The Nordic Model - Embracing globalization and sharing risks

ENDNOTES
1
As an example, public expenditure on health and old-age care in Finland increased annually
in the period 1993–2004 by 1.9 per cent on average. It has been estimated that 0.8 per cent was
due to changes in the structure of the population (age and sex), while 1.1 per cent reflected enhanced
quality. For the period 2000–2004 the corresponding figures were 3.5 per cent and 0.8 per
cent, implying that the main part was not due to the change in the structure of the population
but due to other factors. On this see Hujanen et al. (2006).
2
In its “cost-pressure” scenario the OECD assumes that expenditure, for a given demography,
increases by 1 per cent more than income (which corresponds to the trend in the past two decades).
In its “cost-containment” scenario it is assumed that policy can gradually eliminate this “extra”
growth.
3
Increased growth could improve the public balance much more if it were assumed that
other public transfers are given in nominal terms or are permanently indexed to consumer prices
only (as is formally the case for, say, the flat rate basic pensions). However, historical experience
suggests that transfers are increased by discretionary political decisions in a way which roughly
corresponds to the outcome which would emerge with formal indexation to the development of
wages. As suggested above, this may in the end hold also for the earnings pension system, but
in the simulation it was assumed that the agreed (20/80) pension indexation formula is used permanently.
Another element contributing to the reduced deficit is the fact that accrued pension
rights in Finland are indexed with an (80/20) formula: 80 per cent based on wage developments,
20 per cent based on consumer prices. The simulations were done with the general equilibrium
model (“FOG”) maintained at ETLA.
4
It is a familiar result of the theory of taxation that the efficiency costs caused by taxes are a
non-linear (approximately quadratic) function of the tax wedge.
5
See, for instance, Kleven and Kreiner (2006).
Welfare services: rising costs and increasing demand · 101