The Government's fiscal policy during the corona crisis has been successful – post-crisis measures will be needed to stabilize government debt

According to the National Audit Office, the next step should be specifying the Government's plans for stabilizing the debt ratio.

The corona crisis and its management have increased the amount of government debt rapidly. In the future, it will be important to stabilize the general government debt-to-GDP ratio. According to the Government’s plans, a key role in this is played by employment measures. However, the measures taken so far have had a rather modest impact on general government finances compared with the target. These conclusions are presented in the fiscal policy monitoring report 2020 published by the National Audit Office of Finland (NAOF) in Finnish on 7 December 2020 and in English translation today.

The NAOF considers it justified that the Government continues striving to improve the employment rate despite the corona crisis. In the autumn of 2020, the Government set an employment target that was more ambitious than the original one but had a more flexible timetable. The new target was to increase the number of employed people by 80,000 instead of 60,000 by the end of the decade instead of the end of the government term. The Government’s ‘sustainability roadmap’ states that the new employment target aims at strengthening general government finances by EUR 2 billion.

“This is a challenging target, and according to our assessment, the employment decisions taken so far have had rather modest impacts. There is also a risk that the desired impacts on general government finances will not be achieved even if the employment rate improved as described in the sustainability roadmap. The current version of the roadmap is based on the optimistic assumption that the employment measures to be implemented will not cause any costs to general government,” says the NAOF’s Senior Economist Matthias Strifler.

The Government’s sustainability roadmap should be specified

According to the NAOF, the sustainability roadmap introduced by the Government in 2020 offers starting points for improving sustainability. However, it should be specified: the measures for strengthening general government finances and their impacts should be presented in greater detail. The roadmap should, moreover, take account of the uncertainty of forecasts and debt scenarios.

“This means that sensitivity analyses of the amount by which public finances should be strengthened to stabilise the debt-to-GDP ratio should be presented in connection with the roadmap. Forecasts are extremely uncertain. The amount by which public finances should be strengthened can either increase or decrease, as forecasts are updated and the background assumptions of calculations change,” says the NAOF’s Principal Fiscal Policy Auditor Mika Sainio.

Generally speaking, the NAOF assesses that the timing and scope of the fiscal policy measures the Government has taken to manage the corona crisis have been along the right lines. The measures have succeeded in mitigating the economic impacts of the crisis. The Government should continue to respond to the corona crisis by an active fiscal policy, although the crisis and its management by fiscal policy measures increase the amount of government debt considerably.

“For the time being, low interest rates help general government finances, and a higher debt level is therefore not necessarily unsustainable. However, it is extremely important to stabilize the debt ratio during this decade to prevent the debt-related risk from becoming too high,” says Sainio.

It is important for central government to return to the spending limits rule successfully

The General Government Fiscal Plan for 2021–2024, presented by the Government last spring, did not include multi-annual objectives for general government finances because of the exceptional circumstances. Furthermore, the spending limits rule was dispensed with for 2020. It is possible to return to the spending limits rule successfully in 2021 only if several exceptions are allowed to it. According to the NAOF, the Government should return to normal multi-annual planning of general government finances and spending limits as quickly as possible when the uncertainty caused by the crisis situation subsides.

“It is important to steer public finances to the path towards the budgetary balance objective. This requires commitment to medium-term fiscal planning. For this reason, the objectives set for general government finances and the spending limits play a key role. It should also be observed that in uncertain circumstances, objectives can be more flexible than normal,” says the NAOF’s Director Matti Okko.

The National Audit Office monitors and assesses fiscal policy as an independent national authority. By monitoring fiscal policy, the NAOF promotes the transparency and intelligibility of fiscal rules as well as stable and sustainable general government finances.

Read the new publication: Fiscal policy monitoring report 2020