Fiscal Policy Audit and Monitoring Report 2014

The assessment in the Government’s Annual Report for 2013 that in fiscal year 2013 spending fell below the limits set would appear to be correct.

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On the basis of the National Audit Office’s audit, the assessment in the Government’s Annual Report for 2013 that in fiscal year 2013 spending fell below the limits set would appear to be correct. Consequently, under the rule on spending limits in the Government Programme, EUR 61 million may be carried across to 2014, notwithstanding the limits. The National Audit Office is satisfied that the Government’s Annual Report has continued to comment accurately on adherence to the spending limits.

Expenditure outside the spending limits has remained relatively stable in the period in which the central government spending procedure in its current form has been employed Cyclical expenditure relating to unemployment security, housing allowances and income security have increased , though interest rates have remained exceptionally low. The rise in central government debt and interest rates will push up the amount of interest paid in the future and, as a result, expenditure outside the spending limits. The main factor explaining the increase in expenditure outside the spending limits in 2013 was the continuation of the refinancing of exports as part of financial investments using credits granted out of the state budget.

On the basis of the audit, the National Audit Office finds that Finland complied with the Stability and Growth Pact in 2013. The Office will focus its attention on spending limits for the current year. If the trend in 2014 is less favourable than is now predicted, in 2015 it may have to be declared that the preventive arm of the Stability and Growth Pact was breached in 2014. This could lead to a warning from the European Commission and the need to take corrective action.

The National Audit Office has evaluated the situation in the public sector and how it relates to the rules of the Stability and Growth Pact in the medium term. In 2013, a clear breach of the preventive arm was predicted in the medium term. According to forecasts made in spring 2014, Finland would seem to be complying with the Stability and Growth Pact in the medium term. The Stability and Growth Pact targets applicable to Finland will probably change. The expenditure benchmark associated with the preventive arm of the Stability and Growth Pact is likely to be more stringent for Finland in the future than it is now, because potential growth is predicted to slow down. Parliament and the Government should now prepare for a situation where the expenditure benchmark requires public expenditure in the near future to barely increase at all in real terms; either that, or increases in expenditure will have to be matched by equivalent levels of income. There will be greater insistence on discipline in fiscal policy stance and public expenditure.

The long-term challenges to central government finances are still there in the Finnish economy: slow GDP growth and the growing pressure on expenditure due to an ageing population. Slower economic growth results in a lower increase in tax revenue, and public expenditure has to be set with reference to that. For this reason, the National Audit Office wishes to give attention in its report to the need for the kind of continued structural reforms that would speed up the rise in potential output and slow down the increase in expenditure.

The National Audit Office is of the view that the Government’s structural policy programme is an important tool in stabilising central government finances. However, the programme’s implementation has been very slow in parts and is still largely an abstract concept. It takes time to introduce the reforms and feel the impact of measures, so there should be no postponement of the programme’s implementation and its delivery. The National Audit Office is of the opinion that the structural policy programme should be implemented and put into effect without delay and in an efficient manner.

In addition to direct and indirect liabilities (such as central government debt), there are also indirect contingent liabilities outside the budget economy affecting the country’s economic position, for example, among stateowned companies. A more comprehensive report on the country’s total liabilities would give a better picture of the factors affecting the central government finances. However, more reports will not necessarily be enough to understand what position to adopt on uncertain liabilities. Some are never actually realised, i.e. they do not appear as financed from the state budget or as central government debt in the country’s balance sheet.