Case-study Macro-Fiscal forecasting in Finland

1. Case-studyMacro-Fiscal forecasting in Finland Sami Yläoutinen Building Fiscal Institutions to Meet Post Crisis Challenges Ljubljana, June 2011

2. Macro-fiscal Forecasting in Finland:Outline of Presentation Brief introduction to Fiscal Framework in Finland Macro-fiscal forecasting in Finland: What are the principles/ objectives? How it’s organized? Benefits - weaknesses 2

3. Brief introduction to Finnish Fiscal FrameworkBasic features The spending limits system has been in use in central government finances since 1991; its basis was reformed in 2003 Basic features: In the beginning of the electoral term, the Government decides on a central government spending limit for the entire electoral period. This limit is included in the Government Programme Expenditures affected by cyclical fluctuations, such as unemployment security expenditures, are not included in the spending limits. The procedure allows automatic stabilizers to function symmetrically Supplementary budgets are included About ¾ of the Budget appropriations are covered by the spending limits Expressed in real terms The volume of expenditure remains the same regardless of cost trends, because both the level of the spending limits and price-dependent items are adjusted according to any rise or fall in prices. The allocation of expenditures by administrative branches  is revised yearly with a decision on central government spending limits The overall spending limits set by the Government provide a framework for the ministries in preparing their proposals on the following year's Budget Targets for structural deficit & debt Consistency with: 1) sustainability considerations, 2) the expenditure ceiling?

4. Brief introduction to Finnish Fiscal FrameworkExperiences The Framework has served well During 2003-2007: upturn Even though central government revenue increased by more than was estimated in 2003, this increase did not trickle through to growth in expenditure. Expenditure were kept within the limits decided on in the Government Programme in 2003 in real terms. The rigid spending ceiling was one factor causing central government finances to show a surplus in 2007, even though in 2003 the predictions indicated a considerable deficit. During 2007-2011: downturn Did not prevent discretionary measures The most significant factor is the political commitment of Parliament and the Government to stay within the set spending limits.

5. Macro-fiscal forecasting in FinlandPrinciples/objectives Good internal coordination/consistency Everyone uses the same forecast figures & assumptions Transparency No-policy-change assumption Internal External: reporting Credibility Internal ex-post evaluation External ex-post evaluation (National Audit Office, Audit Committee) Independency from political influence!

6. An Issue of ConsistencyVertical consistency: Two approaches