Central government finances, taxation and general government finances

The EU's fiscal rules were recently reformed due to significant shortcomings in the previous fiscal framework. Now it seems very uncertain whether the new framework provides decisive help in tackling the challenges.

The seminar organised by the National Audit Office's fiscal policy monitoring function on 13 February 2025 discussed how the EU fiscal policy rules, reformed in 2024, function. In this blog post, I will go through the logic behind the rules.

The determination of the amount of deferrable appropriations is steered mainly by the spending limits in annual budgeting as part of the multi-annual spending limits procedure. The transparency of budgeting is undermined by the fact that, as a rule, appropriations carried over from previous years are not presented in the budget by item. The Ministry of Finance should ensure the appropriateness and transparency of budgeting.

The general government debt in Finland has more than doubled since the financial crisis. The Government's fiscal policy aims to strengthen general government finances and to curb the growth of public debt. According to forecasts, it seems unlikely that the Government's fiscal position target will be achieved, but the growth of the debt ratio will slow by the end of the parliamentary term. It is necessary to continue to strengthen public finances beyond parliamentary terms. The EU's reformed fiscal rules, the kernel of which is the debt sustainability analysis, were applied for the first time in the autumn of 2024. In the case of Finland, where debt is growing rapidly, the fiscal framework requires a rapid reduction of the debt ratio.

When assessing the development of general government debt, it is worth taking into account both the actual government debt and the development of net debt. This means taking into account part of the assets of both the central government and other general government. The examination of net debt has become increasingly important in recent years.

The National Audit Office has audited the final central government accounts and the Government’s annual report for 2023. The aim of the audit was to examine whether the final central government accounts have been prepared in compliance with the regulations and whether the budget and budget provisions have been followed. In addition, the National Audit Office also examined whether the Government reports on the state of central and general government finances and on the operational performance in its annual report as required by law.

The business cycle is becoming brighter, but the general government deficit is influenced particularly by structural factors. The Government's objectives to improve the fiscal position and stabilise the government debt-to-GDP ratio are justified from the perspective of the sustainability of public finances. Additional adjustments are necessary, but the government debt ratio in Finland is forecast to grow in the long term despite the adjustment measures now decided. In the light of forecasts, it seems that the Government's objectives will not be achieved despite the additional measures decided.

Joint emergency services providing both primary and specialized 24-hour service suffer from congestion and the costs of specialized medical care increase as reception services for urgent cases are not effective and enough places for follow-up treatment are not available. Insufficiency of places for follow-up treatment also hampers the operation of hospitals and patients’ access to treatment.

The debt sustainability analysis will play a key role in the reformed debt rules. The preliminary calculations made by the fiscal policy monitoring function outline the need to adjust public finances in the coming years. Due to the significant impact of the framework, it would be desirable to have a broader social debate on the subject.

The financial key figures of municipalities involved in the assessment procedure have improved after the procedure, and the municipalities have mainly been satisfied with the procedure. However, communication about the decisions related to the assessment procedure should more transparent, and basic public services should be taken into consideration more systematically during the procedure.

The EU's debt rules will be reformed this year. The new rules will affect, for example, the speed and time at which the Member States must reduce their debt ratio. The need for fiscal adjustment, i.e. tax increases and expenditure cuts, is assessed specifically for each Member State by means of the debt sustainability analysis.