Strengthening of general government finances makes the Government better placed to achieve its targets

NAOF assesses that the Government is now better placed to achieve the targets that it has set for the parliamentary term. According to economic forecasts, most of the targets for general government finances set by the Government may now be achieved as the Finnish economy is picking up after a long period of slow growth.

In its latest fiscal policy evaluation report, the National Audit Office assesses the General Government Fiscal Plan, achievement of the fiscal targets set by the Government, adherence to central government spending limits, and compliance with the Stability and Growth Pact. NAOF also assesses whether the Ministry of Finance’s economic forecasts used as a basis for the General Government Fiscal Plan published in spring 2018 have been realistic.

The medium-term objective for structural balance (-0.5% in relation to GDP) set by the Government was already achieved in 2016. Structural balance measures the general government deficit/surplus without the impact of cyclical factors and one-off measures. According to revised economic forecasts, Finland will also be able to meet the target in 2017–2019. General government debt-to-GDP ratio is projected to fall below the reference value of 60 per cent next year. Thus, NAOF estimates that last year Finland met the criteria laid down in the Stability and Growth Pact, and that this will also be the case in 2018 and 2019.

“There have been improvements in the legislation on general government budgetary planning in recent years. Under an amendment to the Decree on the General Government Fiscal Plan introduced last year, the nominal fiscal balance target must be set on multi-annual basis. In the future, it should be ensured that the targets remain consistent with other fiscal targets. There is also room for making information content of the General Government Fiscal Plan more comprehensive and specific,” explains Matti Okko, Director for Fiscal Policy Audit at NAOF.

Central government spending limits were complied with in 2017 and expenditure outside the spending limits remained stable. However, it has been noted that the spending limits procedure as a means of restricting expenditure is not sufficiently comprehensive. In particular, changes in expenditure taking place between parliamentary terms should be presented in a more transparent manner.

“When major structural changes in public administration are prepared, cost levels should be comprehensively monitored. It should be ensured that the costs incurred by public companies outside budget as a result of the regional government, health and social services reform are also presented in a transparent manner. Economic steering must be transparent and the targets must be communicated in a clear manner,” says Okko.

According to the latest economic forecasts, there has been a clear reduction in the long-term sustainability gap in general government finances. At the same time, however, the risk to general government finances arising from contingent liabilities (such as state guarantees) has increased substantially. The amount of state guarantee liabilities is now many times higher than ten years ago and no limits have been set for the risks arising from them.

The Ministry of Finance’s forecasts for GDP growth and general government net lending relative to GDP in 2018–2020 are in line with the figures presented by other Finnish forecasting institutes and the European Commission. The forecasts for the next few years can be characterised as realistic even though the risk is that the regional government, health and social services reform will lead to higher than expected public spending during the planning period. According to the assessment published by NAOF earlier in the spring, the Ministry of Finance’s economic forecasts have been reliable compared with other forecasting institutes in long time series.

Read the full report.