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Business cycle buffers provide financial stability

BLOG 24.6.2019 14.09
Janne Metsämäki, Managing Director of the Employment Fund

Economic upturns and downturns have an effect on the finances of the Employment Fund. When times are good, the Employment Fund builds a buffer fund that can be used when unemployment is high, and the Fund’s income is low. The buffer helps employers and employees avoid great fluctuations in unemployment insurance contributions and the Employment Fund can deal with the funding of unemployment allowances and other benefits at a steady pace.

Social partners have prepared a proposal on the maximum amount for the Employment Fund’s business cycle buffer pursuant to the Competitiveness Pact. According to the proposal, the maximum amount for the buffer, from the start of 2020, would be the same as the expenditure of a 6 percent unemployment rate. In practice, we could build a buffer worth approximately 1,750 million euros. This means that the Fund would continue to have a financial anchor in the future.

The Fund already has 20 years of experience managing the buffer and history shows that the buffer has truly proven necessary.

From being on the minus to roughly one billion euros on the plus

When Finland joined the Economic and Monetary Union of the European Union (EMU) in 1999, so-called EMU buffers, that are used to build the employee pension and unemployment security system, were established. The Unemployment Insurance Fund was founded at the same time for the task of managing unemployment security funding and it now operates under the name Employment Fund.

The buffer was raised to its maximum amount rather rapidly in the early 2000s and it helped balance unemployment insurance contribution increases in 2003–2004 and 2009–2010.

When the amount of the buffer was adjusted at the end of the 90s, the idea was to have the buffer last for the duration of a 2–3-year recession. The financial crisis that started in 2008 and the consequent euro crisis, which caused a recession lasting for almost a decade, could not be predicted at the time. Unemployment expenses doubled between 2008 and 2015.

Naturally, this also reflected on the expenses of the Unemployment Insurance Fund. The business cycle buffer ran out and in 2015 the Fund had to borrow an extensive amount of money. Debt financing allowed the Fund to keep contribution increases moderate, but unemployment insurance contributions still had to be raised by 1.0 percentage point in 2016.

Eventually, the Finnish economy showed positive growth in 2016. Employment began to increase and unemployment started to go down. The decrease of unemployment expenses resulted in a positive financial result for the Unemployment Insurance Fund. The business cycle buffer began to grow again after years of suffering a deficit and at the end of 2018 the buffer was approximately one billion euros. It was also possible to lower unemployment insurance contributions while the buffer grew.

Management of the Employment Fund’s statutory duties has been secured

Temporary legislation valid in 2017–2019 raised the maximum amount of the business cycle buffer to an amount that corresponds to the expenditure of a seven percent unemployment rate, whereas before it was five percent.

After years of growth, Finland will unfortunately probably have to face uncertain times again at one point. Predicting the future and the economy is difficult, but sources, such as a review published by the Ministry of Employment and the Economy, already predict decline of the positive labour market development.

The proposal on the maximum amount of the buffer provides stability for the operations of the Employment Fund. When times are good we can build the buffer and borrow money when necessary. The Employment Fund continues to be in a good position to carry out its key duties and secure stable development of unemployment insurance contributions.