Fiscal policy monitoring report 2021

The fiscal policy monitoring report assesses, for example, the fiscal stance, the business cycle, the status of fiscal policy steering instruments, and the planning of general government finances during the Covid-19 pandemic. In addition, the report assesses the prospects of the EU fiscal rules and the realism of the economic forecast of the Ministry of Finance.

Public finances are recovering slightly faster than anticipated from the slump caused by the Covid-19 crisis. The ratio of government debt to GDP has risen considerably in Finland during the pandemic. However, when compared with the other EU countries, the increase has been moderate. The large debt taken by Finland in 2020 and 2021 has been at zero interest rate in practice, which will support public finances in the next few years. However, there is a risk that interest payments may increase in the future. Therefore, it is important to ensure that the growth curve of the debt-to-GDP ratio is bent, which is an objective included in the Government’s sustainability roadmap.

The Government’s fiscal policy stimulated the national economy appropriately in 2020. Public expenditure was used to support the economy during the recession and to smooth cyclical fluctuations. In 2021, the economy seems to be growing strongly, and fiscal policy is flexible. Therefore, the fiscal impulse of the full year 2021 may prove to intensify the business cycle. Nevertheless, to ensure that the economy will recover from the crisis, pro-cyclical stimulus measures continue to be justified in 2021. According to the ex-ante assessment, the fiscal impulse of 2022 will be contractionary and counter-cyclical.

The objectives set for public finances in the General Government Fiscal Plan of spring 2021 are broad but meet the requirements laid down in legislation. The General Government Fiscal Plan was completed only on 12 May 2021, which does not comply with the deadline laid down in the decree. Furthermore, in anticipation of the establishment of wellbeing services counties, the monitoring of the limit on local government expenditure was abandoned, although no decisions have yet been made on the future of the expenditure limit.

Both national and EU legislation emphasize the strengthening of public finances when the exceptional circumstances cease to exist. The Government should take the rule-based need for strengthening into account in the fiscal planning for 2023. Any new tax and expenditure decisions for 2023 should, in net terms, be in line with the strengthening requirement. The current decisions and outlook are likely to strengthen public finances as referred to in fiscal regulation.

Central government spending limits expenditure has increased considerably during the parliamentary term. This has been enabled by the decision to dispense with the spending limits in 2020 and the exceptions and increases made to the spending limits as from 2021. Many of these changes have been related to the Covid-19 pandemic. The increase in spending limits expenditure is partly due to the flexibility that was already included in the Government Programme and the original spending limits decision. An example of this is the new mechanism for exceptional circumstances. On the other hand, the decisions taken in spring 2021 to raise the spending limits of 2022 and 2023 clearly violated the principles of the spending limits system. It is important that the spending limits system will continue to serve as a credible tool in the long-term planning of central government expenditure.

The general escape clause activated in the EU fiscal framework in spring 2020 remains in force until the end of 2022. It allows Member States to deviate from the objectives set for their general government finances. The EU is discussing amending the fiscal rules before the deactivation of the escape clause. Member States’ independent fiscal institutions, such as the NAOF’s fiscal policy monitoring, call for clear and carefully prepared rules that support debt sustainability.