Fiscal policy monitoring report 2023

The fiscal policy monitoring report includes an assessment of the status of fiscal rules and objectives, compliance with the central government’s spending limits, and the fiscal stance. The report also deals with the factors affecting the growth of public debt, the realism of economic forecasts, the reform of the fiscal framework proposed by the European Commission, and the debt sustainability analysis.

The economy in Finland continued to cool in 2023, and the economic outlook is weak. The economy is slowed down by high inflation, higher interest rates, the consequences of Russia’s war of aggression, and general uncertainty. The recovery in 2024 is likely to be slow and fragile. The risks of worsening economic development have increased. The forecast of the Ministry of Finance, which underlies the budget proposal, is realistic overall. The level of fiscal policy is counter-cyclical, i.e. slightly stimulating in a negative business cycle, in forecast years 2023–2024.

The general government bodies in Finland, with the exception of earnings-related pension funds, have been accumulating debt especially since the financial crisis of 2008. The main factor behind the increase in debt is the negative primary balance. In Finland, the development of the effective real interest rate on general government gross debt has been favourable compared with the change in GDP volume, which has reduced the debt-to-GDP ratio. However, real interest rates have already started to rise.

Through its fiscal policy, the Government aims to strengthen general government finances and reverse the development of public debt. In the light of recent forecasts, it is unlikely that the objectives set by the Government will be achieved. The Government’s set of measures aimed at strengthening public finances by EUR 6 billion covers only part of its fiscal decisions. The implementation of the investment programme set out in the Government Programme will take the development of general government finances further away from the target path pursued by the Government. In addition, the Government Programme does not contain any taxation or other public-revenue-related objectives that would support the achievement of the fiscal position objective set for 2027. The risk is that measures outside the EUR 6 billion set of measures significantly reduce the strengthening effect of the Government’s fiscal policy on general government finances. Achieving the fiscal position objective is likely to require additional measures and extending the range of measures.

The spending limits set by the Government for the parliamentary term do not fully comply with the targets of the Government Programme, and spending limits expenditure has been presented vaguely. The Government’s investment programme is only partly included in the spending limits. However, with the exception of the investment programme, the spending limits rule of the parliamentary term has been formulated to ensure that expenditure is maintained at the level decided by the Government.

The EU fiscal framework has become complex. A key element of the reform of the framework proposed by the EU Commission is monitoring compliance with the rules on the basis of the net expenditure path specified for each Member State. The net expenditure path is based on debt sustainability analysis. According to the compromise in the EU Council in December2023,  the detailed content, background assumptions, and application of the debt sustainability analysis in the new framework will be specified later by the Commission and the Council. Based on the analysis made by the fiscal policy monitoring function, the underlying assumptions should be particularly carefully selected, as they have a significant impact on the adjustment path that the analysis produces for the Member State. In addition to the report, the calculations underlying the analysis have also been published.