The Economic Consequences of Ever-Growing Government in Finland

I’m currently in Finland for meetings with various people and I learned that the country’s bloated public sector and expensive welfare state are imposing a very heavy cost on the economy.

How heavy of a cost?

According to IMF data, there’s been no growth in per-capita GDP over the past 18 years.

Why is Finland stagnating?

There presumably are several reasons, and some of them may have nothing to do with economic policy.

But I very much suspect that fiscal policy is one of the reasons. Here’s a chart showing how the burden of government has increased since 2007.

The government budget has grown faster than inflation and grown faster than the private economy. The net result, as shown in the chart, is that government is now consuming 57 percent of the economy’s output rather than 47 percent of GDP.

Needless to say, bad spending policy is correlated with bad tax policy.

And these excerpts from a report in the Helsinki Times are good evidence.

The emigration statistics of Finns with significant capital gains are indicative of attempts to avoid capital gains taxes, states Finnwatch. …The report examines emigration trends in different wealth brackets in 2014–2018 based on data from Statistics Finland. It indicates that people with more than 50,000 euros in capital gains are statistically more likely to move to countries where taxes on investment earnings are either not taxed or qualify for partial or full tax exemptions. …Portugal, Luxembourg, Singapore and Switzerland were identified as the most likely destinations for people with more than 50,000 euros in capital gains.

By the way, the design of the Finnish tax system is not necessarily terrible (though personal income tax rates definitely are excessive).

But even a well-designed tax code will be oppressive if politicians want to grab more than half of of the economy’s output.

So rich people are getting pillaged (and some of them are moving), but ordinary Finns are getting pillaged as well (and it’s much harder for them to escape).

I’ll close by noting that bad spending policy also tends to be correlated with bad debt policy. And that’s true for Finland.

Maybe it’s time to create a 20th-Theorem Club?

P.S. People of Finnish descent in America earn for more than Finns in Finland. People should draw the logical conclusion from that factoid.

P.P.S. For those who follow the debate on “basic income,” the Finns have given the world a useful case study.