Contingent liabilities of general government

Conclusions of the National Audit Office

For the formulation of fiscal policy and steering of general government finances, it is important that the decision-makers have access to all essential information about the financial risks related to contingent liabilities of general government. Contingent liabilities include, for example, government guarantees, which may result in government expenditure in certain situations. Sustainable management of general government finances requires that all contingent liabilities are identified, the related risks are assessed, and the possible long-term impacts on the general government balance are taken into consideration. In connection with the updating of its assessment of the state of Finnish government finances and Finland’s compliance with fiscal policy rules in May 2017, the European Commission drew attention to the amount of guarantees provided by Finnish general government.

The purpose of the audit was to assess the management of the increasing number of contingent liabilities of general government and the related preconditions. The main question of the audit concerned whether the management of contingent liabilities of general government is adequately taken into account in the formulation and steering of fiscal policy.

According to the findings, the management of contingent liabilities of general government has not been sufficiently taken into account in the formulation and steering of fiscal policy. The Finnish national fiscal policy rules do not in any way restrict growth in contingent liabilities. The EU has expanded the obligation to report contingent liabilities, but no limits have been set for growth in liabilities. The current status of sustainable financial management cannot be considered adequate in all respects, because no comprehensive calculations regarding the possible impacts on expenditure resulting from the realisation of risks have been presented. Furthermore, the level of risk appetite has not been determined at central government level. Risk assessments are carried out at the level of individual agencies, and no minimum requirements have been specified regarding the contents of the risk assessments.

The EU has expanded the obligation to report contingent liabilities, but no limits have been set for growth in liabilities

The state of the general government finances of the EU Member States is monitored at the EU level in accordance with the rules of the Stability and Growth Pact. The EU has reacted to the strong growth in contingent liabilities and its potential impact on budgets of Member States by expanding the reporting requirements applied to contingent liabilities. However, the EU rules do not contain any specific restrictions concerning growth in contingent liabilities, or any requirements to take related impacts into account in the formulation of the budgetary framework. Furthermore, Member States are not required to produce any comprehensive data on their risks related to liabilities or on the related impacts on their capability to manage potential payment obligations related to such liabilities.

In Finland, contingent liabilities are not reported in the national Stability Programme fully in compliance with the EU rules. The reporting only covers data concerning the central government, and significant liabilities in the local government sector are not appropriately taken into account. The data required by the Budgetary Frameworks Directive are published on the website of the Ministry of Finance.

National fiscal policy rules do not limit growth in guarantees

The spending limits rule laid out in the Government Programme and the central government spending limits are an essential part of Finland’s national fiscal policy framework. However, neither of these contain provisions restricting growth in contingent liabilities. Furthermore, expenditure resulting from contingent liabilities is not adequately taken into consideration in the state budget. Consequently, the budget neither contains any restrictions regarding liabilities.

The reporting concerning contingent liabilities has improved overall, but the assessment of the impacts of related risks should be enhanced

Over the recent years, the coverage of liabilities has been expanded in the Government’s annual report and the final central government accounts. Furthermore, since 2015, the Ministry of Finance has prepared an annual overview of the central government’s financial risks and liabilities. The correctness of the related data has been further supported by the allocating the central responsibility for the compilation and reporting of data on guarantees and warranties to the State Treasury.

However, the data available about the impacts of contingent liabilities on the developments in central government finances and sustainability of financial management are not adequate in all respects. The magnitude of risks related to contingent liabilities remains partly vague, because no extensive scenarios regarding the possible impacts of expenditure resulting from the realisation of risks have been presented, and because the data on incurred losses are insufficient. Some data intended for publication are not actively communicated or utilised in the drafting of the Government’s annual report or risk overview.

The knowledge base of the decision-making process could be enhanced by clarifying the content requirements concerning economic impact assessments

The guidelines for assessing the impact of legislative proposals describe different methods to carry out a comprehensive assessment of expenditure and risks. However, no separate decision has been taken on the minimum data requirements for the decision-making process. According to the audit, economic impact assessments carried out for decisions to increase authorisations vary in content and occasionally provide an insufficient picture of the related risk scenarios and foreseeable costs. In central government, the management of risks concerning contingent liabilities and the related decision-making have been decentralized to different units. The risk assessment procedure has not been harmonised, and each body can determine the contents of the risk assessment itself. Contents of the risk reporting by Finnvera to its owners have not been specified, and the financial supervision of Finnvera is not appropriately organised

The content requirements concerning the ownership control and risk reporting by Finnvera have not been separately specified. The liability of the state concerning Finnvera changed from indirect to direct in 2005. At the time, it was considered that the owner control and industrial policy control of the state over Finnvera and the related reporting should be enhanced and developed to improve the state’s risk management process.

However, the Internal Audit Unit of the Ministry of Economic Affairs and Employment does not have in place an up-to-date plan concerning the contents of its control activities. In practice, the control has been limited to reviewing the reports submitted by Finnvera and to arranging individual meetings and audit visits. The lack of planning regarding the control, and the fact that the principles to be applied have not been specified, have hindered the statutory control. In January 2018, the Ministry of Economic Affairs and Employment decided on the rules that the Ministry will apply to its financial supervision of Finnvera Plc in the future.

Recommendations of the National Audit Office

As the amount of contingent liabilities increases, the potential realisation of the related risks should be better taken into account in the formulation and monitoring of the sustainable management of general government finances. Recommendations of the National Audit Office:

1. Risk limits for contingent liabilities resulting from government subsidisation activities should be specified on the basis of an overall assessment of risks.

2. The Ministry of Finance should promote the creation of content requirements to be applied in the drafting of guarantee decisions and decisions to increase authorisations so that the financial impacts of such commitments are appropriately taken into account.

3. The Ministry of Finance should clarify the risk reporting requirements concerning the Government’s annual report and the risk overview. The risk overview could be more clearly focused on the analysis of risks and related developments, as well as on the description of different risk scenarios.

4. The Ministry of Economic Affairs and Employment should specify the content requirements applied to the risk reporting concerning Finnvera and should ensure that the supervision of Finnvera complies with the legislative objective of supervision in accordance with the principles governing the supervision of credit institutions.