Expenditure Inflexibility in the State Budget: The Fiscal Policy Latitude of the Council of State in Finland

Abstract

This paper deals with expenditure inflexibility, which has a crucial bearing on the fiscal latitude which the government has in the preparation of the Finnish state budget. The government's fiscal latitude, i.e. the possibilities available to the government to increase, decrease or change state expenditures is restricted by various mechanisms. The source material used in this study consists of budget documents and interviews with officials involved in preparing the budget; use was also made of earlier studies relating to this subject.Our major findings fall into three groups. (i) If the degree of inflexibility is used as a basis for classification, four classes of expenditure can be identified in the Finnish state budget: expenditure controlled by statute, expenditure controlled by agreement, expenditure controlled by authorization and expenditure without formal control. (ii) In the budget for 1996, 92 per cent of expenditure was controlled in various ways, leaving only 8 per cent that was flexible. The conclusion can be drawn from this that without changing the mechanisms that bind expenditures, the government's ability to alter fiscal policy in the budget of a single year is very limited. In the 1990s the proportion of statute-controlled expenditures has decreased and the proportion of agreement-controlled and authorization-controlled expenditures has increased. Nevertheless fiscal latitude has grown. (iii) The material used for comparison showed that there is a similar problem in other countries, but that the mechanisms governing expenditure inflexibility and the fiscal latitude that governments may enjoy can vary.

Expenditure Reform in Industrialised Countries: A Case‐Study Approach*

“…By consequence, it became immediately and substantially more difficult to form blocking minorities against measures of expenditure restraint. Hitherto, the previous arrangement had rendered expenditure cuts near to impossible (Meklin, Liinavuori and Nummikoski, 2000). In 1993, Finland additionally reformed the funding of municipalities, replacing retrospective reimbursements with prospective block grants.…”