The report examines the implementation of fiscal policy during the 2011–2014 parliamentary term and the achievement of the fiscal policy objectives set out for the term. The main aim of the Government has been to stabilise general government finances.
This separate report to Parliament contains the fiscal policy auditing and monitoring report of the National Audit Office on the 2011– 2014 parliamentary term. The report examines the implementation of fiscal policy during the 2011–2014 parliamentary term and the achievement of the fiscal policy objectives set out for the term. The main aim of the Government has been to stabilise general government finances.
Slow economic growth has been the most serious challenge during the 2011–2014 parliamentary term and as a result, it has been necessary to take more substantial economic adjustment measures than envisaged. Despite the adjustments, few of the fiscal policy objectives set out in the Government Programme have been achieved. The Government has failed to stabilise general government finances. The adjustment measures have slowed down the growth of deficits but have failed to stop the growth of the central government debt-to-GDP ratio. The process of implementing the measures aimed at closing the sustainability gap in general government finances during the 2011–2014 parliamentary term has been extremely slow. Moreover, the measures have only been partially implemented.
As a result of the ageing of its population and structural changes in its economy, Finland is in a situation where general government expenditure is in danger of exceeding revenue in the long term. The National Audit Office is of the view that the Government’s structural policy programme is an important tool in stabilising general government finances. However, the measures taken to achieve the objectives have been inadequate. The measures aimed at increasing the output potential and productivity of the national economy will not have an immediate effect and for this reason decisions must be made at the start of the 2015–2019 parliamentary term. The current weakness of the Finnish economy, in which substantial additional adjustment may slow down economic growth, highlights the importance of the structural policy programme. If implemented, the structural policy programme will also help Finland to comply with the new EU rules.
There have been conflicting pressures on the tax system. Taxes have been raised as part of the adjustment measures but at the same time, the incentives provided by the tax system and its systematic nature should also be examined as a whole. There was no simplification of the Finnish tax system during the term of Prime Minister Jyrki Katainen’s Government. When decisions on taxation have been made, there has been no systematic consideration of the tax system as a whole. Decision-making has also been characterised by unpredictability. Decisions have been made and cancelled. From the perspective of a credible fiscal policy and private sector decision-making, predictability and systematic approach are important.
Even after the tax reform introduced in spring 2013, complexity and lack of neutrality remain the dominant features of the Finnish system of corporate and capital taxation. There are several different deductions that can be made from income and capital taxation. From the perspective of taxpayers, this makes the system less transparent. One option would be to have a system in which all deductions are based on the same format, which would make it easier to calculate them. This would reduce the administrative burden, might change the behaviour of taxpayers and result in a more equal tax burden among different taxpayer groups.
In the view of the National Audit Office, the general policies and main objectives concerning the tax policy should be set out in the Government Programme. The Government Programme should not be too detailed in this respect. In the political decision-making process, more consideration should be given to the preparatory work carried out by public servants. A more thorough preparatory process would help to keep the tax system under better control, the tax base more cohesive and the system simple. In particular, there should be a critical examination of tax subsidies. The tax system should be simplified.
The state of the Finnish local government finances has weakened to a worrying degree during the last 15 years. There are substantial differences between municipalities in terms of their financial position and the wide differences in population growth rates based on population forecasts will only accentuate the situation.
Too much importance may have been attached to the local government reform as an instrument for reducing the sustainability gap as it has also been seen as a way of stabilising local government finances in the long term. The reduction of local government tasks by about one billion euros should be completed during the next parliamentary term. Reducing the statutory tasks of municipalities requires political leadership and the setting of priorities.
In the view of the National Audit Office, the decision to finance the growing list of local government tasks exclusively by means of central government transfers is a step in the right direction as it eliminates the incentive contained in the previous system under which new local government tasks could be introduced even though there was no need to secure immediate financing for them under the Government spending limits.
There are good grounds for taking an extremely careful approach to binding normative steering in legislation on municipalities, local government services and social and health care services. This would make it possible to improve productivity and economic efficiency by means of new innovations and operating practices.