The Government responded rapidly to crises, but fiscal policy remained too long in exceptional mode

In its new report, the fiscal policy monitoring function of the National Audit Office of Finland (NAOF) assesses the 2019–2022 parliamentary term.

The development of public finances lags far behind the objectives set in the Government Programme and the original objectives of the parliamentary term. This is due, for example, to the crises that marked the 2019–2022 parliamentary term, i.e. the Covid-19 pandemic, Russia’s war of aggression in Ukraine, and the energy crisis resulting from the war.

“The crises have made the parliamentary term truly exceptional, and the Government has had both successes and failures. For example, fiscal policy responded effectively to Covid-19 but remained too loose after the crisis. When new expenditure needs emerged unexpectedly, the additional expenditure on which decisions had been taken earlier should have been assessed in greater detail,” says Matti Okko, Director at the National Audit Office.

The employment rate target was achieved this year if the changes in the way employment statistics are compiled are taken into account. However, the employment measures taken by the Government during the parliamentary term clearly fail to meet the targets. In addition to other employment measures, the Government also took measures that have an adverse impact on employment. Partly because of this, the measures taken are too modest as a whole in view of public finances.

The cyclical fluctuations during the parliamentary term have been exceptionally intense. This has made it difficult to adjust the fiscal stance to the business cycle. The fiscal policy monitoring function estimates that the Government’s fiscal policy supported the economy and society in a timely and adequate manner at the outbreak of the Covid-19 pandemic. The additional expenditure resulting from Russia’s war of aggression and the energy crisis was also justified.

“However, when the business cycle turned after the Covid-19 pandemic, fiscal policy remained too loose, heating the economy unnecessarily”, says Senior Economist Matthias Strifler.

Because of the crises that took place during the parliamentary term, the Government deviated from the agreed spending limits for the first time during the 20-year history of the spending limits system. A number of deviations were made between 2020 and 2022.

“The crises have revealed that the spending limits system is unable to respond adequately to major crises requiring additional expenditure. The deviations and additional expenditure have been necessary, but they have lowered the threshold for making deviations even for minor reasons,” says Senior Economist Jenni Kellokumpu.

Fiscal rules are currently being reformed in the European Union. The European Commission published a proposal for new rules in November. Member States’ independent fiscal institutions (IFIs) emphasize the importance of rules that are based on clear criteria and indicators and that promote debt sustainability.

The report will be published in English in early 2023.