EU, IMF and OECD have all issued similar economic policy recommendations for Finland

The National Audit Office of Finland (NAOF) is taking part in a fiscal policy parallel audit involving six EU countries. The focus is on fiscal risks, the recommendations issued by EU, IMF and the OECD and countries’ reactions to them. The recommendations enrich the economic policy debate in Finland and provide new perspectives on decision-making. In its report, NAOF examined the uncertainty of the impacts arising from two structural reforms: the pension reform, and the regional government and social welfare and health care reform. According to NAOF, the underlying assumptions of the impact assessments and the sensitivity of the assessments to changes in these assumptions should be clearly presented in the Government proposals for such major structural reforms.

The economic policy recommendations for Finland issued by the European Union, International Monetary Fund (IMF) and the Organisation for Economic Co-operation and Development (OECD) between 2012 and 2016 have been quite similar. Also, many of the recommendations have remained unchanged over the years. However, there are also differences: For example, the three organisations give different emphasis to the impacts of fiscal consolidation on economic growth.

− Even though we did not find significant differences between the recommendations issued by the three organisations or in relation to domestic decision-making, it is clear that the recommendations enrich the economic policy debate in Finland. The recommendations contain opinions and initiatives that differ from the decisions made at national level. Also, the external experts view issues from a different perspective and challenge decision-makers to justify their choices. For this reason, the recommendations should be comprehensively communicated at national level and in particular, the communication on the European Semester should be strengthened, says Principal Fiscal Policy Auditor Mika Sainio.

In the international recommendations, Finland has been urged to reduce fiscal risks by for example introducing structural reforms aimed at keeping age-related expenditure under control. However, the impacts of the reforms involve uncertainties, which should be taken into account in the decision-making. In its report, NAOF takes up the pension reform (which entered into force at the start of 2017) and the regional government and social welfare and health care reform (which is currently under preparation) and examines both reforms from the perspective of the uncertainties.

Structural reforms are aimed at reducing the sustainability gap

− There are significant differences between structural reforms with regard to how extensively their impacts can be modelled and the manner in which they are prepared. The process of drafting the pension reform was closely connected with the aim of reducing the sustainability gap. The fact that there were several assessments of the impacts of the reform makes the assessments more reliable and increases the likelihood that the reform will have the anticipated impacts. The regional government and social welfare and health care reform is extensive and has a broad range of different targets. Furthermore, the decisions made as part of this reform process so far have not been exclusively tied to the achievement of the main targets. As the functioning of the savings mechanisms is not adequately known and the transition costs are high, the impacts of the reforms on fiscal risks are not clear, Sainio explains.

Structural reforms are often justified with the need to reduce the sustainability gap. Thus, when decisions on the reforms are made, there should be a clear picture of their economic impacts and the uncertainties that they involve. For this reason, NAOF recommends that the background assumptions for the sustainability gap and other assessments made for major structural reforms and, if possible, the sensitivity of the impact assessments to changes in the underlying assumptions should be clearly presented in the Government proposals.

The report on fiscal risks and international recommendations is connected with the parallel audit carried out by the Fiscal Policy Audit Network functioning under the Contact Committee of the Supreme Audit Institutions of the European Union. The audit covers fiscal risks, recommendations issued by international organisations and countries’ reactions to the recommendations. The following six EU countries take part in the parallel audit: Finland, Latvia, The Netherlands, Portugal, Slovakia and Sweden. A synthesis report will be published in 10-11/2017.