Each year, the Government prepares the General Government Fiscal Plan, which sets out the targets for general government finances and the tools for achieving them. The purpose of the plan is to support decision-making on general government finances in such areas as revenue, expenditure, and structural reforms. The plan is not limited to central government finances as it also covers other areas of general government (local government finances and social security funds). Parliament also uses the plan as a basis when it debates the outlook for general government finances.
The General Government Fiscal Plan is prepared for four years. Setting out the targets on a multi-annual basis is useful for a number of reasons. Nearly all measures impacting general government revenue and expenditure, such as changes in taxation, have long-term effects that extend beyond the annual budget cycle. Furthermore, multi-annual planning helps to ensure that fiscal policy does not excessively strengthen the economic cycles. In other words, general government finances should not be unnecessarily eased during an upturn and not excessively tightened during a downturn. A multi-annual perspective is also built into the fiscal policy rules of the European Union, which set limits to general government deficits and debt.
Financial crisis led to the strengthening of multi-annual planning
General Government Fiscal Plans were introduced after the EU had decided, following the financial crisis of 2008, to strengthen the monitoring of its fiscal policy regulatory framework. It was concluded that multi-annual statutory frameworks for the individual Member States would make it easier to adhere to the fiscal policy rules jointly agreed in the EU. It was also assumed that these arrangements would prevent similar crises from occurring in the future. The Union Member States agreed on the criteria for multi-annual planning in 2011, and Finland prepared its first General Government Fiscal Plan in 2014. Since then, there have been changes in the Finnish legislation steering the preparatory process, and the plan is now more extensive than in the early years.
Already before the introduction of the EU criteria, Finland had been planning its central government finances on a multi-annual basis. The budgeting of central government expenditure has been based on multi-annual spending limits for many years. The conclusion has been that this arrangement keeps central government expenditure under control because the limits are adhered to when decisions are made. Central government spending limits remain an essential part of the General Government Fiscal Plan. The spending limits also provide a direct link between the annual budget planning and the multi-annual General Government Fiscal Plan. The link is necessary so that an effective multi-annual planning process can be ensured.
Rules and targets are set for general government finances but comprehensive steering is impossible
The General Government Fiscal Plan contains both binding rules and more general targets. The only binding rule applies to structural deficits in general government finances, and violations of this rule may also lead to the imposition of sanctions. Structural deficit is the difference between revenue and expenditure, and it is calculated so that the impact of cyclical and one-off factors can be excluded.
Because of their importance as a practical instrument, central government spending limits also have the status of a rule even though no sanctions have been specified for violating them. The General Government Fiscal Plan also lays out targets for public debt as well as the nominal deficit of general government and its parts (central and local government, employment pension institutions and other social security funds).
The General Government Fiscal Plan is based on independent economic forecasts. The plan should present the trend as set out in the forecasts and an alternative path based on the measures planned by the Government. The purpose of this approach is to ensure that the potential impacts of the measures planned by the Government on the achievement of deficit and debt targets can be examined.
Already the short-term steering of the sectors of general government finances is negatively affected by the general uncertainties impacting economic growth. Furthermore, different sectors have their own specific characteristics that have an impact on how extensively the Government can plan their economies and anticipate the manner in which they develop. Government decisions have a substantial impact on central government revenue and expenditure as well as borrowing. The Government cannot, however, determine all economic matters falling within the purview of local government even though the General Government Fiscal Plan also contains instruments for steering local government finances. Social security funds also have a degree of independence, which weakens the ability of the Government to have a direct role in the planning of their economies.
The National Audit Office of Finland (NAOF) is the statutory body monitoring the content of the General Government Fiscal Plan. In its capacity as an independent institution, NAOF also assesses whether general government finances are managed in accordance with the rules and targets set for them.