Fiscal policy monitoring assessment on the management of general government finances, spring 2023

The weak business cycle, high inflation and increasing public debt make it difficult to determine an appropriate fiscal stance. According to spring 2023 forecasts, the development of Finland's general government finances is worrying. The General Government Fiscal Plan for 2024–2027 meets the requirements of the decree related to it and is based on a realistic economic forecast.

The economic decline that began in summer 2022 seems to have ended in spring 2023. However, there are plenty of risk factors in the economy that may weaken the business cycle. A weak business cycle would justify expansionary fiscal policy in 2023. On the other hand, to avoid the problems caused by inflation, fiscal policy should support a tight monetary policy that curbs inflation. The indebtedness of the general government also limits the use of additional fiscal stimulus. In view of the weakening economic outlook and the simultaneous high inflation, a neutral fiscal impulse, which does not contract or stimulate the economy, may therefore prove justified.

The Government approved the last General Government Fiscal Plan of the parliamentary term on 23 March 2023. The plan is based on the spring forecast of the Ministry of Finance, which according to the assessment of the fiscal policy monitoring function can be considered realistic within the meaning of the EU framework. In spring 2023, the readability of the plan has been improved, which makes it easier to utilize the plan in discussions based on it. However, the impacts of the F-35 fighter project on public deficit and debt should be described more transparently in the plan. In addition, the uncertainty of the projections of general government finances should be highlighted more clearly.

According to the spring 2023 forecasts, the development of Finland’s general government finances is worrying. There is a risk that Finland will not comply with the EU’s fiscal rules in the coming years. The general government deficit is projected to rise to and temporarily exceed the 3% limit defined in the EU rules. Finland’s debt-to-GDP ratio is also projected to continue to show an upward trend. The EU framework is being reformed, but the reference values related to deficit and debt are likely to remain unchanged.

The central government spending limits for 2023 were exceptionally exceeded by EUR 0.3 million when the first supplementary budget for 2023 was processed in Parliament. The government proposal for a supplementary budget for 2023 was of effectively the same amount as the ceiling for budget expenditure, leaving thus no margin of manoeuvre. The budget expenditure for 2023 exceeded the ceiling by EUR 273,800 after three different legislative proposals were amended during their processing in Parliament.