Spending limits provide a framework for the budgeting of central government expenditure. The framework allows allocating appropriations until a pre-defined amount, which may not be exceeded. The spending limits framework supports the long-term planning of central government finances and the sustainability of public finances. The National Audit Office is responsible for monitoring compliance with the spending limits.
At the beginning of the parliamentary term, the Government decides on the spending limits, which restrict the budgeting of central government expenditure. The spending limits decision is included in the annual General Government Fiscal Plan published by the Ministry of Finance.
The principles governing the spending limits procedure, the level of expenditure within the spending limits, and decisions concerning increases and cuts in central government expenditure are set out in the Government Programme. The spending limits working group is responsible for the drafting of the spending limits principles, as well as for assessing the effectiveness of the previous principles and possible revision needs on the basis of the experiences from the previous parliamentary term and the priority areas of the new Government.
The spending limits framework does not prevent the economically efficient and effective use of state funds, as the allocation of appropriations can be adjusted within the spending limits. The Government policy steers the decision-making concerning cuts and increases in expenditure.
Large-scale reforms require flexibility from the spending limits framework
The central government spending limits framework is prepared at the beginning of the parliamentary term for the following four-year period. It is possible to make structural adjustments to the spending limits due to changes in central government operations, as well as to carry over funds from one year to the next, cancel appropriations, or re-budget appropriations. Appropriations may also be increased due to changes in cost levels since the framework does not prevent making price adjustments.
In addition to the spending limit appropriations, the framework also includes two reserves: an annual reserve of EUR 300 million for supplementary budget proposals and an unallocated reserve of EUR 200 million. The purpose of these reserves is to prepare for any unforeseen expenditure arising during the parliamentary term. Any reserves remaining after the final supplementary budget for the budget year may be carried over to the following year.
The flexibility of the spending limits framework needs to be reassessed in the event of large-scale reforms or when there is uncertainty concerning the future trends. Although the purpose of the spending limits procedure is to limit the increase in central government expenditure, it should also support operational reforms and flexible budgeting of expenditure. The flexibility of the spending limits framework could be enhanced by shifting the focus of budgeting from allocating appropriations to pre-defined purposes towards making reservations. Efficient re-allocation of appropriations supports adhering to the spending rule.
Is the procedure for the limiting of central government expenditure transparent and credible?
Central government expenditure items within the spending limits are primarily funded with tax revenue, fee income, property income, revenue from the state’s chargeable services or state-owned business operations, and central government debt. The majority of central government expenditure concerns transfers, such as aid and loans to off-budget entities. Unlike in Sweden, for example, not all central government expenditure in Finland falls within the scope of the spending limits framework, but approximately a fifth of the expenditure items are outside the spending limits.
Expenditure outside the spending limits includes items that vary according to the economic cycle, such as unemployment security expenditure, social assistance, housing allowance and debt interest payments. These items function as ‘automatic fiscal stabilisers’, which means that they typically increase during economic downturns and decrease during periods of rapid economic growth.
Expenditure associated with revenue offsetting that expenditure, such as value-added tax expenditure and expenditure corresponding to revenue from the EU or revenue generated by the national lottery, are also excluded from the spending limits. Furthermore, financial investment expenditure is also outside the spending limits, as these items are assumed to maintain their value. Off-budget funds and state-owned companies are also excluded from the spending limits since these are off-budget items.
This breakdown of budget appropriations into spending limits expenditure and expenditure outside the spending limits can occasionally result in confusion regarding whether certain appropriations are within or outside the spending limits according to the principles set out in the Government Programme and in the spending limits manual. In terms of the credibility of the spending limits procedure, this breakdown should not leave room for interpretation, but in practice different spending limits principles may be contradictory.
The main spending limits principle is that taxpayers’ overall tax burden should not be changed. In addition, expenditure falling within the spending limits according to the principles should not be transferred outside the spending limits.
The National Audit Office is responsible for ensuring that the spending limits procedure remains as a sufficiently transparent and credible tool for limiting the increase in central government expenditure.