Audit activities: Sustainable General Government Finances

The impact area Sustainable General Government Finances consists of five areas: fiscal policy, central government asset management and investments, financing risks, ownership steering of state-owned companies and organization of central government operations, and supervision of the financial sector.

The impact area focuses on the planning and management of general and central government finances. The audit themes include fiscal policy and its preparation, as well as the management of central government assets, liabilities, investments, and financial risks. The functioning of the ownership steering of state-owned companies is audited particularly from the perspective of asset management and the organization of operations. In the impact area, we also audit the financial sector supervision and regulation, which are strongly linked with the development of the EU banking union and important in view of the indirect risks directed at central government finances. Audits related to this area are limited by the audit rights of the National Audit Office.

Independent fiscal policy monitoring ensures that public finances are managed sustainably and assesses the functioning of rules-based fiscal policy. Its duties also include assessing the appropriateness of fiscal rules. The importance of this is emphasized in 2022, when the EU framework will be reformed. Our fiscal policy monitoring assesses the fiscal policy pursued and submits related conclusions and recommendations to the Government. The activities and targets of fiscal policy monitoring during the planning period are described in Appendix 1.

Audit and monitoring information helps to ensure that general and central government finances are managed in a sustainable, responsible, and transparent manner. The targeting of activities is impacted by the growth in indebtedness as a result of the Covid-19 crisis and the resulting need to stabilize general government finances. Audits are targeted at operations and projects that are the most important for the preparation of fiscal policy and the management of central and general government finances. The perspective of central government finances is thus always an integral part of all audits. Audits are targeted in a risk-based manner at topics that are significant to central government finances, taking into account the timeliness of the information in view of the decision-making in Parliament and public administration.

During the planning period, the audit work will focus on ensuring the reliability of the fiscal policy knowledge base, assessing the functioning and efficiency of fiscal policy steering instruments, the planning and funding models of major investments by the state, and the organization of risk management in the central government and state-owned companies. We will also audit the role of state-owned companies in the development of a mining and battery cluster in Finland. The functioning of ownership steering will be assessed in the light of the ownership steering principles of state-owned companies. In our audit work, we will take into account the changes resulting from the Covid-19 situation in the operating environment of financial management. The impact area will also conduct an audit related to the incentives and obstacles to work-based immigration and an audit related to the implementation and effectiveness of the activities, and the risk management of the Housing Finance and Development Centre of Finland (ARA).

We have an active dialogue on the results of our audit and monitoring with the parliamentary committees, the Ministry of Finance, and other ministries and agencies. By the monitoring activities of the impact area, we identify risks that are significant for general and central government finances as well as potential audit topics, and draw up expert opinions, briefing papers, and other statements to support Parliament and the central government in decision-making.

Fiscal policy

As regards the preparation of fiscal policy and the knowledge base of decision-making, we will audit the reliability and comprehensiveness of forecasts, statistics, and impact assessments. As for the forecasts and projections by the Ministry of Finance, we will focus on assessing the implementation of the recommendations we have given in our previous audit reports. In auditing the knowledge base, we will focus on the practices of managing the quality of the macroeconomic and fiscal statistics prepared by Statistics Finland in compliance with the National Accounts. At the same time, we will assess the reliability of the key source of statistical information (e.g. data on local government finances) in a risk-based manner.

Auditing will be targeted at the effectiveness of automatic fiscal stabilizers. The operation of automatic stabilizers does not depend on separate discretionary political measures. Instead, they smooth cyclical fluctuations counter-cyclically through the expenditure and income items of the central government, social security funds, and local government. Automatic stabilizers also fall outside the central government spending limits, which enables them to operate during a downturn without being hindered by the spending limits rule.

Based on the results of a previously completed audit of the steering of local government finances, we will focus on influencing the measures to enhance the reconciliation of macroeconomic and microeconomic steering. The audit will assess the effectiveness of municipalities’ assessment procedure.

Asset management and investments

During the planning period, we will monitor the planning and implementation of the management of transport infrastructure assets, which are significant to central government finances. We will also monitor the planning and implementation of investments in the transport infrastructure and their financing, which includes multi-channel financing models. Our monitoring and audit activities will focus particularly on the planning of rail investments at limited liability companies where the state is a majority shareholder, i.e. so-called special purpose entities. The purpose of the special purpose entities is to develop and produce plans for the rail transport infrastructure and to assess the related benefits, disadvantages, and other impacts in order to meet the needs of society, government authorities, and their own shareholders. The planning of the rail transport infrastructure is carried out up to the construction phase.

We will continue to monitor the preparation and implementation of the strategic projects of the Finnish Defence Forces. We will target other monitoring and audit activities in a risk-based manner, taking Parliament’s information needs into account in a timely manner.

Financial risks

With regard to financial risks, the audit activities will focus particularly on the risk management procedures of the financing activities of the state’s special assignment companies. We will monitor the development of the management of the state’s contingent liabilities in relation to our previous findings and recommendations. We will pay special attention to the implementation of risk-based limitations to guarantee liabilities and the related risk management and monitoring practices. One of the issues we will examine during the planning period is the management of the state’s growing pension liabilities.

Ownership steering of state-owned companies and organization of central government operations

The incorporation of central government functions has continued in recent years. We will assess future incorporations based on the conclusions of the audit completed in 2020 and thereby provide Parliament with information to support the related decision-making. In this way, we aim to support the selection of appropriate forms of organization for central government operations and duties to ensure cost-effective operations. As regards incorporations, we will also look into the financing and implementation of investments from the perspective of central government finances.

A good governance model consists of ownership steering and good governance by state-owned companies and their bodies. This is necessary in order for the companies to be able to operate efficiently and effectively in the long term. Although the division of tasks between the companies and ownership steering is quite clear, problems may arise in the cooperation between the different actors. We will monitor how the ownership steering works in state-owned companies and, if necessary, target audits with a problem-oriented approach, focusing on issues that are relevant for the management of state assets. On the other hand, we will also examine the functioning of the good governance model, which consists of the companies’ management and ownership steering.

Supervision and regulation of the financial sector

In 2020, we completed an audit of the operations of the Financial Stability Authority, which serves as the national resolution authority. The audit related to the preparedness to resolve crises of ‘less significant institutions’.

We will also promote the prerequisites for external audit of the supervision of the financial sector, taking into account Parliament’s positions on the matter. The National Audit Office does not have the right to audit the operations of the Financial Supervisory Authority or the Bank of Finland. They have a key role in organizing the EU banking union’s common banking supervision and resolution. We will monitor the expansion of the mechanisms of the banking union and pay special attention to the liabilities they cause to the state.