Efficient employment policy measures are needed to ensure Finland's compliance with the EU fiscal policy rules

The National Audit Office of Finland (NAOF) estimates that Finland risks violating those rules of the preventive arm of the EU Stability and Growth Pact which aim at ensuring stable general government finances. The preparation and successful implementation of measures to improve the employment rate play a key role in balancing general government finances.

According to the NAOF, there is a risk that Finland fails to comply with the preventive arm of the EU Stability and Growth Pact in 2020. The preventive arm aims at ensuring the stability of general government finances. At present, it seems that a significant deviation from the Pact may arise in the structural balance of general government bodies. On the other hand, in light of the information presently available, the limit would be exceeded by only a small degree.

The NAOF also estimates that in 2020 general government expenditure will grow faster than allowed by the EU rules. In order for Finland to be able to ensure compliance with the fiscal policy rules in the coming years, the employment rate should be improved.

“The Government’s one-off future investment programme will be launched in 2020, and it will have an impact on the compliance. In addition, the additional permanent expenditure decided by the Government will be realised before the tax increases decided by the Government bring additional income. Although the estimates involve uncertainty, we encourage the Government to pay attention to the risk of a substantial deviation from the preventive arm of the Stability and Growth Pact. In the spring of 2021, we will give our final estimate of Finland’s compliance with the Pact in 2020,” says Economist Leena Savolainen.

The Government aims at balancing general government finances by improving the employment rate. The Government aims at 60,000 new employed persons. It is possible to achieve this target in view of the differences between the employment rate in Finland and the other Nordic countries. However, this requires that the measures to improve the employment rate are selected and prepared successfully. Based on a comparison between the Nordic countries, the employment target would be achieved if Finland merely succeeded in increasing the employment rate of men over 50 years, for example, to the level it is in Sweden.

The economic policy targets of Prime Minister Antti Rinne’s Government are focused on balance in general government finances, improvement of the employment rate, decrease in inequality and narrowing of the income gaps, and achievement of carbon neutrality. The goal that the Government set for general government finances is that they will be in balance in 2023 under normal global economic circumstances.

“In its General Government Fiscal Plan, the Government has not yet proposed specific methods for achieving the balance target. Regardless of this, the contents of the General Government Fiscal Plan conform substantially to the requirements set by legislation. In addition, the forecast by the Ministry of Finance, on which the plan is based, is realistic,” says Principal Fiscal Policy Auditor Mika Sainio.

The observations are based on the NAOF’s recently published assessment of fiscal policy monitoring. The assessment examines Finland’s compliance with the EU fiscal policy rules, the economic policy targets of the parliamentary term that began in 2019, the General Government Fiscal Plan, and the economic forecast by the Ministry of Finance, on which the Plan is based.

In December 2019, the NAOF will publish a more extensive fiscal policy monitoring report. The report will include a more detailed assessment of the objectives the Government has set for the current parliamentary term as well as Finland’s compliance with the fiscal policy rules. At the end of the year, the NAOF will also publish two audit reports related to sustainability assessments of general government finances in the knowledge base of economic policy, and medium-term projections in the planning of general government finances.

Fiscal policy monitoring assessment on management of general government finances

Read more about good governance and the audits performed by the NAOF: VTV.fi