Assessment of the sustainability of general government finances has so far focused on the long-term sustainability gap. According to the National Audit Office of Finland (NAOF), the Ministry of Finance should assess the sustainability and medium-term economic development more comprehensively.
The NAOF is of the opinion that the sustainability of public finances is assessed from a too narrow perspective. In assessing the long-term balance of public revenue and expenditure, the Ministry of Finance focuses on the sustainability gap, where the expenditure is estimated until 2070.
In order to get a more comprehensive picture of the outlook for general government finances, information would also be needed on shorter periods.
“The EU Commission and the Swedish Government, for example, also use a 15-year period in their assessments. The Ministry of Finance in Finland could also apply this method. Using different indicators in parallel generates more detailed information about the time frame of sustainability issues. This makes it easier to assess the necessary policy measures,” says Mika Sainio, Principal Fiscal Policy Auditor at the National Audit Office of Finland.
Because of the ageing of the population and the current low birth rate, it will continue to be important to get a true and fair picture of the outlook of public finances.
“When the economic policy is planned, it is important to ensure the sustainability of general government finances. One of the factors improving the sustainability is a higher employment rate. It is important to keep in mind that sustainability indicators involve a significant degree of uncertainty and cannot therefore be used as precise indicators. They mainly provide a situational picture and make it easier to assess whether structural reforms are needed,” says Sainio.
Medium-term assessment methods should also be broadened
The Government uses the medium-term projections of the Ministry of Finance as a basis when planning general government finances and fiscal policy. It is therefore important that these projections are consistent. The medium-term projections are partly impacted by the shared output gap method of the EU Commission and the EU Member States.
“In the present medium-term economic forecasts, the output gap estimates often need to be revised considerably afterwards, which weakens the reliability of the forecasts. The estimates should therefore be drawn up in a more comprehensive manner,” says Ville Haltia, Principal Fiscal Policy Auditor at the NAOF.
Medium-term macroeconomic projections cover both short-term forecasts (the current year and the next two years) and economic projections that extend beyond two years. According to the NAOF, the methods applied with the projections for the last two years differ from those applied with short-term forecasts.
The observations of the NAOF are based on two recently completed audits. One of the audits focused on evaluating the sustainability gap calculations produced by the Ministry of Finance, the reporting on the sustainability of general government finances, and the use of sustainability indicators in the steering of fiscal policy. The other audit focused on assessing the medium-term projections of the Ministry of Finance used in the planning of general government finances.
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Read more about good governance and the audits conducted by the NAOF: VTV.fi