Separate report to Parliament: Interim fiscal policy audit report for the 2011–2014 electoral term

This electoral term’s fiscal policy regulatory framework and fiscal policy targets viewed against the previous electoral term were used as the starting points for this report.

This separate report to Parliament contains the interim report for the 2011–2014 electoral term concerning fiscal policy auditingand monitoring conducted by the National Audit Office. This electoral term’s fiscal policy regulatory framework and fiscal policy targets viewed against the previous electoral term were used as the starting points for this report.

The Government Programme’s spending rules and, consequently, the spending limits for the electoral term, are key elements of the fiscal policy regulatory framework. During previous electoral terms the limits were raised in order to implement reforms included in the Government Programme. During the current electoral term, however, the level of spending limits has been lowered from the preceding term’s last decision on spending limits and again in conjunction with the spring 2012 spending limits decision. Despite this, in the light of autumn 2012 forecasts it strongly appears that the deficit and debt objectives included in the Government Programme will not be reached during the 2011–2014 electoral term. It can, however, be stated that the connection between the spending rules and the balancing and debt objectives included in the Government Programme is clearer than before during the current electoral term. In addition, preparedness to lower the spending limits level increases the Government’s fiscal policy credibility.

Increases in reallocations and improved harmonisation of the Government Programme’s strategic objectives and the spending limits have been achieved in the context of spending limits. There is still, however, clear room for improvement in this respect for the Government’s strategy decision to be as uniform and economically realistic as possible. Reforms based on reallocations will continue to be necessary in efforts to address the sustainability gap in public finances and balance central government finances. Therefore it is important to have clear rules of play concerning reallocations. Expenditure reviews are necessary for reallocations and expenditure level balancing, and these reviews call for a thorough examination of the bases of expenditure and the expenditure structure.

The bulk of public service expenditure is covered by municipalities. This expenditure is only regulated by central government spending limits via the central government transfers to local government included in the spending limits system. The problem that still remains from the perspective of addressing the general government sustainability challenge is the narrow coverage of the central government spending limits.

In the light of the current practice, the Finnish local government sector has a poor capacity to contribute towards the long-term sustainability of general government finances on the whole. The local government sector has underlined the role of central government measures as a key source of uncertainty for local government finances. The National Audit Office finds that special attention must be paid to the assessment of the local government finances impact of new duties assigned to municipalities in Government proposals. In this context assessments must be made of the financial impacts of new duties from the perspectives of municipalities with differing revenue and expenditure structures.

Efforts to curb growth in local government expenditure have yet to bear fruit, but many important reforms are still ongoing. Prepared in conjunction with the spending limits decision, the Basic Public Services Programme contains an assessment of the local government financial development outlook and changes in the operating environment. The Programme also contains measures to achieve a balance in local government revenue and expenditure. Predictability in the local government sector could be improved through the development of the Programme under municipal guidance.

There is a sustainability gap in public finances, and closing this gap should be a priority in fiscal policy target-setting. The assessments made in 2012 of the Finnish sustainability gap differ considerably from each other, but it is undisputable that there is a sustainability gap that calls for policy measures. The sustainability gap assessments presented in autumn 2012 are particularly uncertain as regards the starting point of the calculations. Therefore, in addition to individual point estimates, attention should be paid to the assumptions underlying the calculations as well as the structural factors behind the sustainability gap.

It is difficult to bridge the sustainability gap by merely using direct fiscal policy adjustment measures. Measures necessary to close the gap and consolidate public finances include structural reforms that will extend working careers, strengthen the growth potential of the economy, improve costefficiency in public service production and increase competition. The broad-based and rapid implementation of the programme for promoting healthy competition launched By the Government will be needed in all of the programme areas. New measures promoting competition, particularly in the service sector, will also be required.