When the exceptional situation returns to normal, the already familiar structural problems of the economy will once again be faced.
In economic policy it is time to decide how to return to normal from the exception periods. The need for the transition emphasizes that normal times in Finland appear to be a problem, the solution of which requires decisive action in many areas of economic policy.
Due to the coronavirus pandemic, government deficits have increased worldwide. The sharp economic downturn has cut government revenues and increased spending. The growing needs of public health and the efforts to alleviate the problems caused by the economic downturn have already paid off enormously. Government public debt relative to GDP is bouncing to new decades around the world.
In the world there is an unusually broad consensus on the broad economic policy line.
Even at a time when the epidemic is rampant and filling hospitals, movement and business are being restricted in many ways and the future looks uncertain, it is wise for states to support households and businesses to sustain demand.
The epidemic will subside in Finland when a sufficient number of people have been vaccinated. It may happen by the fall of this year or by the turn of the year at the latest. Then we find the challenges we face – demographic change, technological change and climate change – that require economic reform to manage. It should be supported already during the epidemic.
In order for states to support economic and social restructuring, they need to ensure that confidence in public finances is maintained. The public finances need to be buffered against the next unpleasant surprises, and there must also be room for investment, training and research in the process of restructuring. Therefore, a plan is needed to reduce deficits and halt indebtedness relative to GDP once the epidemic subsides. What is needed is a path along which epidemic-related subsidies can be reached.
A credible plan can help fend off fears of a debt clump. Part of a credible plan is a return to the rules governing public finances, such as expenditure frameworks in Finland, which are tuned according to the carrying capacity of the economy and to which decision-makers are committed. The framework is the cornerstone of government finances, which has maintained confidence in public finances.
Even with caution According to forecasts, the epidemic will subside in Finland by the end of the year and the economy will return to normal in 2022. The focus of economic policy must be shifted from acute crisis management to strengthening the conditions for economic growth and stabilizing public finances.
Finland’s special features are a rapidly aging population, a weak growth outlook and a chronic budget deficit. Therefore, the performance of the economy must be strengthened by all means, and the use of money must support economic renewal. Once the epidemic has subsided, public finances need to be adjusted within the framework set by economic performance. If economic performance increases, the framework for public finances will also expand.
Decision making the next stage is the mid-term review of the government term and the fiscal planning debate in a couple of months in April. At that time, the government has announced that it will refine its sustainability roadmap and propose concrete measures to support economic growth, strengthen public finances and halt public debt-to-GDP ratios in the 2020s.
At the same time, the setting of fiscal policy targets for the final election period should be clarified, ie in practice the financial position of the state, local government and social security funds should be targeted towards lower deficits and declining public debt relative to GDP in the medium term. This is already required by the laws and regulations governing Finland’s public finances.
Mikko Spolander and Sami Yläoutinen
Spolander is the Director General and Senior Budget Manager at the Ministry of Finance.
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