Fiscal policy monitoring assessment on the management of general government finances, spring 2025

The Government does not present a plausible plan to balance public finances

Finland’s general government debt-to-GDP ratio is already more than 80% and continues to grow. The increase in debt is driven by both structural and cyclical factors. The ageing of the population increases particularly social security and health expenditure, and the development of general government revenue has not kept up with expenditure.

According to forecasts, the Government’s fiscal position target will not be achieved. The growth of the debt ratio will slow temporarily by the end of the parliamentary term, as the borrowing requirement will be reduced on a one-off basis by selling assets. Without permanent adjustment measures, the growth of debt will accelerate after the government term. It is necessary to plan and implement the strengthening of public finances in a long-term manner across parliamentary terms and to comprehensively assess both the expenditure and revenue base. It is particularly important to ensure the sustainability of public finances in the current security environment.

According to the National Audit Office’s fiscal policy monitoring assessment, the Government does not present a plausible plan to balance public finances. The General Government Fiscal Plan does not present measures to achieve the objectives of reducing the deficit and bending the growth curve of the debt ratio.

The decisions taken in the mid-term review weaken public finances and take them further away from the adjustment target of the Government Programme. There are good grounds for increasing defence expenditure, but it is important to draw up a plan as soon as possible for financing it and for re-prioritising expenditure. Additional measures targeted at revenue will reduce revenue in net terms. The transfer from the State Pension Fund and the sale of shares will reduce the general government’s borrowing requirement on a one-off basis. Strengthening public finances will require measures at the end of the parliamentary term.

Without the escape clause, Finland would not comply with the deficit and debt criteria

As a result of the reform of the EU’s fiscal rules, Finland is committed to the net expenditure path, and compliance with it is central to meeting the debt criterion. In March 2025, the European Commission issued a Communication proposing the activation of national escape clauses in the EU fiscal framework due to the deteriorated security situation and pressure to increase defence expenditure.

The Finnish Government has decided to request the activation of the escape clause, which would provide Finland with substantial temporary fiscal space. Without the escape clause, Finland would not comply with the deficit and debt criteria.

However, the flexibility provided by the escape clause does not eliminate the need to adjust other areas of fiscal policy. Flexibility should only be used for its actual purpose – to finance defence expenditure – and not as a general means of increasing other expenditure. The decisions taken in the Government discussion on spending limits are not in line with ensuring compliance with the EU rules. In order to ensure external security, public finances must develop sustainably.

The fiscal policy monitoring assessment also deals with the cyclical situation, the fiscal stance, the spending limits, and the realism of the Ministry of Finance’s economic forecasts. The business cycle continues to be weak, but there are signs of recovery. Fiscal policy remains expansionary, but the Government’s discretionary measures are becoming contractionary. The spending limits expenditure does not fall as intended, but the spending limit system serves as an instrument for monitoring and prioritising expenditure. The forecast of the Ministry of Finance is realistic, and its economic growth forecast is more optimistic than those of other forecasters.