Fiscal policy expert group: central government adjustment measures can be phased

Central government finances will remain permanently and substantially in deficit and the debt-to-GDP ratio will continue to rise without new measures to reduce central government spending and increase revenue, says a fiscal policy expert group, which has delivered its assessment to the Government.

An adjustment strengthening central government finances by around EUR 3 billion will be sufficient to slow the rise in the central government debt ratio and reduce the central government deficit to around one per cent of GDP, assuming that economic growth averages around 1.5 per cent per year. At the same time, this – together with an adjustment according to the structural policy programme directed at local government finances – will turn general government indebtedness overall onto a downward path in relation to GDP, considers a group of economists led by Ministry of Finance Permanent Secretary Martti Hetemäki.

The group states that, taking into account adjustment measures implemented during one year and already decided for 2015, measures strengthening central government finances by around EUR 3 billion would mean an excessive tightening of fiscal policy in a situation in which the economy is only just recovering from the recession and underutilisation of resources is still high. This supports the phasing of the adjustment over several years. Phasing requires, however, that the Government specify the adjustment measures precisely and implement the structural programme purposefully and in a front-loaded way.

Adjustment measures should be selected so that adverse effects on long-term growth are minimised. The measures can be phased over the period 2015–2017 such that EUR 1 billion is implemented by the end of 2015, and EUR 1 billion in 2016 and 2017. In addition, the Government should decide the adjustment measures in the Government spending limits discussion in March 2014 and submit the necessary legislative proposals relating to them so that they can be decided on in the current parliamentary term.

In terms of achieving the objectives of the structural policy programme, it is critical that organisations negotiate a solution on pension reform to credibly implement a jointly agreed objective by autumn 2014 and that all legislative proposals relating to the reform are submitted to Parliament immediately after the 2015 parliamentary elections and the reform comes into force no later than the beginning of 2017. In terms of achieving the objectives of the programme, it is also critical that the social welfare and health care reform results in a functionally and administratively efficient service structure, supported by the local government structural reform, and that the necessary legislation is decided on in the current parliamentary term. In addition, local government finances should be restored to balance by reducing municipalities’ tasks and obligations according to an agreed level and through the municipalities’ own efforts, and the balance should be maintained with the aid of a new local government financial framework.

The assessment emphasises that adjustment measures to reduce spending and increase revenue must be permanent in nature. Measures to reduce structural employment will permanently reduce unemployment security, housing allowance and social assistance expenditure, for example, and they will permanently increase tax revenue. In calculating the EUR 3 billion adjustment requirement, measures to reduce structural unemployment contained in the structural policy programme have not been taken into account. In so far as the impacts of the measures can be reliably estimated and unemployment will fall, the impacts can be included as part of the EUR 3 billion adjustment.

Together with the adjustment directed at local government finances, the additional adjustment of EUR 3 billion directed at central government finances will be sufficient to correct the deviation that has arisen in the target set for the general government medium-term structural budgetary position. In 2018 the structural budgetary position would already be a surplus of 1 per cent of GDP. Bridging the sustainability gap in general government finances requires a clearly surplus budgetary position in Finland before the unfavourable effects of ageing on the public finances strengthen in the 2020s.

Reducing central government borrowing and bridging the sustainability gap are more demanding objectives that the obligations relating to the management of public finances set by EU agreements. The measures presented here will therefore also fulfil these objectives, state the experts in their assessment.

The Economic Council will discuss the assessment on 25 February

On the proposal of the Prime Minister Jyrki Katainen, the Economic Council requested in December 2013 an assessment of economic policy choices from a group of economists, which has now submitted its work. The group was led by Ministry of Finance Permanent Secretary, Martti Hetemäki Ph.D., and the other members of the group were Jukka Pekkarinen Ph.D. (Ministry of Finance), Pasi Holm Ph.D. (Pellervo Institute of Economic Research), Seija Ilmakunnas Ph.D. (Labour Institute for Economic Research), Juhana Vartiainen Ph.D. (Government Institute for Economic Research) and Vesa Vihriälä Ph.D. (Research Institute of the Finnish Economy), and as an external expert Lauri Kajanoja Ph.D. (Bank of Finland).

The Economic Council will discuss the results of the work in an extraordinary meeting on Tuesday, 25 February. The Government and the Ministry of Finance will utilise the working group’s report and the Economic Council’s discussion in the preparation of fiscal policy decisions for the Government spending limits discussion to be held on 24 and 25 March 2014.

Further information: Permanent Secretary Martti Hetemäki, Ministry of Finance, p. +358 295 530 292