Fiscal policy evaluation report spring 2018

As part of its statutory fiscal policy monitoring task, NAOF has assessed whether the General Government Fiscal Plan has been prepared in accordance with the legislation, the fulfilment of the targets set by the Government for the general government finances, compliance with the central government spending limits and the EU Stability and Growth Pact in 2017, and the reliability of the Ministry of Finance’s forecasts that form the basis of the 2018 General Government Fiscal Plan.

Fiscal policy evaluation assessment

As part of its statutory fiscal policy monitoring task, NAOF has assessed whether the General Government Fiscal Plan has been prepared in accordance with the legislation, the fulfilment of the targets set by the Government for the general government finances, compliance with the central government spending limits and the EU Stability and Growth Pact in 2017, and the reliability of the Ministry of Finance’s forecasts that form the basis of the 2018 General Government Fiscal Plan. The assessment is based on the background material of the General Government Fiscal Plan and the Finland’s Stability Programme included in it, the Ministry of Finance’s independent forecasts and economic forecasts of economic research institutes. The calculation of the structural balance and expenditure benchmark defined in EU Stability and Growth Pact, as well as related interpretations are based on governing EU regulations and guidance. Compliance with spending limits was assessed on the basis of the Government’s spending limits decisions and budget documents, budget implementation data and the state’s financial statements. The conclusions and findings made by NAOF on the basis of its assessment are as follows:

  1. The General Government Fiscal Plan for 2019–2022 has been prepared, in key parts, in accordance with the governing decree.

  2. The multi-annual target introduced by the Government for the nominal financial position of general government and the financial position targets set in the first General Government Fiscal Plan of the parliamentary term for general government sub-sectors are not fully consistent.

  3. As a result of the improved economic situation, the Government is reaching the medium-term objective for general government structural balance (MTO) set for 2019. In addition, the general government debt-to-GDP ratio is bending in accordance with the goal set.

  4. The central government spending limits were complied with in 2017.

  5. Finland complied with the preventive and corrective arms of the EU Stability and Growth Pact in 2017.

  6. The Ministry of Finance’s forecast used as a basis for the General Government Fiscal Plan is realistic , although the health, social care and regional government reform involves a risk for larger-than-expected government expenditure during the planning period.

Summary of the findings

On the basis of NAOF’s assessment, the majority of the targets set for the financial position and debt in the first General Government Fiscal Plan of the government term will be achieved. The medium-term objective (MTO) regarding the general government structural balance was already achieved in 2016. In addition, the achievement of the nominal financial position targets is not far. General government debt in relation to GDP has turned to a decline. The long-term sustainability gap of the general government has decreased significantly, while the risk of contingent liabilities, such as state guarantees to the long-term sustainability of general government finances has increased substantially.

In the assessment no significant shortcomings in compliance with the Fiscal Policy Act or the regulations issued under it were detected. The fulfilment of the MTO defined in the Fiscal Compact has proceeded in accordance with the legislation. The multi-annual targets for the general government and its parts, required by the amended decree on the General Government Fiscal Plan, concerning the nominal financial position have been set. The content and structure of the General Government Fiscal Plan are largely in line with the requirements. However, the targets set for general government finances remain inconsistent. In addition, the data content of the General Government Fiscal Plan needs to be improved regarding certain details.

According to NAOF’s assessment, Finland complied with the preventive and corrective arms of the EU Stability and Growth Pact in 2017. According to a preliminary assessment, Finland will fulfil the requirements set out in the preventive arm regarding the fulfilment of the medium-term objective in 2018 and 2019.  According to a preliminary assessment, the criteria set out in the corrective arm will be complied with in 2018 and 2019.

The Ministry of Finance’s forecasts of GDP growth and the general government net lending for 2018–2020 are close to estimates of Finnish economic research institutes and the European Commission. According to currently available information, the forecasts can be regarded as realistic. However, the health, social care and regional government reform involves risks of general government expenditure being higher than expected during the planning period. The risk of an upward or downward revision of the forecast of economic growth is neutral, while the risk is expected to be slightly negative following this year. The Ministry of Finance’s macroeconomic forecasts have been proved reliable in comparison with forecasts produced by other institutions.

According to NAOF’s findings, the central government spending limits were complied with in 2017 and expenditure outside the spending limits remained stable. Adjustments made to the 2017 spending limits were carried out in accordance with the principles of the spending limits procedure. However, problems have been discovered in the functionality of the spending limits procedure as a mechanism for limiting expenditure. Special attention should be paid, in particular, to the transparent presentation of the reasons for structural adjustments.

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