The spending limits procedure has succeeded in curbing central government expenditure included in its sphere. According to the results of the audit, rulebased fiscal policy using the spending limits procedure should continue.
This separate report to Parliament presents the main findings and recommendations of an audit conducted by the National Audit Office concerning the functioning and effectiveness of the central government spending limits procedure as a fiscal policy instrument during the electoral term 2007–2010. The report is an external evaluation of fiscal policy during the entire electoral term according to OECD recommendations.
The spending limits procedure has succeeded in curbing central government expenditure included in its sphere. Spending limits were not broken during the electoral term – not even in 2009, when Finland’s GDP fell more than in any other year since Finland gained independence. The process of preparing spending limits and the division of labour are clear. Preparation is hampered by the tight timetable and the general planning cycle in central government, however. The coordination of the drafting of legislation and the spending limits procedure should be improved. The openness and transparency of the price and structural adjustments that are made in the spending limits as well as the positions that are taken in the spending limits process should be increased.
The bulk of budget appropriations and thus most of the appropriations covered By spending limits are mandated by legislation. As a result, reallocating funds usually requires political decisions even with regard to transfers within an administrative sector. Consequently real room for manoeuvre is quite small. Spending structures and their necessity should be genuinely reevaluated from time to time. The model adopted in years of rapid economic growth has led to a situation in which old spending structures are passed on from one government to another, since priorities are not set. The genuine reallocation of funds would also require the opening of administrative sectors’ Basic calculations.
Coherence and consistency between the setting of fiscal policy objectives and the setting of spending limits should be strengthened. Spending limits have not been derived consistently and openly from objectives regarding the sustainability of public finances. Objectives regarding sustainability have not been achieved.
The Research Institute of the Finnish Economy (ETLA) is conducting a study concerning the sustainability gap and related uncertainty factors. ETLA’s sustainability calculation, which is based on a stochastic population forecast, takes into consideration the uncertainty of population forecasts. In addition the calculation of health and care costs is based on the age structure and mortality. With this method health and care costs increase less than in calculations based solely on the age structure. Although the sustainability gap calculated by ETLA is lower than the figures projected by other organisations, it indicates a significant risk for the maintenance of the welfare state in its present scope. The forecast will be refined in later stages of the project, but on the basis of previous studies it appears that the tax rate in the 2030s could be five percentage points higher, with a probability of 30–40 per cent. If population trends and returns on investment led to a course of development in which the need to increase the tax rate exceeded five percentage points and a major financial crisis occurred, the welfare state would truly be threatened.
On the basis of the audit, the financial foundation of the welfare state in its current form and scope is in serious danger. With current modes of financing, local authorities will not be able to perform the statutory tasks that have been assigned to them without increasing local tax rates.
Central government spending limits cover about one-third of total public expenditure. This causes problems for the sustainability of public finances, since cost pressures resulting from the ageing of the population will particularly affect local services and social security funds. Consequently, spending limits can do only so much to ensure long-term sustainability. In the opinion of the National Audit Office, it is important to take into consideration adjustment needs required for sustainability in evaluating the fiscal policy regulation system and particularly the level of spending limits. In developing fiscal policy rules and in setting objectives during the next electoral term, greater weight should be given to the sustainability of public finances.
According to the results of the audit, rulebased fiscal policy using the spending limits procedure should continue. Spending limits should be expanded to include off-budget funds and central government’s share of local government expenditure. It is worth considering whether there are still grounds for the performance of permanent tasks through offbudget funds as prescribed in section 87 of the Constitution, and insofar as these do not exist, off-budget funds should be integrated into the budget economy.
The dimensioning of spending limits should be derived openly and clearly from objectives concerning the sustainability of public finances. The dimensioning of the first spending limits in the electoral term is vitally important for the functioning of fiscal policy objectives and the spending limits system. The setting of objectives concerning the sustainability of public finances and the dimensioning of spending limits should be based on realistic assumptions and expectations regarding economic development and should take into consideration risks involving economic trends and the Finnish economy.
Since spending limits are tied to the electoral term, there is a risk of gaps in fiscal policy. A procedure that would ensure the sustainability of public finances and the continuity of long-term economic planning should be found for spending limits covering public finances as a whole. There is a particular need for rules concerning spending decisions that are left until the following electoral term.