Fiscal Policy Monitoring and Audit Report on the 2019–2022 Parliamentary Term

Finland's fiscal policy responded appropriately to the Covid-19 pandemic. However, after the pandemic, it remained too loose. During the 2019–2022 parliamentary term, the Government deviated several times from the central government spending limits. Some of the deviations were justified because of the crises during the parliamentary term, but some of them violated the principles of the spending limits system. The impacts of the employment measures taken fall clearly short of the target set for the number of new employed people. However, the Government succeeded in implementing important reforms during the parliamentary term.

The fiscal policy monitoring and audit report includes an assessment of the state of  fiscal rules and objectives, compliance with the central government’s spending limits, and the fiscal stance during the 2019–2022 parliamentary term. The report also examines the sustainability of public finances, the realism of economic forecasts, and the progress of employment measures.

The Covid-19 pandemic, Russia’s war of aggression in Ukraine, and the energy crisis resulting from the war have marked the development of public finances and the national economy during the 2019–2022 parliamentary term. The ratio of government debt to gross domestic product (GDP) rose substantially in Finland as a result of the Covid-19 pandemic. However, when compared with the other EU countries, the increase was moderate. Assessments of the sustainability of public finances did not change significantly during the parliamentary term, but the growth of the government debt-to-GDP ratio means reduced fiscal space.

Rapid cyclical fluctuations have made it more difficult to adjust the fiscal stance to the business cycle. The fiscal policy monitoring function assesses that the Government’s fiscal policy supported the economy and society in a timely manner and on a sufficiently large scale at the outbreak of the Covid-19 pandemic in 2020. However, the fiscal stance remained too loose after the Covid-19 pandemic.

The general escape clause, which allows Member States to deviate from the fiscal objectives, was activated in the EU fiscal framework in spring 2020. Due to the escape clause activated at the EU level, the statutory national fiscal planning has not been implemented as normal, either. No multi-annual fiscal objectives were set in spring 2020 due to the Covid-19 pandemic. After that, objectives have been set according to the projected fiscal development.

During the parliamentary term, the Government has deviated several times from the spending limits agreed in the Government Programme. The deviations are largely explained by the crises that took place during the parliamentary term. Dispensing with the spending limits was justified in 2020, as the situation was very exceptional due to the Covid-19 pandemic. However, the Government has also made such deviations from the spending limits that clearly violate the principles of the spending limits system. In the future, it is important that the Government commits to the spending limits system as a tool for planning central government finances and develops it while also adhering to its proven strengths.

During the parliamentary term, the Government succeeded in carrying out reforms that may strengthen the sustainability of public finances. However, during the parliamentary term, the impacts of the Government’s discretionary employment measures clearly fail to meet the targets included in the Government’s sustainability roadmap of spring 2021. On the basis of the experience gained during the parliamentary term, it would be useful to link the examination of the general government’s debt sustainability more closely to the statutory General Government Fiscal Plan. In addition to making structural reforms, the Government should also take measures affecting revenue and expenditure directly in order to ensure debt sustainability. In strengthening public finances, it is important to choose means that are the most favourable in view of economic growth and wellbeing. When the measures to be taken are selected, it is therefore necessary to have as comprehensive a knowledge base as possible available. In its decision-making, the Government should therefore utilize the most comprehensive surveys available on public expenditure and revenue.


URN identification

URN:NBN: vtv-R252022vp