Functioning of the central government spending limits system – Expenditure can be limited by the system, but other fiscal policy rules are also needed

The spending limits rule has limited the growth of central government expenditure. However, the expenditure objective of the spending limits system is not set consistently in relation to other fiscal policy objectives. Therefore, the spending limits system alone is not sufficient to ensure the balance of central government finances. Consistency between the expenditure objective of the spending limits system and other fiscal policy objectives should be ensured, and it should be reassessed during the parliamentary term.

The audit was targeted at the central government spending limits system, which is the most important national fiscal policy rule. The objective of the spending limits system is to limit the growth of central government expenditure. The spending limits rule also serves as a tool for achieving other fiscal policy objectives.

During the current spending limits system, the share of central government spending limits expenditure has remained at around 35 –40 per cent of the total general government expenditure. The spending limits system can limit the growth of central government expenditure, but it is not sufficiently comprehensive to limit the growth of general government expenditure.

The spending limits rule has proved to be a concrete and useful tool for prioritizing expenditure decisions. It helps to maintain the expenditure level set at the beginning of the parliamentary term so that only changes permitted by the spending limits rule are made.

The audit found some ambiguities in the interpretation of the principles of the spending limits rule.  These were related, for example, to the fact that supplementary budgets issued during an election year after the change of government responsibilities do not fall within the scope of the spending limits as well as to expenditure classified to fall outside the limits.

The expenditure objective should be consistent with the other objectives included in the Government Programme and with the EU’s fiscal policy objectives. If the expenditure benchmark has been set in such a manner that the consistency depends on the achievement of other objectives related to, for example, economic growth and employment rate, the expenditure objective should be reassessed during the government term if these other objectives are not achieved. Particular attention should be paid to ensuring that the expenditure objective is linked to central government revenue. Taking revenue into account would enable expenditure and income policy to function as a single entity, and it would also promote predictability in the short term.

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