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The Economic Background to the Incomes Policy Agreement

The competitive edge which Finnish companies enjoy in the international market is excellent. The national debt is one of the lowest of the EU member states and public finance is in a strong position. As a consequence of the balance of payments having shown a surplus for a number of years, the Finnish economy has now arrived at a stage where the net overseas indebtedness is about to entirely disappear, and so in 2001 the figures will show net receivables. This indicates that the prospects for growth in both private consumption and the general domestic demand are also remarkably good.

However, there are also risk factors, which may affect the development of the Finnish economy in the future. These are mostly connected with the international economy and its effects, but this, along with those export markets which are of importance to Finland, is currently continuing its strong growth.

Uncertainty about future developments is caused, first and foremost, by the expanding US deficit in the balance of payments and in addition, the unsustainable indebtedness of both private individuals and companies within the USA. This may finally lead to a sudden slowdown of economic growth in the USA, which would have an effect on the entire global economy. Additionally, big swings in share prices, and the unpredictability of the movements of international capital, present a continuous risk to the stability of the economy.

The rise in the global price of oil has led to the acceleration of inflation, both in Finland and elsewhere in Europe. On the one hand, the fall in the value of the euro has sharpened the competitiveness of the export trade, in comparison with those countries which are outside the euro zone, but on the other hand, it has increased inflationary pressures. In addition to these factors, the increase in interest rates has also cut the purchasing power of the employees. Halting both the rise of the price of oil and the weakening of the euro, will be essential prerequisites for a deceleration, to any significant degree, of inflation during the year 2001. The current year will see a rise in inflation to something in the region of 3.5%.

The numerous risk factors which affect the development of the international economy, highlight the need for the maintenance of both stability and predictability in the national economy and in social development. An incomes policy has in this situation a vital role to play, as it will lead to an advancement in economic growth and employment, in securing an increase in real earnings and purchasing power, and in the prevention of the development of an inflationary spiral.

After some tough negotiating, a draft agreement for an incomes policy was reached on 17^th November 2000. The efforts of the employers to place the entire load of price rises onto the shoulders of the employees, combined with their desire to abandon the jointly agreed pay award standard, which takes into account the inflation targets of the EU area as a whole plus the growth in national productivity, caused difficulty in the negotiations, particularly during the early stages.

Pay increases, which are stipulated by the incomes policy agreement, are to be 3.1% in the year 2001 and 2.3% in the following year. Solidarity with the low-paid is demonstrated by the calculation in cash terms of the general pay increase, and by a separate equality allowance which will be focused on the low-paid sectors, in which most of the workers are women. Average pay will rise some 4% in 2001 and 3% in 2002, due to the sliding scale of the pay awards. The proposed pay rises are somewhat moderate, particularly as the increase in productivity in Finland has exceeded the average rise in Europe, and has recently grown by some 2.5 to 3%. It is forecast that inflation will clearly slow down during the term of this incomes policy agreement, and will fall below the figure of 2%. All of the foregoing is with the proviso that external factors, (oil, euro, interest rates), which affect the Finnish economy, will not bring any surprises.

The combination of pay rises, plus the tax concessions which are proposed by the Government, together with the prophesied drop in inflation, means that net real earnings (ie purchasing power) per employee will rise by more than 3% in 2001 and just 1% less during the following year, or to put it another way, by more than 5% over the two-year term of the agreement.

Ismo Luimula
Economist