Helsingin Sanomat on Wednesday reported that the rules would prevent policymakers from allocating significant sums to new projects based solely on economic growth, employment, or increased tax revenues—without cutting public spending at the same time.
“If there is a surplus due to the good economic situation, it should primarily be used for debt repayments,” Niemelä summed up for Helsingin Sanomat.
The rules would mean a transition to stricter management of public finances, the so-called of the control framework, which dates back to 2003 and allows governments to set a spending ceiling for the entire election period.
The working group stated in its final report that the credibility of the mechanism has been put to the test in the current election period, when the government released its economic policy goals partly due to exceptional circumstances.
“The credibility of sustainable fiscal policy has been weakened by, among other things, exceeding the expenditure ceilings, abandoning the government program’s goal of balancing the public finances, little consideration of the EU rules governing fiscal policy, and difficulties related to financing. clear communication of fiscal policy objectives,” its summary reads.
“The erosion of rules must be halted to prevent a trend leading to uncontrolled economic policies.”
According to the working group’s view, Finnish politicians should commit to following the rules across party lines, because there is no guarantee that the next government will dare to take on a debt spiral. The economy will continue even without increases in public spending, as the government raises eight billion euros of additional debt per year based on its policy decisions and latest forecasts.
According to the working group, breaking the cycle is key for the country to be able to finance its response to future crises and cope with the consequences of global warming and population aging.
Four key propositions
The working group proposes that long-term debt sustainability, measured by the long-term development of the debt ratio, be taken as the starting point for economic policy decision-making in the next election period. In its action plan, every government must set a clear goal for its budget position – the difference between public revenues and expenditures – and the measures necessary to achieve it, including spending cuts of billions of euros.
The goal would be binding regardless of economic cycles.
Niemelä admitted to Helsingin Sanomat that it is difficult to ensure that each party is committed to curbing the debt burden and that governments can resist the temptation to pass the problem on to their successors.
“If the joint commitment is not enough to reduce the debt, taking care of it must be recorded in accordance with the law. But that’s not what we’re suggesting now. However, we must not leave our children and grandchildren to take care of an over-indebted country,” he stressed.
He also confirmed that governments must either refrain from implementing reforms that significantly increase public spending, or make structural changes that reduce costs to society.
“It’s necessary because we’re constantly living beyond our means,” he said.
The working group proposes that the current control framework be maintained with changes that increase its rigidity. It believes that investment in research, development and green transition should be kept within limits so that governments do not redefine certain cost items as investments to achieve their political goals.
Temporary future investments and flagship projects should also be prohibited due to the problems of evaluating their effects, even if they are financed by asset sales.
The working group would give governments the opportunity to use the so-called escape clause as an emergency brake in the event of a major crisis, such as the coronavirus pandemic or Russia’s war of aggression in Ukraine. However, the criteria for triggering the clause and the amount of funding released by the clause should be a clearly defined government program.
Niemelä told Helsingin Sanomat that the clause should include a self-financing component in order to stop the borrowing seen in this election period.
“If there were, say, 500 million euros in emergency funding, the state would have to finance it partially or completely in other ways than with state debt. Such ways could be scrapping government program projects, selling assets or raising taxes, he said. “The government should think about whether managing the crisis was more important than implementing the government program.”
The working group would also set new conditions for tax policy decisions to prevent governments from circumventing spending limits through taxation.
The tax policy decisions recorded in the government program must, in turn, be based on careful impact assessments made by the Ministry of Finance. According to Helsingin Sanomat, the rules would basically prohibit governing parties from making tax cuts or increases for purely ideological reasons.
In addition, the state should refrain from assigning new tasks to newly established welfare service municipalities, partly due to the increase in costs and personnel needs caused by the obligations set by the current government.
The state must compensate the issuing of new obligations either financially or by reducing other obligations accordingly.
Although the provinces’ funding should be entirely within the spending framework, there should be room for maneuver in the framework in case of unexpected needs. Flexibility could be implemented, for example, with a reserve that cannot be used for other expenses, the working group estimates.
Aleksi Teivainen – HT
Source: The Nordic Page