August 29, 2013 / 10:18 PM / 4 years ago

UPDATE 2-Finnish government plans to trim generous welfare model

* Government seeks to raise retirement age

* Plans change to childcare leave policy

* Plan likely to raise opposition (Adds comments from finance minister, opposition lawmakers)

By Ritsuko Ando and Jussi Rosendahl

HELSINKI, Aug 29 (Reuters) - Finland's government announced a long-term plan to start scaling back its welfare system, one of the most generous in the world, aiming to preserve its triple-A credit rating in the face of a slower economy and aging population.

In a statement on Thursday, the government laid out a wide range of measures, including a hike to the effective retirement age to 62.4 in 2025 from a current 60.9. It also said it could force municipalities to consolidate and speed up health care reforms.

The changes are not immediate but are likely to put off some voters who may see them as steps towards destroying a welfare model which, like those of its Nordic neighbours, emphasises social equality and well-being.

In earlier negotiations, Prime Minister Jyrki Katainen's conservative National Coalition party faced strong resistance from left-leaning parties in government.

In the end, even the No. 2 Social Democrats Party (SDP), which depends on labour unions for support, acknowledged a need for structural reforms.

"The challenges in our economy are so large that one cure is not enough. We need several measures," said Finance Minister Jutta Urpilainen, who is also head of the SDP. "We know that it is not possible to maintain this kind of welfare model without a higher employment rate."

Finland was initially seen sheltered from Europe's financial crisis due to its solid finances.

But the prolonged downturn has hit exports and accelerated a decline in industries such as forestry, tipping the current account into deficit. The Finance Ministry forecast Finnish GDP to contract 0.5 percent this year.

With the exception of some gaming companies - such as Rovio of Angry Birds fame and Clash of Clans developer Supercell - there have been few growth companies to replace the declining fortune of Nokia, once the global leader in mobile phones.

Economists have warned that in a few years, a combination of slower growth and rising costs of caring for an aging population will start weighing heavily on Finland's finances, currently one of the healthiest in the euro zone.

The government previously forecast gross debt-to-GDP ratio will increase to 59.9 percent in 2015 from 53 in 2012 - close to breaching the European Union's criteria of 60 percent.

Finnish taxes are already among the highest in the world at 44.1 percent of GDP, meaning changes need to come from cutting benefits or encouraging people to work longer.

OECD data shows Finland's average job participation rate, or the proportion of active workers to the total labour force, was 75 percent last year, lower than a range of 78 to 80 percent among Sweden, Denmark and Norway.

POLITICALLY RISKY PLAN

The government's plan also includes cutting financial benefits for students to encourage them to look for work earlier.

It is also proposing changing childcare leave policies to encourage mothers to return to work sooner.

Under the existing system, parents of children under 3 can take paid leave beyond the initial, parental leave period of 9 months. The planned change would force parents to split the second leave period, drawing mothers back to work sooner but also encouraging more fathers to take leave.

The plan was announced along with the government's official proposal of a 53.9 billion euro budget for 2014, down from 55.1 billion euros in 2013.

There is no assurance that the plan will be implemented because it will be up to future governments to adopt them.

But it is still a major step for the current government, which faces its next parliamentary election in 2015. Katainen's coalition includes six parties with varied views, meaning that passing legislation is usually smooth, but agreeing on topics such as social welfare is tough.

Welfare reform has been a particularly fraught subject as many Finns take pride in their welfare system, which includes free and high-quality education and egalitarian childcare services.

"It says a lot about this government as it is cutting from families with children and students after granting tax relief for large companies," said Pirkko Ruohonen-Lerner, a senior member of the opposition party, The Finns.

The Centre Party, another opposition party with agrarian roots and strong support in rural areas, criticised the planned consolidation of municipalities.

"The National Coalition and Social Democrats Party had promised that they would not force joint municipalities. Now they have betrayed the Finns," the party said in a statement. (Reporting by Jussi Rosendahl and Ritsuko Ando; Editing by Sonya Hepinstall and Stacey Joyce)

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