General government finances have approached balance

According to an assessment by the National Audit Office (NAOF), a balance of general government finances will be reached in 2019. The development has been supported especially by the economic growth that started in 2016. The Government seems to be able to reach the key objectives it set at the beginning of the parliamentary term on the balancing of the general government fiscal position and the reduction of debt. The long-term sustainability gap of general government finances was not eradicated during the parliamentary term, but it became smaller as the short-term outlook improved.

“In our opinion, continuing with the structural reforms aiming at decreasing the sustainability gap during the next parliamentary term is important. The social and health care service reform that focuses on economic sustainability offers important support for this objective,” says Matti Okko, the Director for Fiscal Policy Audit at the NAOF.

The EU Stability and Growth Pact aims at a sustainable fiscal policy and correction of any excessive budget deficit and debt encumbrance of general government finances. According to the NAOF’s assessment, Finland was in compliance with the rules of the Pact during the early years of the parliamentary term, in 2015–2017, and according to the NAOF’s ex-ante assessment, compliance with the rules will also be reached in 2018 and 2019. According to a forecast produced by the Ministry of Finance, Finland will reach its medium-term structural balance objective on of general government (MTO) at the end of the parliamentary term in 2019.

“The next Government will have to ensure fiscal policy is managed in compliance with the Stability and Growth Pact and secure a sustainable level of the debt ratio,” says Leena Savolainen, an economist at the NAOF.

According to the NAOF’s assessment, the Government has complied with the Act on the Implementation and Application of the Provisions Governed by the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union and on Requirements Concerning Multiannual Budgetary Frameworks (869/2012; the “Fiscal Policy Act”) and the related regulations in essential respects. Fiscal planning and governance in general improved during the parliamentary term, and related legislation was developed. Strenghtening of the steering of local government finances also improved the governance of general government finances as a whole. On the other hand, the governance does not properly take into account risks related to contingent liabilities, such as government guarantees.

“Setting a risk-based limit for government guarantees would be justified. The liabilities as a whole should be managed better than at present to make the information about the related risks better available to decision-makers,” Okko says.

The general government spending limits were followed during the parliamentary term. Their credibility was challenged by, for example, the fact that funding of the Finnish Broadcasting Company was removed from the scope of the spending limits and the fact that some expenditure items outside the spending limits have not been clearly determined. The amount of tax expenditures also increased during the parliamentary term. Tax expenditures can be used as an alternative for subsidies that would be limited by the spending limits.

According to the NAOF’s assessment, the economic forecasts produced by the Ministry of Finance as a basis forfiscal policy planning are at least as reliable as the economic forecasts produced by the other forecasting institutions.

In its latest fiscal policy monitoring and audit report, the NAOF assesses the General Government Fiscal Plan, functionality of the governance of general government finances, achievement of the objectives set by the Government, compliance with the general government spending limits, compliance with the Stability and Growth Pact and reliability of the economic forecasts by the Ministry of Finance.

“Independent governance of fiscal policy is essential and Finland being responsible is important. Italy is currently having an argument with the European Commission because Italy has become severely indebted and according to its draft budgetary plan, the general government deficit will continue to increase, which goes against the fiscal rules,” Matti Okko says.