Management of the crisis is now most important but structural reforms will be needed in the future

According to the assessment of the National Audit Office of Finland (NAOF), sufficiently extensive and well targeted fiscal policy measures are needed to respond to the corona crisis. The measures taken should also be rapid but temporary. The crisis will increase the amount of general government debt considerably. Although low interest rates make the situation of general government finances easier, Finland will need structural reforms in order to stop the growth of the debt ratio.

The crisis measures taken by the Government seem to be approximately in line with those of the other Nordic countries. However, international comparisons are difficult to make and subject to uncertainty.

“In the acute phase of the crisis, the measures taken should be focused on avoiding bankruptcies and mass unemployment. When the confidence of households is beginning to be restored and there are no longer severe disturbances in production, it is time for actual stimulus measures,” says Senior Economist Matthias Strifler.

General government debt will increase considerably as a result of the crisis. According to the projection of the Ministry of Finance, the debt-to-GDP ratio will be close to 80 per cent in 2024.

“Low interest rates help general government finances to take this hit. However, in the longer term, Finland should achieve a situation where the government debt-to-GDP ratio is reduced during economic upturns and where it is allowed to increase only for stimulus measures during downturns. For this reason, the social and health care reform should be continued and employment measures should be implemented during this parliamentary term, even though it is important to focus on managing the acute crisis right now,” says Mika Sainio, Principal Fiscal Policy Auditor.

The Government should return to normal fiscal policy planning as soon as possible

On account of the crisis, the EU fiscal framework that steers the management of general government finances is not valid for the time being. Nor are the domestic objectives and rules that steer the fiscal policy applied in all respects for the time being. Derogations have been implemented from the central government spending limits rule, for example.

“To ensure the management of the crisis, it is justified to deviate temporarily from the fiscal policy planning practices. Regardless of the prevailing uncertainty, the Government should strive to return as soon as possible to the established practice, where the General Government Fiscal Plan includes multi-annual objectives and a plan on how to achieve them. This is important in order to ensure that the management of public finances is planned systematically. The binding spending limits should also be adhered to”, underlines Director Matti Okko.

The observations are based on the freshly published fiscal policy monitoring assessment of the National Audit Office. In the assessment, the NAOF examines the General Government Fiscal Plan 2021–2024, the impacts of the exceptional circumstances on the planning of general government finances, and the measures taken by the Government on account of the coronavirus situation. In the assessment, the NAOF also examines the realism of the economic forecast on which the General Government Fiscal Plan is based.

View the NAOF’s new assessment: NAOF’s assessment on the management of general government finances

An English translation of the assessment will be published at the website later on.

Read also NAOF experts’ blog posts on the financial impacts of the corona crisis.