Overview of Central Government Risks and Liabilities 2018

Central government debt has almost doubled in the past ten years, to approximately EUR 105 billion at the end of 2017. The debt-to-GDP ratio has also grown substantially. The government’s implicit liabilities have been growing at an even faster rate than the debt figure. Whereas in 2008 government guarantees amounted to about EUR 22 billion, the year-end 2017 figure was as much as EUR 52 billion. Central government finances are concerned not only with explicit and implicit liabilities but also ‘hidden’ liabilities, the most significant of which are connected with the banking sector and local government. As a consequence of structural changes, the size of the banking sector in relation to GDP in Finland will grow in the remainder of this year to a point significantly beyond the EU average. Although the government has no legal obligation to rescue banks from difficulties they may find themselves in, experience has shown that in times of crisis, governments have used tax payer funds to safeguard the continuity of access to deposits and the functioning of critical infrastructure. The European banking union, if it succeeds, may limit these hidden liabilities. In Finland, the municipalities enjoy wide-ranging autonomy under the Constitution, and central government is not liable for the municipalities’ financial commitments. Local government finances are nevertheless part of general government finances, and financial problems experienced by municipalities will most likely also affect central government finances. As with central government, the municipalities’ loan and guarantee portfolios have grown considerably in the past ten years. In Finland, with the regional government, health and social services reform, local government finances are also in the midst of a major structural change. In the reform, healthcare and social welfare costs will change from being a hidden liability to more of an explicit liability of central government. The extent of explicit, implicit and hidden liabilities will be dependent on the performance of the economy. Finland’s economic outlook is expected to be favourable in the coming years. There are risks associated with this, however. Political decision-makers should also be prepared for the economy to perform less well than expected. The growing debt burden and increase in implicit liabilities have weakened the government’s room for manoeuvre and ability to deal with negative shocks in recent years. Efforts to strengthen general government finances should be continued and the growth in the government’s guarantee liabilities should be restricted in order that any economic disturbances do not lead to an unnecessary tightening of fiscal policy for the purpose of securing the government’s liquidity and preserving its credit worthiness.