As of 1987, public-sector spending amounted to about 42
percent of GDP, below the OECD average. Austerity policies
limited real budget increases to about 1.5 percent per
1980 to 1987, substantially less than the rapid growth in
government spending during the 1960s and 1970s (see
Appendix A). Total taxes amounted to about 36 percent of
1987, fluctuating by a few percentage points from year to
Because of the gap between taxes and spending, government
grew relatively rapidly during the 1980s, reaching almost
percent of GDP by 1987, but it was still low by OECD
Each autumn the Ministry of Finance submitted to the
Eduskunta, the country's parliament, the budget for the
fiscal year (which corresponded to the calendar year),
accompanied by a survey of the economic situation. Early
following spring, while the budget was being debated, the
ministry published a revised version of the survey, which
estimated the overall fiscal impact on aggregate demand,
and money supply. After parliamentary approval of the
budget, the government often responded to changing
requesting supplementary appropriations, sometimes
modifying the original budget.
Starting in the late 1970s, as it sought to maintain
limits on the growth of the public sector, the government,
fiscal policy considerations, began to analyze social
funds and local spending as parts of the overall budget.
central government regularly transferred large sums to
authorities, which accounted for about two-thirds of
publicsector operations. Local administrations levied a flat
had reached about 16 percent in 1986, on earned income.
central government influenced local expenditures by
transfers and by negotiating multiyear spending limits.
Nevertheless, current local government expenditures, many
which were required by law, sometimes exceeded targets.
central government also attempted to manipulate social
taxes as an instrument of fiscal policy, a technique that
had pioneered. The government lowered employers'
for health, accident, and unemployment insurance by about
percent of the wage bill between 1977 and 1987 in an
encourage job creation.
National taxes absorbed about 26 percent of GDP, and
taxes, roughly 16 percent, in the mid-1980s. In 1986 the
government introduced reforms of business income taxes,
a reduced value-added tax on energy, designed to improve
competitiveness. In 1988 the legislature enacted a
tax reform meant to reduce marginal rates of taxation
eliminating many deductions. Policy makers expected that
reform would reduce tax-induced distortions in investment
behavior and would make the tax system fairer.
Government spending had changed significantly during
postwar years. In the late 1940s and early 1950s,
expenditures associated with the war dominated the budget.
the early 1950s to the early 1970s, the fastest-growing
in the budget were education, social welfare transfers,
capital investments. By the late 1980s, current
remained roughly the same as in the 1970s, but investments
fallen. In 1987, for example, debt service led
about 17.2 percent of total outlays), followed closely by
security (17.1 percent) and education, science, and the
percent). Government operations and defense amounted to
14.7 percent, and health, to 8 percent. Except for
and forestry (which absorbed 8.3 percent) and transport (8
percent), subsidies for different branches of the economy
relatively small amounts: housing, 4.4 percent; industry,
percent; and labor, 2.5 percent.
Finland's state debt, at about 14 percent of GDP in
low by international standards, as was the debt of local
governments, which stood at roughly 3 percent.
during the 1980s the government tried to limit the growth
state debt to avoid increased interest expenditures. As of
slightly more than half the state debt was in foreign
When the state sought financing abroad, it avoided
private borrowers in Finland's relatively shallow capital
but foreign debt increased foreign-exchange risk. In 1986
1987, however, officials took advantage of their
high credit rating to refinance much of the debt at lower
interest rates. Although policy makers would have to
debt carefully, most analysts believed it was unlikely
Finland's state debt would seriously constrain government
operations during the late 1980s and early 1990s.
Data as of December 1988