Sipilänomics, or Finland's fake austerity

While everyone is more or less horrified by the ongoing train wreck that is the Donald Trump presidential campaign, it's worth remembering that in Finland, we elected our own version of Trump prime minister. Juha Sipilä, a Christian millionaire businessman, became an agrarian party MP in 2011, was elected party leader in 2012 and went on to win the 2015 parliamentary election and form the current cabinet. This fall, he's been busy shocking the nation with unprecedented cuts in education, social security and now public sector salaries. All is, however, not as it seems.

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The recession of the early 1990's hit Finland particularly hard, not least because it coincided with the collapse of our friendly, co-operative and helpful major trading partner. Government debt, already rising in the 1980's, exploded during the recession when unemployment hit 20% and the economy contracted dramatically.

Even though growth resumed, we'd only gotten about halfway through the debt before the collapse of Nokia and the current financial crisis. Again, the economy contracted, and growth since has been slow or nonexistent, with the government running multi-billion euro deficits for several years in a row.

This is the essential background to the previous election. Even though neither the debt or deficit are alarmingly high in themselves, all parties except the extreme left agreed that this couldn't go on, and we needed to balance the budget. Sipilä didn't so much make a convincing case that he could do this, as he maddeningly refused to commit to any concrete measures whatsoever before the elections. Instead, what I think happened was that his general aura of masculine leadership was felt to be exactly what the country needed. In other words, he ran Ray Smuckles's election campaign, and won. Welcome to Finland.

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After the election, Sipilä formed the first majority right-wing-only cabinet in Finnish history with the Coalition party and the populist racists who have the effrontery to call themselves the "Finns party". The new cabinet came out swinging, with a political program that promised four billion euros of spending cuts over their four-year tenure. The main targets were welfare, health care and education; on a personal note, the University of Helsinki, where I study, is set to lose at least a fifth of its government funding over the next couple of years. Sipilä then summoned the labor unions to negotiations over what he hilariously called a social contract, in practice a program for lowering salaries to boost national competitiveness. When the unions predictably refused and Finland, presumably, returned to a state of nature, the cabinet announced they would implement their competitiveness measures unilaterally.

Last week, we got a taste of what this Sipilänomics was going to mean in practice. The cabinet announced considerable cuts to salaries and benefits: Sunday pay will now no longer be double, but rather 175% of normal, the first day of sick leave is unpaid, a couple of holidays come off the calendar, overtime pay is halved, and public sector workers lose a bunch of vacation days per year. Overall, this adds up to savings of over a billion euros.

Our professor of economic history estimates that the net effect of these cuts will be to increase our government deficit by half a billion euros. No, I didn't mistype that. First of all, lower salaries also mean lower tax incomes, but crucially, the cut package also includes a 1.72% deduction in social security payments from employers, which will henceforth be covered from the government budget. This comes with a price tag of some 800 million euros, wiping out over half of the nominal savings by itself.

Of course, the idea is that the deduction in employment costs will encourage companies to hire more people. Our minister of finance, Coalition party leader Alexander Stubb, has blithely assured us that the cuts will create "tens of thousands of jobs". At least one prominent economist dismisses this entirely, believing the cuts will create no new jobs whatsoever. The cabinet has generally been criticized for overly optimistic views of the future, and this seems to be an excellent example; with world trade the way it is, plus the fact that the cuts will reduce domestic purchasing power by 3%, it's very difficult to understand where the tens of thousands of jobs are going to come from. The net effect of the cuts was calculated ceteris paribus, so it's entirely possible that the cuts will increase the deficit even more.

So if the government's cuts are actually going to make the deficit worse, where does the money go? Effectively, the Sipilä government is subsidising corporate payroll expenses by almost one billion euros. So the newest round of spending cuts aren't actually spending cuts at all; they're a wealth transfer from workers, and especially public sector workers, to corporate shareholders. If the net effect of the cuts really is to increase the deficit, then they are, in fact, a transfer of wealth from all taxpayers to shareholders. This isn't balancing a budget, let alone austerity; this is the opposite. The Sipilä administration is increasing our public deficit in order to redistribute income.

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For a number of years, the political and economic debate in Finland has been framed as a juxtaposition of balanced budgets and stimulus. Supposedly, the right wants to cut spending to balance the public budget, while the left insists that the correct course of action is countercyclical stimulus. Their version of the story has Finland gripped by merciless fiscal austerity under a succession of penny-pinching right-wing governments.

For comparison, this is what austerity looks like: (image: Wikipedia Commons)

Greece underwent an extremely painful process of austerity, at great human cost, to almost eliminate their primary deficit. Until Syriza came along, that is. But in terms of statistical indicators, the above is austerity: a clear and sustained drop in government expenditure, ideally to the point where borrowing is no longer required. At that point, the budget can be called balanced.

I've put together the following graph from official government statistics collated by the Taxpayers Association of Finland and Statistics Finland. The blue line shows real central government debt in millions of euros; the red line is net central government budget expenditure. The time is 1990-2014.

Would any of our left-wingers like to show me on this diagram where, exactly, the Finnish government has done anything that even remotely resembles austerity?

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As the graph shows, in this millenium Finnish central government expenditure has, with very few minute exceptions, only gone up. The national debt is skyrocketing. In short, at no point since the beginning of the current series of financial crises has there been any austerity whatsoever in Finland. Overall government spending has not been cut.

To anyone who's lived in Finland, this is a massively unintuitive conclusion. Surely we know for a fact that several successive right-wing-led cabinets have made several cuts to public spending? The university cuts I mentioned, for instance, were only the latest in a long series of cuts and budgetary interventions by the state. So where the hell is the money?

To answer this question comprehensively would take a lot more work and expertise than I can put into this blog post, but I'll give a couple of examples. Sipilä's agrarian predecessor Matti Vanhanen's cabinet removed the Social Insurance Institution payments from employers. This came with an estimated cost of 800 million euros, and because of the particular progression of the payments, chiefly benefited large, capital-intensive corporations. According to the rhetoric of the time, this was supposed to generate thousands of jobs. There are no good reasons to think that it created any at all. At one point, a regional experiment actually tried removing employer social security payments entirely - and found no overall benefits whatsoever (h/t to the sadly defunct Markkinakohinaa blog). So the end result was that government spending went up, and a billion-euro subsidy was delivered to Finnish corporations. Sound familiar?

The agrarian cabinet was finally ousted by a Coalition victory, which brought us Jyrki Katainen's six-party cabinet. One political measure all parties could agree on was, rather surprisingly given the presence of the Left Alliance and the Social Democrats, lowering Finland's corporate tax rate. This made a dent in the budget of approximately a billion euros, but the "dynamic effects" of the tax cut were estimated to increase revenue by at least half that, and, of course, create ten thousand jobs. Before writing this, I had no idea that ten thousand jobs and a billion euros is the Finnish government equivalent of about tree fiddy. Predictably, the dynamic effects never showed up; corporate tax income fell by, coincidentally, 800 million euros, and the jobs were nowhere to be seen. Instead, the money seems to have mostly been paid out as dividends to shareholders.

In both these cases, the failures of the stimulating effects was chalked up to the poor performance of the world economy. Or to put it another way, in both cases Finnish politicians had been far too optimistic about future economic growth, and gave up sizeable chunks of government revenue to boost growth that never happened. So against this background, it's hardly surprising that the Sipilä cabinet has come up with a billion euros of cuts, which he intends to use to directly subsidize corporate shareholders because economic growth is just around the corner. Apparently this is what we do in this country.

But to sum up, it seems to me that a large reason why government spending continues to rise despite expansive cuts is that the money saved has been given away, saddling the central government with more fiscal responsibilities while leaving it with lower tax revenue.

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Having been quite critical of the left, I have to say that the right's rhetoric is also at times unbearable. The cuts the current administration are making are not the only possible way to respond to our fiscal situation. Even if you firmly believe that the deficit needs to be cut, there are other ways of going about it than these specific cuts. The right has been alarmingly succesful in creating a rhetorical environment in which any criticism of the government's cuts means fiscal irresponsibility. At worst, they pretend that the cabinet has no choice but to make these exact cuts, and couldn't possibly make any others. This is an outrageous lie. Choosing to make cuts that disproportionately impact the poorest citizens, women with low incomes and higher education, while barely touching higher income classes and giving money to big companies and farmers, are all political choices made by the current administration. It takes an astonishing degree of willful blindness and idiocy to maintain that there are no alternatives. We incessantly hear the right bleat about the massively expensive welfare state, and never acknowledge that we already pay more in farm subsidies than in unemployment benefits. The vast sums of money wasted in botched information systems are similarly completely exempt from cuts. These are all political choices, not the inevitable functioning of economic realities. It's deeply reprehensible for the right to try to deny its own political agency.

By far the most ludicrous aspect of right-wing rhetorics is the constant posturing over fiscal responsibility. If you believe the right, heroic right-wing politicians have been tirelessly trying to plug the deficit while an evil, greedy labor union movement does everything it can to stop them. Rightists moralizing about balanced budgets are equally welcome to show me on the diagram where, exactly, a succession of right-led cabinets has done anything at all to curb overall spending. Until you can do that, it might be smarter to not pretend to champion some fiscal responsibility that the parties you represent have no intention of executing.

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There are two conclusions to draw from this. Firstly, for all its pseudo-corporate jargon and pretense of novelty, the Sipilä cabinet is doing exactly what its predecessors did: making sweeping cuts to government spending, only to give the money saved away to big business. I hate to sound so much like a socialist, but unfortunately that seems to be the reality of what our politicians do. This includes all parties of the left, who have enthusiastically participated in subsidizing our corporations and their owners. While this may seem surprising to an outsider, it makes perfect sense in a country dominated by a nationalist-corporatist ideology of national competitiveness. One of the most widely held articles of economic faith in this country is that the only sector of the economy that produces real value is the export industry. This is completely nonsensical, but articles of faith often are.

The second conclusion, which I wish would propagate even a little, is that the all-pervasive debate on austerity and cuts versus borrowing and stimulus is senseless. Not one single party in this country has at any point shown the slightest intention of balancing the budget. There has been no austerity; there will be no austerity. Instead, each party has its own particular schemes for ensuring the competitiveness of our export industry for when the upturn comes, which is literally the only way we can conceive of of reducing the deficit. The Sipilä administration's plan to reach a primary surplus by 2021 is nonsensical - unless you assume that the world economy will boom and Finland's exports will boom with it. If that doesn't happen, and given what's going on in China one is tempted to say when rather than if, we're screwed. No party is willing to even contemplate the idea that slow growth might be the new normal.

The only substantial fiscal policy difference between Finnish parties outside the lunatic fringe is which sectors of government spending that aren't farm subsidies to cut in order to transfer more money to our major corporations.

So a reasonable prognosis for the future is that Finnish parties will continue to engage in public spending cuts with dramatic impacts on our quality of life, human capital and purchasing power, in order to fund various hare-brained stimulus schemes with imaginary "dynamic effects". Although that's probably unfair to rabbits. It's utterly pointless for the left to rave about imaginary austerity and budget-balancing when no such things are even being attempted. Actually challenging the economic policies of the current administration requires critically dismantling the myth of national competitiveness through exports, and the endless optimism that sees 5% annual growth perennially around the next corner.

The problem is that the general Finnish population is completely economically illiterate. I personally know intelligent, academically educated people who can't even understand the simplest market transaction, let alone what economic policy even is. Because they don't understand that they don't understand economics, most people are faced with two alternatives: accept the right-wing neoliberal narrative that the only possible thing that can be done is cut welfare and salaries, or embrace some lunatic fringe theory that economics and money are all a scam. I'm honestly kind of surprised we don't have sovereign citizens in this country, and that the political left is doing so badly, because the complete ignorance of economics that so much of the population demonstrates would seem to be fertile ground for both brands of nonsense.

The biggest single reason for this is the unwillingness of our school system to actually teach any basics of economics. These days, there is one compulsory course on economics in high school, but this is a fairly recent development. What exacerbates this into a serious issue is the ignorance of our media on the same subject, which leads to the same effect on its pages: Finnish journalism will, in general, either parrot the government's competitiveness narrative, or challenge it with conspiracy theory garbage. Mostly, our media seems to see its task as explaining the government's actions to the people, rather than doing actual journalism. The run-up to the elections was a pathetic mess, and after it they've regressed to reporting on the government and then reporting on the opposition's reply. No analysis is being done, or is going to be done, because there's apparently simply no-one to do it. To question the competitiveness narrative, let alone massive money sinks like farm subsidies and conscription, is to question nationalism, which in a small, xenophobic country in thrall to its invented heroic past is simply not done.

Because of the dominance of the economic doctrine of national competitiveness, and the extreme difficulty of challenging it due to popular ignorance and media ineptitude, it's difficult to see how Finland can expect to escape the debilitating fixation on labor costs and export industries. Add to this the nationalist lunacy of wasting billions of euros each year on maintaining the illusion of agricultural self-sufficiency and "area equality", and it seems inevitable that things are going to get much worse before they get better. Despite the right's scare-mongering, Finland is far from going the way of Greece, but not only are the constant cuts to health care and education destructive right now, they'll be rebounding on us later with far greater effect, like they did after the previous recession. Because we can only conceive of competitiveness in terms of labor costs, we're effectively eradicating our human capital. This is complete madness.

The only thing that can save this country is if there's an upturn in world trade that boosts our economy before the pseudo-austerity of "competitiveness" wrecks it completely. If this happens, the main question will be whether the upturn lasts long enough that we can repair the damage. Last time, it didn't, and we entered the next downturn with a massive debt burden and huge structural problems. Next time, it'll probably be worse. The way it looks now, I don't think our political system can solve this problem. In the long term, we're a failing state.