government financial assistance (subsidy) has impact on reducing their costs of production, lowering the market price and helping to increase the demands. Tax changes can have a role on motivation of work forces and their overall efficiency and productivity.
Reducing the rates of cooperation taxes and other business taxes can encourage the capital investments in the businesses. If the investment increases, the national capital stock can rise and the capital stock for the individuals can also rise. The government can also use some tax allowances to encourage more start-up businesses and increase and developments in R&D. With the low rate of cooperation taxes and other business taxes can lead more inflows of foreign investment which might benefit both public demand and supply.
Fiscal policy has been used as a tool of demand management for a long time by many governments in the world. The decisions of changing the fiscal policy must be made deliberately as it has a great impact on the general economy.
The fiscal stance is a term that is used to describe whether fiscal policy is being used to actively expand demand and output in the economy or otherwise to take demand out of the circular flow.
A neutral fiscal stance might be shown if the government runs with a balanced budget where government spending is equal to tax revenues. Adjusting for where the economy is in the economic cycle, a neutral fiscal stance means that policy has no impact on the level of economic activity.
A reflationary fiscal stance happens when the government is running a large deficit budget. Loosening the fiscal stance means the government borrows money to inject funds into the economy so as to increase the level of aggregate demand and economic activity.
A deflationary fiscal stance happens when the government runs a budget surplus. The government is injecting fewer funds into the economy than it is withdrawing through taxes. The level of aggregate demand and economic activity falls.
The level of government borrowing is an important part of fiscal policy and management of aggregate demand in any economy. When the government is running a budget deficit, it means that in a given year, total government expenditure exceeds total tax revenue. As a result, the government has to borrow through the issue of debt such as Treasury Bills and long-term government Bonds. The issue of debt is done by the central bank and involves selling debt to the bond and bill markets.
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Continuous running of large budget deficit can be a problem for government and the economy. The budget deficit can be financed by issuing of new government debt to investors from home and abroad. But if the budget deficit rises to a high level, the government might have to offer higher interest rates to attract buyers of the debt which will affect the general economy negatively. In the long term, government borrowings become a heavy burden as the government has to spend more each year in interest payment for the debts to the holders of government bonds and other securities. Therefore the government has to introduce a high rate of taxes which can hinder or decrease the growth rate of GDP, consumption and investment spending. This has happened in Finland in the 1990s which was the financial crisis caused by massive national debt.
Fiscal policy should not be isolated from monetary policy. Monetary policy is made and developed by central bank of the nation to control supply of money within the economy. Monetary policy affects all the sectors of the economy but in different ways and with a variable impact on it. Monetary policy plays a very important role in controlling inflation, interest rate, exchange rate and money supply which has great impact on overall economy. Lower interest rates will lead to an increase in both consumer and business capital spending which increases equilibrium national income and also the growth rate of GDP. In the contrast, high interest rates will decrease the capital spending of both consumer and business which will definitely reduce the productivity and buying power. But raising interest rate can be used effectively used to control the inflation when it is caused by the bank credit.
When the economy is in a recession, fiscal policy may be more effective in increasing spending and income by stimulating demands. But when there is inflation problem, it can be easier to control it by introducing monetary policies such as controlling interest rate, cash reserve ratio and open market operations.
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