National Audit Office’s separate report to Parliament: Interim Report on Fiscal Policy Evaluation for the Parliamentary Term of 2015–2018

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This separate report to Parliament contains the interim fiscal policy evaluation report on the 2015–2018 parliamentary term prepared By the National Audit Office.

The report covers the overall steering of general government finances, fiscal policy framework for the parliamentary term, adherence to central government spending limits and compliance with the Stability and Growth Pact during the early part of the current parliamentary term. An estimate of the entire parliamentary term is also provided.

Overall steering of general government finances has been put on a more consolidated basis during the current parliamentary term. This is based on the Decree on the General Government Fiscal Plan, under which the steering of general government finances must be put on a more comprehensive and long-term basis. This is also manifested in the Programme of Prime Minister Juha Sipilä’s Government.

The National Audit Office takes a positive view of the fact that the long-term impacts of economic policy and the challenges to the Finnish economy posed by structural factors are taken into account in fiscal policy planning. The process of consolidating general government finances with ten billion euros will extend beyond the current parliamentary term. This requires that all parties involved are committed to a long-term economic policy.

The savings targets laid out by the Government have meant strict spending limits for central government finances. Strict spending limits are one reason why the economic growth has been stimulated through means outside the spending limits (increases in tax subsidies, financial investments and guarantee commitments). The National Audit Office reminds that general government liabilities and the risks associated with them should be monitored as a whole and in relation to the rest of the economy.

According to forecasts, the decisions made by autumn 2016 are not enough to achieve the sub-sector budgetary targets set out by the Government. It will be particularly difficult to achieve the budgetary targets laid out for central government. If achieved, the targets would ensure the balancing of general government finances and help to put the debt-to-GDP ratio on a downward trend. The Government can only achieve the targets it has set by continuing its efforts to strengthen the general government fiscal position and especially the central government fiscal position.

General guidelines and the most important targets for the tax policy are laid out in the Government Programme. The National Audit Office recommends that there should be a comprehensive assessment of the future of the tax policy and the tax system of the future during the latter half of the parliamentary term.

The central government spending limits and the spending limits rule contained in them are the most important instruments for steering national fiscal policy. According the observations of the National Audit Office, the Government has been in compliance with the central government spending limits in 2015. The central government spending limits are an important steering instrument and should therefore be in accordance with the targets laid out for central government finances.

Finland was in compliance with the Stability and Growth Pact in 2015. According to a preliminary assessment produced by the National Audit Office, Finland is in compliance with the preventive arm also in 2016 but may be in breach of the debt rule of the corrective arm. According to an assessment of the National Audit Office, there is a risk of a significant deviation from the requirements of the preventive arm in 2017.

The National Audit Office draws attention to the functioning of the preventive arm of the Stability and Growth Pact. The preventive arm contains a degree of flexibility, which means that more consideration can be given to the special characteristics of the economy in the definition of the required adjustment. In Finland’s case, flexibility of the rules and the permitted deviations from the requirements are leading to a situation where compliance with the preventive arm has not provided an adequate safety margin for the criteria of the corrective arm, as Finland’s general government debt-to-GDP ratio has exceeded the permitted 60 per cent limit.