FINNISH EXPERIENCES ON REDIRECTING PUBLIC EXPENDITURES
Ministry of Finance of FinlandPaper completed: December 20051. Introduction
Key objectives and challenges
In the past 15 years the development of general government expenditure has been strongly affected by
the unusual economic events of the economy. General government expenditure increased very rapidly in
the early 1990s, primarily as a result of the economic recession that swept the country. At the same time
total output actually slipped into negative territory, and consequently the expenditure-to-GDP ratio
increased by double digits in the space of five years. Measures to restore general government finances
and the onset of rapid economic growth turned things around in the mid-1990s. General government
expenditure as a proportion of GDP peaked at 65 per cent in 1993, since when the figure has fallen back
to 51 per cent in 2004. The fall in expenditures was a consequence of several decisions to cut down
benefits and measures implemented to regain the sustainability of public finances. Much of this reduction
has come in social security expenditure and general government interest expenses. The decrease in social
security expenditure during this period is greatly due to pension reforms and lowered unemployment
security costs following the recovery of employment after the recession.
Although the Finnish economy is in reasonably good balance and its short-term prospects are rather
bright, the longer term prospects are not without risks. The population in Finland is ageing faster than in
other EU countries, which is causing tensions in the labour market and in public finances. Ageing
presents a formidable challenge particularly for the sustainable funding of general government: on the
one hand there are growing pressures in ageing related expenditure. The pressure of increasing
expenditure is greatest in pensions and health and social care services. It is estimated that by 2030,
changes in the age structure will drive up the combined share of these expenditure items by 6 percentage
points as a proportion of GDP. Finland is prepared for these expenditure pressures for instance by
reforming the pension system and increasing prefunding of pensions. In addition, securing balanced
general government finances in the longer term will require proper allocation of public sector resources
and assigning task priorities. It is important that there is the flexibility to reallocate resources from one
task area to another according to changes in the population age structure and the regional structure and
according to the new priorities of service needs.
The budgetary procedures and the implementation of the government programme have been developed
significantly during the past years. Since 2003 the development of public expenditures has been
controlled by setting spending limits for the whole electoral term. Control of central government
expenditure is vital for a stable economic policy, which in turn is needed to ensure investment revival
and long-term economic growth. The Government is also aiming at securing balanced central
government finances under normal conditions of economic growth at the end of the electoral period, as
measured in terms of national accounting. Furthermore, the Government expects that even in conditions
of adverse economic development, the deficit in central government finances, as measured in national
accounting terms, shall not exceed 2¾ per cent of GDP.