Finland’s Millennial PM Warned of Baby Boomer Threat to Finances

Kati Pohjanpalo

(Bloomberg) -- The world’s youngest prime minister needs to act quickly to tackle one of Europe’s fastest-aging populations.

Finland’s central bank said on Tuesday that the burden on public finances, as more people head for retirement, is unsustainable and requires a political response. The warning comes just days after 34-year-old Prime Minister Sanna Marin took office.

The so-called sustainability gap -- which measures the difference between spending and income -- has widened to 4.7% relative to gross domestic product, from about 3% a year ago, the Bank of Finland said in a report on Tuesday. The biggest contributors to the increase are cooling growth, higher government borrowing and political stalling over health and welfare reform.

According to the European Commission, the sustainability gap poses a significant risk to the long-term health of public finances when it exceeds 6%, while a reading of under 2% denotes low risk.

“One factor currently weighing on the long-term outlook for the public finances is the fact that the baby-boom generation has reached retirement age,” the central bank said. “This has increased public pension expenditure, and over the next few years it will also lead to a more rapid increase in expenditure on health care and long-term care of the elderly.”

Like much of Europe, Finland needs to come to grips with the growing pressures of an aging and shrinking population. In the Nordic nation’s case, the issue assumes even greater importance because of its generous welfare state, relatively low immigration and the constraints of euro membership.

While recent governments have taken action to address the problem, more needs to be done, said the central bank, which has been issuing similar warnings since the start of the decade.

The new government of Sanna Marin, the world’s youngest prime minister, has confirmed previous plans to raise the employment rate to 75% of the working-age people, from about 72% now. According to Governor Olli Rehn, the objective is “well-justified.”

“More determined action should, however, be taken to strengthen the public finances and the prerequisites for employment,” he said.

The central bank on Tuesday also cut its growth forecasts for the euro area’s northernmost economy, to 0.9% in 2020 and 1.1% in 2021. Its previous forecasts pointed to growth rates of 1.5% and 1.3% respectively.

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