Economic Policy Council's 2019 report: Loose fiscal policy lacks a proper plan for sustainability

Finnish government’s fiscal policy is moderately expansive when compared to a path with no policy changes. Given the fact that there are also long-term reasons to consolidate public finances, the fiscal policy stance can be considered too lax.

The current forecast is that growth in the Finnish economy in 2020 is expected to be around 1 per cent, and growth in future years will be of the same magnitude. Growth is not slower than in the past for cyclical reasons; rather it seems that the slow growth is a structural phenomenon. Therefore, fiscal policy should not be expansive from the cyclical perspective. Despite this, the government has chosen to conduct somewhat expansive fiscal policy.

An employment target is useful but an imprecise instrument

Increasing employment is beneficial as it helps finance public expenditures needed to support society’s welfare objectives. However, the fiscal implications of increasing employment depend crucially on the type and quality of new jobs created. Since the government has made fiscal policy decisions conditional on reaching the employment target, it is imperative that employment outcomes are properly evaluated, and their fiscal consequences properly understood.

The sustainability problem is a medium-term issue

The debt-to-GDP ratio in Finland is expected to increase by 20 percentage points over the next 15 years. During the government’s term, it is forecast to breach the 60 per cent debt ceiling of the Stability and Growth Pact. Furthermore, substantial downside risks are likely to increase public debt even further in the medium term, for example due to the fiscal risks associated with government guarantees in Finland.

A proper plan for fiscal sustainability is needed

Because of these developments, a credible medium-term plan is needed to lower the deficit and ensure that public finances are on a sustainable path. The current goal of balancing the budget by the end of the government’s term is commendable, but it remains uncertain whether it can be achieved. A credible and detailed medium-term plan would also help create fiscal space that could be used in any future downturn to promote effective countercyclical policy.

The composition and financing of public spending needs to improve

The government’s future-oriented investment package is problematic to the extent that it contains many items that resemble traditional public consumption more than public investment. Financing the package by selling state assets is also questionable. The decision to sell state assets should be based on appropriate strategic considerations of state ownership, not on the need to fund public spending.

Further information:

Jouko Vilmunen, Chairman of the Economic Policy Council
jouko.vilmunen(@)utu.fi, tel. + 358 29 450 4119

Seppo Orjasniemi, Secretary of the Economic Policy Council
seppo.orjasniemi(@)vatt.fi, tel.: +358 295 519 412

Report: Economic Policy Council

The Economic Policy Council was founded in 2014 to impartially evaluate the aims and methods of economic policy. The chairman of the Economic Policy Council is Professor Jouko Vilmunen. The other members are Professor Martin Ellison, Professor Jukka Pirttilä, Professor Jari Vainiomäki, and Professor Johanna Niemi.