Fiscal policy monitoring assessment on the management of general government finances, spring 2021

The objectives the Government set for general government finances in the General Government Fiscal Plan of spring 2021 meet the requirements laid down in legislation. However, the decisions included in the plan concerning the central government spending limits undermine the credibility of the spending limits system. At present, the most important national fiscal policy objective is the Government's objective to bend the growth curve of government debt in relation to GDP. When the employment measures decided so far during the government term are assessed in relation to the debt objective presented in the sustainability roadmap, they account for only a small part of the targeted overall improvement.

The ratio of government debt to GDP has risen considerably in Finland during the Covid-19 pandemic. However, when compared with the other EU countries, the increase has been moderate. Finland’s economic outlook collapsed in spring 2020 as a result of the pandemic. Based on current data, the economic outlook appears to have turned positive in the second quarter of 2021. If this development continues to be strong throughout the year, Finland should move towards a more contractionary fiscal policy. This makes it possible for fiscal policy to function as well as possible as a counter-cyclical tool and support the collection of reserves in good economic times.

In line with the other actors producing economic forecasts, the Ministry of Finance expects the economy to recover at the end of 2021. According to the NAOF’s assessment, the economic forecast of the Ministry of Finance is realistic as a whole.

The Government dispensed with the spending limits rule for the year 2020, and the return to the spending limits in 2021 involved numerous exceptions. In its 2021 discussion on spending limits, the Government raised the spending limits for 2022 and 2023 by way of derogation from the limits agreed at the beginning of the parliamentary term. The spending limits system has been found to be mainly an effective tool in limiting the growth of expenditure. However, exceeding the spending limits may undermine this role of the system, as it may lead to easier deviation from the spending limits in the future.

The general escape clause activated in spring 2020 is still in force in the EU fiscal framework. It allows Member States to deviate from the objectives set for general government finances. The escape clause also provides flexibility to the national objectives that are based on fiscal policy legislation. The objectives set for general government finances in the General Government Fiscal Plan of spring 2021 are broad but meet the requirements laid down in legislation.

At present, fiscal policy is steered more by the Government’s objective of bending the growth curve of government debt relative to GDP than by the medium-term fiscal position objective set for general government finances. It is extremely important to succeed in stopping the growth of the debt ratio. To stop the growth of the debt ratio, it is necessary to improve public finances. The estimate of the improvement requirement presented in the sustainability roadmap of spring 2021 is significantly lower than the one presented in autumn 2020.

The Government’s objective is to improve the employment rate to 75 per cent by the middle of the decade and, through employment measures, to increase the number of people employed by 80,000 by the end of the decade as part of the objective of stabilizing the debt ratio.  The Ministry of Finance estimates that the employment measures decided so far during the government term will improve public finances by approximately EUR 450 million by the end of the decade. When the employment measures decided so far are assessed in relation to the debt path presented in the sustainability roadmap, they account for approximately EUR –2 to +403 million of the targeted overall improvement (EUR 2–2.5 billion) to be achieved by different measures in order to stabilize the debt ratio.

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