Fiscal policy monitoring report 2020

The fiscal policy monitoring report assesses the Government’s fiscal policy during the corona crisis and the Government’s employment measures and objectives. The report also examines the cyclical conditions in Finland, the prospects of debt sustainability of general government finances, and the realism of the economic forecast of the Ministry of Finance.

The Government’s decision to dispense with compliance with the spending limits for 2020 was justified under the exceptional circumstances. In the budget proposal for 2021, the expenditure level has been changed within the flexibility provided by the spending limits rule, but flexibility has also been sought through exceptions to the spending limits rule. In order for the spending limits rule to remain a credible multi-annual planning instrument for central government finances, it is important to return to complying with it from 2021 onwards.

The General Government Fiscal Plan for 2021–2024, presented by the Government in the spring of 2020, did not include multi-annual objectives for general government finances. However, it complied with the requirements laid down by fiscal policy legislation in the prevailing exceptional circumstances. In the future, fiscal policy legislation should be specified to include more clearly defined provisions on exceptional situations similar to the present one. The Government should return to normal multi-annual planning of general government finances – including the objectives set for public finances – as soon as possible in view of the development of the crisis.

Because of the coronavirus crisis, the ratio of government debt to GDP will grow considerably in Finland but at a typical rate if compared with the other European countries. The government debt-to-GDP ratio should be stabilized according to the Government’s objective, as the costs of refinancing debts falling due in the future involve a risk. However, low interest rates support general government’s ability to manage the growing debt. The loans the State of Finland has taken in 2020 have been at zero interest in practice.

The Government’s sustainability roadmap offers a starting point for stabilizing general government finances and improving sustainability in the long term. However, it should be specified. The roadmap should also prepare for the uncertainty included in different debt scenarios.

In the autumn of 2020, the Government set an employment target that was more ambitious than the original one but had a more flexible timetable. It is good that the Government did not give up striving for higher employment because of the corona crisis. The Government’s sustainability roadmap defines the degree to which the new employment target aims to improve public finances. The National Audit Office assesses that the employment decisions taken so far during the parliamentary term improve general government finances only modestly.

The National Audit Office assesses that the economic forecast of the Ministry of Finance on which the budget for 2021 is based is realistic, considering when it was prepared. Nevertheless, the corona crisis has made it difficult to forecast economic development, as the epidemic spreads unpredictably and has major economic impacts.