Despite additional security policy expenditure, the growth curve of the debt ratio must be bent

The war in Ukraine has had a wide impact on the management of public finances.

The uncertain security policy situation is also reflected in the fiscal policy monitoring assessment of the National Audit Office of Finland (NAOF) published today. The assessment deals with, for example, the General Government Fiscal Plan and the economic forecast by the Ministry of Finance.

The Russian invasion of Ukraine has affected the management of public finances in Finland in many ways. When preparing the General Government Fiscal Plan for 2023–2026, the Government decided on significant additional expenditure due to the security policy situation.

“The exceptions made during the government term have increased spending limits expenditure in total by around EUR 17 billion, of which around EUR 4 billion are due to the security policy situation. It has been justified to deviate from the spending limits because of the security policy situation. However, this deviation covers many types of expenditure from measures to promote the green transition to compensation for price increases,” says Senior Auditor Sini Salmi.

In its General Government Fiscal Plan, the Government also transferred the funding of the beneficiaries of the state-owned gaming company Veikkaus to the central government spending limits. To this end, the spending limits for 2023 were raised by a total of EUR 990 million based on a funding model outlined in Parliament. However, according to the spending limits rule, the limits should have been raised only by the amount payable by Veikkaus to the State budget, i.e. by around EUR 762 million. Moreover, the decision created an additional margin of manoeuvre in the 2023 spending limits, as part of the expenditure of Veikkaus’ beneficiaries had already previously been included in the 2023 spending limits

“The transfer of the funding of Veikkaus to the scope of the spending limits has been carried out in a manner that violates the principles of the spending limits system. However, from the perspective of the spending limits rule, the expenditure of Veikkaus’ beneficiaries falls within the scope of the spending limits. The decision is therefore correct in view of the whole system, even though the implementation was contrary to the spending limits principles,” Salmi says.

Long-term debt sustainability should be kept in mind

In fiscal policy-making, it is important to ensure longer-term debt sustainability. According to the assessment by the NAOF’s economists, the Government should as soon as possible update its ‘sustainability roadmap’, which aims to bend the growth curve of the general government debt-to-GDP ratio.

“The balance between long-term public expenditure and revenue should be improved. When decisions are taken to strengthen public finances, it is important to assess public finances as a whole, keeping in mind structural decisions to promote economic growth,” says Arto Kokkinen, Senior Economist at the National Audit Office.

According to Kokkinen, the Government should have up-to-date and comprehensive information on expenditure, taxation, and other revenue structures in order to be able to make as sound decisions as possible on public expenditure and revenue from the perspective of economic growth and wellbeing. If necessary, the Government should supplement the information, for example by spending reviews.

An English translation of the fiscal policy monitoring assessment will be published later.