The government’s fiscal policy is one of gradual tightening and government spending cuts of almost four billion euros over the government term. Tightening fiscal policy will dampen economic growth, but is essential since government spending and revenue are not in long-term balance. Even after the spending cuts, the forecast is for a substantial deficit in public finances at the end of the government term, and the medium-term fiscal policy objectives are unlikely to be met.
There is very little margin for manoeuvre in fiscal policy. In the current scenario of weak economic growth, tighter fiscal policy would be harmful, but postponing adjustment would not deliver significant benefits either. The Economic Policy Council therefore considers the scale and timetable of the government’s adjustment measures to be justified.
On the other hand, the Economic Policy Council criticises the objectives set for fiscal policy. The ultimate purpose of fiscal policy objectives and rules is to secure the sustainability of public finances in the long term. In the short and medium term, therefore, objectives should be set so as to be compatible with the long-term sustainability objective. Furthermore, the objectives for central government, the municipal sector and social security funds should also be compatible with the objectives for the public sector as a whole. The sector-specific objectives, therefore, should be cyclically adjusted and the total amount should be the same as the medium-term objective for the public sector as a whole.
The Economic Policy Council is critical of the government’s policy line that the tax rate will not increase during the parliamentary term and the resultant decision to achieve fiscal consolidation by cutting spending alone. Taxes are high in Finland by international comparison, but the tax rate is a poor indicator of the size of public finances or of distortions caused by taxation. Furthermore, cutting public expenditure and in particular reducing public investments has a greater negative effect on economic growth than tax increases have. On average, the effect of the level of taxation on employment and taxable income is rather minor, and on the other hand certain public services support employment. Nonetheless, the Economic Policy Council considers it positive that tax cuts are being targeted at low wage earners by increasing the earned income tax credit.
The government aims to improve the competitiveness of Finnish companies by cutting employer contributions and reducing holiday pay and sick day compensation. It is hoped that this will correct the competitiveness problem that has emerged because the wage level has not adapted to the reduction in labour productivity. The Economic Policy Council considers this a good objective, but finds the government’s calculations of the employment impact of the competiveness package to be too optimistic. The Economic Policy Council considers especially problematic the assumptions in the calculations that the wage level does not react to changes in working conditions and the assumptions concerning the magnitude of the employment effects of wage costs. The financing of the competitiveness package, using savings in the public sector, is also on an insecure foundation.
The Economic Policy Council was established in 2014 to provide independent evaluation of the government’s economic policy objectives and the appropriateness of the measures selected to achieve them. The Economic Policy Council comprises five members appointed based on the recommendations of university economics units and the Academy of Finland and a secretariat hosted by the VATT Institute for Economic Research.
For further information please contact:
Roope Uusitalo
Chairman of the Economic Policy Council
e-mail: roope.uusitalo@jyu.fi; tel: +358400842340
Tuomas Matikka
Secretary General of the Economic Policy Council
e-mail:tuomas.matikka@vatt.fi; tel: +358295519461