Covid-19 changed the management of central government finances
In 2020, the Covid-19 pandemic with its consequences forced everyone to act in a new way on many issues. State spending also changed dramatically from what was planned. Central government expenditure increased by one fifth from the previous year. Compliance with the spending limits and the EU fiscal rules steering central government finances was dispensed with. As expenditure increased and revenue declined, the amount of debt grew rapidly. A significant part of the additional loan was taken by exceptional means. The pandemic also caused other actors a large amount of expenditure, which was mainly borne by the state through indebtedness. The state also plays a major role in stimulus measures.
The Covid-19 pandemic had an unexpected and strong impact on central government finances in 2020. The pandemic is still ongoing and continues to impact the economy and society. These impacts will be assessed and the appropriateness of the use of state funds will mainly be audited later. However, the National Audit Office launched audits of exceptional business subsidies and security of supply activities shortly after the start of the exceptional circumstances in spring 2020. The Covid-19 crisis also had a significant impact on the content of the audits of central government debt management and spending limits.
Compliance with the spending limits system was temporarily dispensed with
The spending limits system is a multi-annual steering instrument for limiting the growth of central government expenditure dependent on Government decisions. The contents of the spending limits are always decided by the Government, and approximately 80 per cent of central government expenditure normally falls within the framework. The purpose of the spending limits is not to limit all expenditure: particularly expenditure related to unemployment, housing allowance, and social assistance deliberately falls outside the spending limits, as it automatically offsets cyclical fluctuations.
The Covid-19 pandemic required the Government to approve a large number of additional expenditures, the total of which was very difficult to foresee. It would probably have been impossible to prioritize the new and increased expenditures over spending limits expenditures rapidly through negotiations. Compliance with the spending limits was therefore quickly dispensed with when the economic significance of the crisis became evident in spring 2020.
Although the spending limits system has proved to be a useful tool in limiting the growth of central government expenditure, it had weaknesses already before the Covid-19 crisis. Supplementary budgets issued during an election year, after the change of governmental responsibilities, do not fall within the scope of the spending limits of either parliamentary term. These supplementary budgets should be included in the spending limits rule. Moreover, the expenditure objective is not linked to central government revenue. Taking revenue into account would enable expenditure and income policy to function as a single entity, and it would also promote predictability in the short term.
The return to the spending limits system has not yet been successful.
The effectiveness of the spending limits has often been weakened by the fact that the achievement of the objectives related to balanced general government finances has been tied to the achievement of other objectives, such as objectives related to economic growth or employment. However, the Government has direct decision-making power only over the level of central government expenditure, which means that the targeted balance may not be achieved if, for example, tax revenue does not increase as expected. If the expenditure objective has been set in such a manner that the achievement of the objectives related to balanced finances depends on the achievement of other objectives, the expenditure objective should be reassessed during the government term if the other objectives are not achieved.
The 2021 budget did not succeed in returning to the spending limits system, and a number of exceptions have still been made to the spending limits. It has been justified to keep the costs directly related to the management of the pandemic outside the spending limits. In addition, the original budget for 2021 already included an additional provision of EUR 500 million, which was further raised to EUR 1.85 billion in the Government discussions on spending limits and supplementary budgets. The audit of the central government spending limits system (Audit Report 8/2021) found this item, which the Government describes as a one-off expense mandatory in terms of fiscal policy, inadequately justified. However, the spending limits system has proved to have an important role in limiting the growth of central government expenditure and achieving fiscal policy objectives. The system has also provided one way for Finland to strive to achieve the medium-term deficit objectives set by the EU directive on budgetary frameworks for general government as a whole. It would be good to return to complying with the spending limits as soon as possible.
The amount of debt increased, and the Government resorted to exceptional means of borrowing
In 2020, the state’s need for borrowing grew rapidly, and there was no accurate picture yet of the magnitude of this change at the outbreak of the Covid-19 crisis in the spring of 2020. At that time, the central government prepared for a reduction in tax revenue and an increase in expenditure by building up its cash reserves considerably by borrowing. Liquid cash, which had amounted to EUR 4.9 billion at the beginning of the year, reached a maximum of EUR 17.6 billion in May. The need for borrowing increased considerably as well. While the net borrowing planned in the 2020 budget was EUR 2 billion, the final need amounted to EUR 19.1 billion. Due to problems in government bond markets between March and May 2020, the state took long-term loans largely through exceptional procedures.
Old reference loans were increased by private placement. In the private placement procedure, the state negotiates bilaterally with the main market guarantor banks in order to sell loan tranches to one or more investors. In 2020, EUR 7.35 billion of the net borrowing totalling EUR 19.1 billion was implemented in this manner. The exceptional procedure was abandoned when normal market functioning had been restored as a result of the measures taken by the European Central Bank, for example.
Since May 2020, state net borrowing has taken place normally through issuing new reference loans and auctioning additional tranches to old reference loans. Building up the cash buffer and the exceptional means of taking long-term loans made it possible to increase net borrowing and safeguard state funding, which is the main objective of debt management. The measures were taken quickly, which did not, however, take place without any problems. For example, there was no time to document the operations normally. It may be necessary to use additional private placements in future crises as well. In its audit Central Government Debt Management, the National Audit Office states, however, that the threshold for applying this procedure should be high. The process description and guidelines should also be prepared appropriately in order to make it easy to apply the procedure when necessary.
Finland’s debt management strategy has worked well even in crisis conditions. In the highly exceptional circumstances of the Covid-19 crisis, Finland managed to achieve the most important objective of debt management, i.e. to safeguard state funding. Costs have also been controlled by setting setting a strategic interest rate risk position to be achieved by the use of derivative instruments. The savings in interest expenses have been significant: more than EUR 3.5 billion in the 2000s according to the calculations by the State Treasury. Although the amount of government debt has increased, central government interest expenses have declined during the past decade. However, interest rates and their setting have been in an exceptional state for a long time, and therefore it is good that the Ministry of Finance is currently also assessing alternative debt strategies.
Large amounts of business subsidies were targeted at both development and the difficulties caused by the Covid-19 crisis
The Covid-19 pandemic was followed by an economic crisis that affected different companies in very different ways. Some companies in the service sector, in particular, were experiencing difficulties, whereas in many production sectors, the impacts were limited. The state provided a lot of financial support to companies in 2020, and some of the subsidies continue to be paid in 2021. One of the most significant subsidies in euro terms was the EUR 1.3 billion development aid on which a decision was made immediately after the outbreak of the crisis and which was channelled through Business Finland and the ELY Centres. Another significant support form was the business cost support to compensate for companies’ loss of turnover; decisions concerning this support were made in several phases, and the business cost support granted by the State Treasury totalled EUR 139 million in 2020. The National Audit Office audited whether the subsidies granted on the basis of the Covid-19 crisis have been appropriately managed and targeted, particularly in view of the economic impacts of the crisis.
Business development aid was also justified by the Covid-19 crisis.
Business Finland and the ELY Centres granted a large amount of development aid to companies that had not suffered from the crisis economically. When the grant decisions were prepared, the need for support was not assessed appropriately. It was also problematic that applicants were not treated equally in the management of subsidies. The support guidelines were interpreted on a case-by-case basis either strictly or broadly. Problems were also caused by the fact that several forms of support were introduced simultaneously. When making grant decisions, the authorities had difficulties in interpreting how they affected each other. For this reason, some applicants were granted overlapping subsidies.
Visualization: Sectors to which business development aid was granted in 2020 because of the Covid-19 pandemic and the development of their turnover
The figure illustrates how the business development aid granted was divided between different sectors and how the pandemic affected the turnover of these sectors. The size of the circles reflects the amount of business development aid granted to the sector in relation to the other sectors. The vertical axis shows the change in the sectors’ turnover in April 2020 compared with their average turnover in March–June 2019. The change in turnover is also expressed as a percentage in the middle of the circle.
The aim was to offset the shortcomings of the rapidly introduced development aid with business cost support, which was prepared over a longer period of time. The State Treasury granted business cost support in several phases. There were different kinds of financial support available with different terms and conditions. Unlike the generally used development aid, the terms and conditions of the business cost support made it possible to grant it only to companies whose turnover had fallen significantly due to Covid-19 and that had faced difficulties in adjusting their business and costs to the changed situation. The business cost support was granted on the basis of several criteria that were as objective as possible. As a whole, the subsidies granted on the basis of Covid-19 were not targeted particularly well in view of the financial difficulties faced by companies.
As a whole, the support granted on the basis of Covid-19 was not targeted particularly well in view of the financial difficulties faced by companies.
Companies have also been supported significantly in other ways. Coping with financial difficulties was supported by granting deferral of tax payments and guarantees for loans. However, these measures were not implemented as expected, and their significance has remained reasonably low. On the other hand, at the beginning of the crisis, they highlighted the importance of crisis packages.
Finland’s preparedness was put to the test by the crisis management and safeguarding the security of supply
From the perspective of security of supply, Finland seems to have succeeded well overall in managing the Covid-19 pandemic although the pandemic has differed completely from the type of crisis for which Finland’s security of supply has been built over the past decades. The public sector has been primarily preparing for military threats and smaller, short-term crises, such as major accidents or disasters. On the other hand, the description of an influenza pandemic presented in the National risk assessment 2018, for example, has a high resemblance with the current pandemic. The national pandemic plan was also updated in 2012 after the previous Sars epidemic. However, despite risk assessments, Finland had not prepared particularly concrete measures in advance to manage a long-term pandemic. In particular, preparedness for the financial consequences of a pandemic had remained minimal, even though they had been identified.
The National Emergency Supply Agency has a key role in safeguarding security of supply. Its duties include preparedness and its planning, as well as steering of the emergency supply organization. In the Covid-19 crisis, it proved important that the National Emergency Supply Centre was able to rapidly mobilize funds from the National Emergency Supply Fund it manages. This made it possible to solve problems threatening security of supply rapidly.
Central government and society have remained operational throughout the crisis. The impacts of the crisis have also remained reasonably limited, with the exception of impacts on certain parts of the economy and the costs caused to certain actors. It is impossible to find out what the final costs are. It was not known even before the crisis what the costs of maintaining security of supply were to the state, not to mention potential costs to other actors.
There are many types of organizations operating in the emergency supply organization and in the tasks of security of supply. The actors include government authorities, other public administration, and privately owned companies, and even individual citizens have a role related to security of supply. The total costs of security of supply remain hidden: there is no estimate of even the costs of the central government, nor does Finland systematically monitor the costs for implementing the objectives set by the Government for security of supply or the costs related to the security of supply measures in the Security Strategy for Society. Security of supply is largely based on the activities of private companies, and the costs incurred by them are not monitored, either. Knowledge-based decision-making would also require the costs caused to different actors to be estimated on a regular basis.
More than a billion euros were spent on supporting logistics, which plays a key role in security of supply.
The Covid-19 crisis has shown how important it is for security of supply that people and goods move. Functional transport and logistics chains are the foundation for the security of material supply. It has been necessary to limit border traffic in order to prevent the spread of the pandemic, but at the same time, it has been necessary to arrange the transport necessary for security of supply. This has caused huge costs to the central government. Almost EUR 1 billion have been spent on the capitalization of state-owned companies, such as Finnair and Finavia, and on compensations paid to them, and EUR 24 million have been spent on transport subsidies for shipping companies. Logistics companies have also been supported by more than EUR 1.6 billion in loans and loan guarantees. For shipping companies, the support provided by the National Emergency Supply Centre proved to be important: although passenger transport onboard ships ceased, the EUR 30 million support provided by the National Emergency Supply Centre ensured that maritime transport continued without interruption in the spring of 2020 until funding was arranged through the state budget.
The Covid-19 crisis highlighted in a new way what is important in safeguarding security of supply. Mere material preparedness is not enough; during the Covid-19 pandemic, the spotlight has turned to risks associated with personnel and human resources in key sectors. The crisis showed that more attention in preparedness should be paid to the role and obligations of private service providers. When public administration functions are outsourced, the contracts should also take more systematically into account the obligations related to security of supply.
In the end, it is the financial resources that determine how society succeeds in coping with a crisis
Despite the difficulties in 2020, society has continued to operate, and with the exception of Covid-19, people’s lives have not been particularly endangered. All functions of society and central government have continued to work at least reasonably well. Finland has not experienced any significant problems with the payment of benefits, the activities of the authorities, the organization of production, or the distribution of products. This has been mainly due to the sustainability of economy. Rapid indebtedness has been possible because the initial level has been reasonable. The state has been able to help business life to overcome the crisis, thus ensuring the maintenance of production potential. The amount of development aid was high in the initial stage of the crisis, which may have a positive impact on the growth of production. Financial resources have ensured Finland’s security of supply and also made it possible to buy products needed by society from global markets where the situation has been exceptional. This crisis will probably not be the last one. Therefore, it will be important to maintain strong financial resources in society and manage the central government finances in such a manner that the state will also be able to act in any future crises.
The chapter is based on the following audits
- Functioning of the central government spending limits system (Audit report 8/2021)
- Central government debt management (the audit will be published in 2021)
- Direct business subsidies granted in response to the Covid-19 epidemic – allocation and management of the subsidies in the early stages of the epidemic (Audit report 13/2021)
- Security of supply and safeguarding it during the Covid-19 pandemic (10/2021).