Fiscal policy monitoring assessment on the management of general government finances, spring 2020

The fiscal policy measures taken because of the corona crisis should be sufficiently extensive, well targeted, timely, and temporary. It is justified to deviate from the established practices of fiscal policy planning on account of the crisis, but the Government should strive to return to normal planning of general government finances as soon as possible. Low interest rates make it easier to cope with the growing general government debt. However, in the longer term, the sustainability of general government finances requires structural reforms.

Because of the corona crisis, the European Commission, supported by the Member States, activated the general escape clause in the EU fiscal rules to prevent the rules from limiting the Member States’ opportunities to respond to the crisis and its consequences by fiscal policy measures. Because the EU rules are linked with the national ones, the domestic fiscal policy steering instruments are partly dormant as well. For the time being, multi-annual planning of general government finances is not performed in the established manner, and Finland has implemented several derogations from its spending limits rule on account of the crisis. The National Audit Office considers the derogations to be justified because of the crisis, but the Government should strive to return to normal planning of general government finances as soon as possible.

In order for the economy to recover as quickly as possible, fiscal policy should be timely and correctly targeted. In addition, the measures taken to mitigate the impacts of the crisis should be extensive but temporary. During the acute phase of the crisis, fiscal policy should focus on safeguarding companies’ liquidity and preventing mass employment and bankruptcies. The time for conventional stimulus measures is only later. The fiscal policy in Finland has reacted relatively quickly to the pandemic and the restrictions taken in line with the above principles. It is difficult to compare the fiscal policy measures taken by different countries. At present, it seems that Finland’s current support package is slightly smaller than, but still in the same ballpark as those of the other Nordic countries, particularly Denmark and Sweden.

As the interest rate of general government debt is very low, the rapid growth of Finland’s debt as a result of the corona crisis will not significantly burden the general government finances in the current market situation. Even if the government debt-to-GDP ratio grew rapidly, it would therefore not automatically mean an unsustainable debt level. However, once the impacts of the crisis have become less strong, it would be important to achieve a situation where the debt ratio can be reduced during an economic upturn and where it is allowed to increase only for stimulus measures during a downturn. The ageing population highlights the need to continue with the social and health care reform and the employment policy measures during the ongoing parliamentary term, although it is appropriate to prioritize the management of the corona crisis in the near future.

It is a statutory task of the National Audit Office of Finland (NAOF), as part of the audit of the management of central government finances, to monitor compliance with the Fiscal Policy Act and the provisions issued under it. To perform its supervisory task, the National Audit Office has assessed the General Government Fiscal Plan for 2021–2024, the impacts of the exceptional circumstances on the planning of general government finances, and the measures taken by the Government on account of the coronavirus situation. In the assessment, the NAOF also examines the realism of the economic forecast on which the General Government Fiscal Plan is based.