Fiscal policy monitoring assessment on the management of general government finances, spring 2024

The business cycle is becoming brighter, but the general government deficit is influenced particularly by structural factors. The Government's objectives to improve the fiscal position and stabilise the government debt-to-GDP ratio are justified from the perspective of the sustainability of public finances. Additional adjustments are necessary, but the government debt ratio in Finland is forecast to grow in the long term despite the adjustment measures now decided. In the light of forecasts, it seems that the Government's objectives will not be achieved despite the additional measures decided.

The economy in Finland continued to deteriorate in winter 2024. However, it seems that the rock bottom of the long period of weakening has now been reached and an upturn is about to start. According to the forecast of the business cycle heatmap, the recovery of the economy in 2024–2025 will be slow and fragile. The economic forecast of the Ministry of Finance is mainly in line with those of other forecasters but differs from them in 2025 as regards the investment forecast, for example.

After the financial crisis, Finland’s general government expenditure has increased faster than revenue, which has resulted in a general government deficit of permanent nature. The underlying factors are mainly structural, i.e. non-cyclical, such as the ageing of the population.

In the light of forecasts, the current Government’s objectives of improving the general government fiscal position and stopping the growth of government debt will not be achieved despite the additional measures taken. However, the parliamentary term is still in its early stages. Despite the adjustment measures now decided, the government debt-to-GDP ratio in Finland is forecast to grow in the long term. In future, measures should be directed to a greater extent at the causes for expenditure pressures, such as the ageing of the population. This would make it possible to better control the growth of Finland’s government debt-to-GDP ratio in the long-term.

In the spring 2024 Government discussion on spending limits, the spending limits were tightened. At this stage of the parliamentary term, it seems that the Government’s target of EUR 1.5 billion savings on spending limits expenditure will be reached, but some additional expenditure of the investment programme has not yet been incorporated in the spending limits. The level of fiscal policy in forecast years 2024–2025 will be counter-cyclical, i.e. slightly stimulating in a negative business cycle. The fiscal impulse, i.e. the change in fiscal policy, will be counter-cyclically contractionary in 2025. The Government’s fiscal policy is therefore in line with the short-term business cycle.

The Government’s measures to strengthen employment have progressed well. The Government aims at 100,000 new employed people and thereby at strengthening public finances by EUR 2 billion by 2027. It is good that the employment measures have been linked with a fiscal target in euros. According to calculations by the fiscal policy monitoring function, the total employment impact of the measures decided so far is 65,200–82,100. In this case, the dynamic impact on public finances would be EUR 1.3–2.1 billion when the Government’s target was EUR 2 billion. The total impact of the measures would be EUR 2.0–2.9 billion. It seems that some of the impacts of the measures will only be seen in years following the parliamentary period.

The reform of the EU fiscal framework entered into force on 30 April 2024. Under the new rules, instead of the development of the general government structural balance and debt in relation to GDP, what is monitored is the Member-State-specific net expenditure path. The net expenditure path applied to Finland will not be defined until in autumn 2024, and therefore the prospects for its compliance are not yet assessed in this report. The 3% reference value applied to the general government deficit continues to be in force even after the reform of the rules. Finland risks breaching this reference value this year.