Credibility of the spending limits system is at stake

In 2020, the Government fully dispensed with the spending limits systembecause of the Covid-19 crisis. This year, the Government has returned to the spending limits but has included a large number of exceptions in them. In its mid-term review of this spring, the Government raised the spending limits for the years 2022 and 2023.

The extensive exceptions and changes made by the Government to the spending limits are likely to extend beyond the Covid-19 pandemic. According to the National Audit Office, this undermines the credibility of the spending limits system and may erode its role in limiting the growth of central government expenditure.

“The decisions taken in the mid-term review may lead to further deviations from the spending limits and a failure to reach to the expenditure level agreed in the Government Programme. This poses a risk to the long-term and predictable decision-making culture on which Finland's reputation as a reliable actor is based,” says Senior Auditor Sini Salmi.

The NAOF conducted an audit of the functioning of the spending limits between 2003 and 2020, when the system has been in use in its current form. In addition to the audit, the NAOF published its annual spring fiscal policy monitoring assessment. The NAOF considers the central government spending limits system to be a necessary fiscal policy tool. As a rule, the system has worked well, and it would be important to maintain its credibility even in the future . The spending limits system is a useful tool for prioritizing expenditure decisions and planning the allocation of expenditure during the parliamentary term.

“Real expenditure in the state budget has increased, but relative to GDP, expenditure has remained rather stable. Thus, the spending limits system seems to curb the growth of expenditure, but its weakness is that it does not take into account the relationship between expenditure and revenue. The imbalance between revenue and expenditure has resulted in budget deficits even during a period of growth, and the government debt-to-GDP ratio has grown considerably during the 2010s,” says Salmi.

The stabilization of the government debt ratio must be ensured

After the exceptional year 2020, in May 2021, the Government returned the statutory objectives related to the development of public finances over the next few years to the General Government Fiscal Plan. The objectives set are broad but in compliance with legislation, as exceptional circumstances specified in EU legislation continue to prevail in Finland.

“Because the statutory objectives are broad, it is even more important than before to achieve the objective the Government's sustainability roadmap sets for bending the growth curve of the government debt ratio. It is useful that different scenarios have been added to the roadmap concerning the debt ratio. This illustrates the uncertainty of the debt projection and the impact of different policy options,” says Principal Fiscal Policy Auditor Mika Sainio.

The NAOF's fiscal policy monitoring team underlines that fiscal policy should take into account the business cycle. Smoothing cyclical fluctuations makes it possible to collect economic buffers in good times. The cyclical indicator produced by the NAOF's fiscal policy monitoring indicates strong economic recovery in spring 2021. You can find the monthly updated cyclical indicator and the underlying business cycle heatmap on the VTV.fi website.

Read the publications:

Functioning of the central government spending limits system

An English translation of the fiscal policy monitoring assessment will be published soon.

More information on the audit of the spending limits system

Sini Salmi, Senior Auditor
Tel. +358 (0)50 574 0191
firstname.lastname@vtv.fi 

More information on the fiscal policy monitoring assessment 

Mika Sainio, Principal Fiscal Policy Auditor
Tel. +358 (0)50 598 6768
etunimi.sukunimi@vtv.fi