Fiscal policy monitoring report spring 2017

Fiscal policy evaluation assessment

As part of its statutory fiscal policy evaluation task, the National Audit Office has assessed the overall steering of general government finances, compliance with central government spending limits and the Stability and Growth Pact in 2016 and whether the Ministry of Finance forecasts used as a basis for the General Government Fiscal Plan published in spring 2017 are realistic. The conclusions and observations made by the National Audit Office on the basis of its evaluation are as follows:

1. The measures presented in the General Government Fiscal Plan for 2018–2021 are not sufficient for achieving the Medium-Term Objective (MTO) set for the structural balance of general government finances.

2. The multiannual target path presented by the Government towards achieving the MTO set for the structural balance of general government finances support the implementation of results-oriented fiscal policy.

3. The Government target path does not aim towards achieving the binding financial position targets set for the central government and social security funds in the first General Government Fiscal Plan for the parliamentary term.

4. The central government spending limits were complied with in 2016.

5. Finland complied with the preventive arm and the corrective arm of the Stability and Growth Pact in 2016.

6. The Ministry of Finance forecast used as a basis for the General Government Fiscal Plan is cautious, yet realistic.

Summary of the findings

The National Audit Office has assessed the overall steering of general government finances and compliance with the fiscal policy rules.

The measures concerning the balancing of general government finances decided by the Government in its mid-term review in spring 2017 focus more strongly on the improvement of the employment situation. Achieving the medium-term objective (MTO) by the year 2019 is based on reaching the Government’s 72% employment rate target and on the resulting economic growth.

The National Audit Office considers the employment target to be important and the already decided and partly implemented Government measures aiming at increasing the employment rate as positive developments in terms of stabilisation of public finances.

However, on the basis of the measures decided in the mid-term policy review in spring 2017, the objectives set by the Government cannot be achieved by the year 2019.

According to the forecasts prepared in spring 2017, the Government is falling behind schedule to achieve its general government structural balance target. Of the subsectors of general government, in particular, the central government is falling below its financial position target without initiating additional measures, because not even reaching the 72 per cent employment target would be enough to achieve the central government target level during the parliamentary term. Even if the employment rate exceeded the forecasts, the Government must still commit to implementing additional measures to ensure that the structural balance target can be achieved.

The forecasts of the Ministry of Finance concerning the GDP growth and development of the general government budgetary position in 2017–2019 are cautious, but have been revised towards a more positive trend since last autumn for legitimate reasons. The forecasts may need to be further revised upwards, particularly for the year 2017.

According to the findings of the National Audit Office, the central government spending limits have been complied with in 2016 and expenditure outside the spending limits has remained stable. The latitude within the spending limits was used almost in full in the drafting of the budget, which indicates that there were significant expenditure pressures in 2016.

Finland complied with the preventive arm of the Stability and Growth Pact in 2016. On the basis of the forecasts prepared in spring 2017, Finland will also meet the criteria of the preventive arm in 2017, even though the structural balance will significantly deteriorate, according to the forecasts. Compliance with the criteria is possible due to the flexibility granted by the European Commission. According to the Commission’s assessment, Finland has also complied with the criteria of the corrective arm in 2016, even though the general government debt-to-GDP ratio has exceeded the 60% reference value.

The introduction of flexibility within the rules of the Stability and Growth Pact has increased the need for interpretation and, thus, decreased the transparency of the rules. Although the flexibility created within the rules can be considered generally justified, it may also weaken the predictability and consistency of fiscal policy. In the case of Finland, adding flexibility within the criteria of the preventive arm impedes the levelling off of the debt ratio.