Fiscal Policy Audit – National Audit Office of Finland

1. Fiscal Policy Audit – National Audit Office of Finland Hannu Rajamäki Director for Performance Audit NAO of Finland

2. Audit of Fiscal Policy instruments • In connection with the audit of the report on the final central government accounts, the NAO audits the information basis of the government's financial management and fiscal policy decision-making as well as the functioning and effects of fiscal policy instruments (such as spending limits). • According to the NAO’s strategy 2007-2012 the functioning of the spending limits system is one of the annual themes in reporting to the Parliament in 2010. • The NAO appointed a Working Group on Fiscal Policy Audit in 2007. The Working Group is chaired by the Auditor-General and includes four senior auditors and the directors of Performance Audit and Financial Audit.

3. Spending Limits System for Central Government Finances • The spending limits system has been in use for Finnish central government finances since 1991. • The reformed spending limits system for central government finances was introduced for the electoral period 2003-2007. Spending limits express the expenditure rule (government commitment for the 4-year election period). • The spending limits are set in real terms, with a yearly adjustment to price changes. • There is strong political commitment of Finnish Parliament and Government to stay within the set spending limits.

4. Spending Limits System (continued) • About three-fourths of budget expenditure is specified in advance in the spending limits decisions. Within the spending limits annual appropriations can be reallocated, for example between administrative sectors, as long as total expenditure does not increase. • The main criticism, expressed for example by the Parliament Public Finance Committee, has been related to the lack of flexibility in case of unforeseen or new expenditure needs, shortfall in transport route construction expenditure, the use of tax subsidies to circumvent the spending limits and the lack of transparency of the information basis used for the spending limits decisions and the yearly price adjustments.

5. The need for an external evaluation of the system • So far, the spending limits system has not been evaluated by an external independent entity. The Ministry of Finance has the responsibility of monitoring the spending limits, while it also prepares the spending limits decisions and the budgetary decisions. • Thus the NAO has taken on, with the fiscal policy audit, a major role in providing objective information for the parliament and the public regarding the use of the fiscal policy instruments and procedures of the government. • The NAO acts as an independent external evaluator of the soundness and effectiveness of government fiscal policy.

6. NAO Audit Plan • The ongoing fiscal policy audit concerns spending limit decisions for the electoral period 2007-2011, the budget proposal and budgets together with preparatory materials, and final accounts. • The main objective of the audit is to evaluate the functioning of the spending limit system as a financial steering tool. The audit will investigate whether the procedure has been transparent and whether it has functioned in the intended way. • The theme report will be presented to Parliament in 2010 (before the next parliamentary elections). • A separate report will be completed in 2012 for the entire electoral period.

7. NAO Audit Plan (continued) • The theme reporting will be based on audit results, which will be obtained by auditing spending limits decision activities, the economic assumptions used in preparing the decisions and the technical preparation, and the implementation of the spending limit system. • The audit will also be connected to the audit of the report on the final central government accounts, on which the National Audit Office issues a separate report to Parliament annually. • Separate theme reporting covers findings on the effectiveness of the government productivity programme, the social and health care system and the climate change/environmental risk management.

8. Audit tools and results Annual analysis Separate audits (2) - Ongoing audits Analysis of reports on the final central government accounts - Separate reports - NAO Reports on the final central government accounts THEME REPORT - - Audit Plan (continued)

9. Audit Criteria • The audit will draw conclusions on the basis of the audit criteria. These are: 1) Transparency, risks 2) Functioning and effectiveness

10. Audit Questions • 1) Is the purpose of the spending limits system clear? • 2) Have spending limits decisions been prepared in such a way that they serve the desired purpose? • 3) Have actors complied with spending limits decisions? • 4) What have been the effects of the spending limits system?

11. Audit Questions (continued) • 1) Is the purpose of the spending limits system clear? - What are the objectives that have been set for the system? - Whom/what does the spending limits system serve? • 2) Have spending limits decisions been prepared in such a way that they serve the desired purpose? - What assumptions and evaluations have been used as the basis for decisions? - How are the decisions made on the basis of assumptions in practice?

12. Audit Questions (continued) • 3) Have actors complied with the spending limits decisions? - Calculatory implementation - Preparation of the budget in relation to the spending limits decision - Spending limits decision in relation to final accounts - Content and structural changes in the operating environment (budget legislation etc) - True and fair information in reporting

13. Audit Questions (continued) • 4) What have been the effects of the spending limits system? - Desired and undesired effects - Preparation of the budget and any problems caused by the spending limits decision (for example inflexibility) - Final accounts in relation to the spending limits decision - Economic development

14. Cooperation with other SAIs • The theme of fiscal policy audit was presented jointly by the Finnish and Swedish SAIs in the December 2007 European Union Contact Committee meeeting. • Swedish SAI (Riksrevision) has published several reports under the Fiscal Policy theme. • NAO of Finland has published a report on Tax subsidies (2007) and a Fiscal Policy review in its Annual Report to the Parliament in May 2008, as well as reports on Cash Management (August 2008) and Debt Management (September 2008).

15. Perspectives: Fiscal Policy Audit in the EU • The Stability and Growth Pact and in the implementation of the Lisbon Strategy for Growth and Jobs requires a better connection between the European level of target-setting and surveillance and the national budgetary, policy-making and accountability arrangements. • The functioning of the fiscal frameworks in each Member State is a key concern for all in the European Union.

16. SAIs’ role in providing information on Fiscal Policy measures • Parliaments and citizens are entitled to have a fair view on the quality of the governance of fiscal policy and the risks related to sustainability and stability. • The effectiveness of long-term fiscal adjustments and reforms requires public confidence towards the government and its institutions. • Supreme Audit Institutions can contribute to the effectiveness of fiscal policy frameworks by improving accountability and information concerning the results of fiscal policy.