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Finland Public Finance
As of 1987, public-sector spending amounted to about 42
percent of GDP, below the OECD average. Austerity policies
had
limited real budget increases to about 1.5 percent per
annum from
1980 to 1987, substantially less than the rapid growth in
government spending during the 1960s and 1970s (see
table 14,
Appendix A). Total taxes amounted to about 36 percent of
GDP in
1987, fluctuating by a few percentage points from year to
year.
Because of the gap between taxes and spending, government
debt
grew relatively rapidly during the 1980s, reaching almost
15
percent of GDP by 1987, but it was still low by OECD
standards.
Each autumn the Ministry of Finance submitted to the
Eduskunta, the country's parliament, the budget for the
next
fiscal year (which corresponded to the calendar year),
accompanied by a survey of the economic situation. Early
in the
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,
income,
and money supply. After parliamentary approval of the
annual
budget, the government often responded to changing
conditions by
requesting supplementary appropriations, sometimes
significantly
modifying the original budget.
Starting in the late 1970s, as it sought to maintain
tight
limits on the growth of the public sector, the government,
in its
fiscal policy considerations, began to analyze social
security
funds and local spending as parts of the overall budget.
The
central government regularly transferred large sums to
local
authorities, which accounted for about two-thirds of
publicsector operations. Local administrations levied a flat
tax, which
had reached about 16 percent in 1986, on earned income.
The
central government influenced local expenditures by
regulating
transfers and by negotiating multiyear spending limits.
Nevertheless, current local government expenditures, many
of
which were required by law, sometimes exceeded targets.
The
central government also attempted to manipulate social
security
taxes as an instrument of fiscal policy, a technique that
Finland
had pioneered. The government lowered employers'
contributions
for health, accident, and unemployment insurance by about
2
percent of the wage bill between 1977 and 1987 in an
attempt to
encourage job creation.
National taxes absorbed about 26 percent of GDP, and
local
taxes, roughly 16 percent, in the mid-1980s. In 1986 the
government introduced reforms of business income taxes,
including
a reduced value-added tax on energy, designed to improve
export
competitiveness. In 1988 the legislature enacted a
comprehensive
tax reform meant to reduce marginal rates of taxation
after
eliminating many deductions. Policy makers expected that
the 1988
reform would reduce tax-induced distortions in investment
behavior and would make the tax system fairer.
Government spending had changed significantly during
the
postwar years. In the late 1940s and early 1950s,
temporary
expenditures associated with the war dominated the budget.
From
the early 1950s to the early 1970s, the fastest-growing
sectors
in the budget were education, social welfare transfers,
and
capital investments. By the late 1980s, current
expenditures
remained roughly the same as in the 1970s, but investments
had
fallen. In 1987, for example, debt service led
expenditures (at
about 17.2 percent of total outlays), followed closely by
social
security (17.1 percent) and education, science, and the
arts (16
percent). Government operations and defense amounted to
about
14.7 percent, and health, to 8 percent. Except for
agriculture
and forestry (which absorbed 8.3 percent) and transport (8
percent), subsidies for different branches of the economy
took
relatively small amounts: housing, 4.4 percent; industry,
3.4
percent; and labor, 2.5 percent.
Finland's state debt, at about 14 percent of GDP in
1987, was
low by international standards, as was the debt of local
governments, which stood at roughly 3 percent.
Nevertheless,
during the 1980s the government tried to limit the growth
of
state debt to avoid increased interest expenditures. As of
1987,
slightly more than half the state debt was in foreign
currencies.
When the state sought financing abroad, it avoided
crowding out
private borrowers in Finland's relatively shallow capital
market,
but foreign debt increased foreign-exchange risk. In 1986
and
1987, however, officials took advantage of their
government's
high credit rating to refinance much of the debt at lower
interest rates. Although policy makers would have to
manage the
debt carefully, most analysts believed it was unlikely
that
Finland's state debt would seriously constrain government
operations during the late 1980s and early 1990s.
Data as of December 1988
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