EXPENDITURE INFLEXIBILITY IN THE STATE
BUDGET: THE FISCAL POLICY LATITUDE OF
THE COUNCIL OF STATE IN FINLAND
PENTTI MEKLIN, JUHA LIINAVUORI AND JUKKA NUMMIKOSKI
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.
INTRODUCTION
During the last few decades in different countries the state budget has to
an ever-increasing degree become an instrument of control in the public
economy and in the national economy as a whole (see Schick 1990a; and
Wildavsky and Jones 1994). The share of the public sector in the national
economy has grown rapidly in many countries, and major changes in a
national economy can happen very quickly. Many national economies have
suffered from unemployment, a reduction in national product, problems in
the balance of current accounts and public sector deficit problems. At the
same time, the political leaders of these countries are expected to solve such
problems, and in this the state budget is a central instrument (Leonard et
al. 1995).
Pentti Meklin is Professor of Local Public Economics; Juha Liinavuori and Jukka Nummikoski are
research students in the Department of Local Government Studies at the University of Tampere,
Finland.
Public Administration Vol. 78, No. 1, 2000 (193–207)
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PENTTI MEKLIN, JUHA LIINAVUORI AND JUKKA NUMMIKOSKI
The initial stimulus to this study was the observation that in fact the
government does not have much influence over the budget-drafting process, because the expenditures have been fixed beforehand by statutes and
other binding mechanisms. Our main idea was to study the inflexibility of
budget expenditure and then the focus of our research shifted to the question of how much fiscal policy latitude there is in the budget-drafting process.
It is precisely the inflexibility of expenditure which restricts fiscal policy
latitude, and so the study of the latter illuminates the former. The inflexibility of expenditure means that the state budget expenditures are determined
by some statute, agreement or obligation which makes the inclusion of an
expenditure in the budget mandatory. The control of expenditure can be
real (political realities) or formal.
The object of our research is the formal inflexibility of expenditure. An
essential factor affecting inflexibility is the period of time over which it is
monitored. When the period of time is long, there is less inflexibility,
because in principle it is even possible to change all the statutes. An
important practical situation where fiscal policy latitude is needed is the
drafting of the next year’s budget. For this reason this research concentrates
on latitude and inflexibility in the short run, in other words, on a situation
where the government is drafting the next year’s budget.
Change has occurred in recent years. As expenditure inflexibility has
been charted before, we seek to ascertain how expenditure inflexibility
mechanisms have changed in recent years. Our study has three main objectives:
(i) to ascertain and classify the expenditure inflexibility mechanisms
and any change in their composition and relative size between 1990
and 1996;
(ii) to ascertain how big the proportion of the various types of inflexible
expenditures was in the state budget for 1996 and how that proportion has changed between 1990 and 1996; and
(iii) to ascertain what examples can be found of expenditure inflexibility
in other countries.
RESEARCH METHODS AND MATERIALS
This research began by examining earlier studies on the subject, in search
of inflexibility classifications for expenditure. As we are dealing with formal
inflexibility created by existing statutes, we composed a classification of
expenditure inflexibility mechanisms and studied the degree of flexibility
in these classes according to the Finnish judicial system. At the same time,
we also examined the changes which have taken place in the inflexibility
mechanisms during the last few years. Using these findings and working
together with a consultant group from the Finnish Ministry of Finance, we
arrived at an inflexibility classification (Research Objective (i)) (table 2)
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which was different from previous classifications because of the changes
in the inflexibility mechanisms.
After that, we applied the classification to expenditures in the Finnish
national budget proposals of 1996 in the inflexibility classification given
below, and compared the proportion of the inflexible expenditure with that
found by earlier research. Finally, we tried to elucidate the proportion of
inflexible expenditures and how that proportion has changed (Research
Objective (ii)). The validity of the placing of the expenditures in the inflexibility classification was ascertained by having the person in the Finnish
Ministry of Finance responsible for each administrative sector (for example
Agriculture and Forestry, Interior, Defence, Labour, etc.) examine the placement of expenditures which we had made. In this way we were able to
make certain that the person having the best qualifications was responsible
for the placement of expenditures.
Alongside the empirical investigation of the situation in Finland, we tried
to collect comparative material from other countries, although we were not
able to find very much, even though a similar problem exists in many countries
PREVIOUS RESEARCH ON THE INFLEXIBILITY OF BUDGET
EXPENDITURES IN FINLAND
In Finland, earlier studies on the inflexibility of expenditure date from 1964
(Ministry of Finance 1964), 1984 (Asumalahti), and 1992 (Nummikoski). In
the last two, expenditure inflexibility is analysed by means of a classification consisting of the following four groups. The first class is composed
of statutory expenditures. The second class consists of expenditure controlled by agreement, and the third one of discretionary expenditure controlled by statute. The last class is composed of expenditure without
immediate formal inflexibility.
The earlier Finnish studies examine the inflexibility of expenditure in
1980, 1985 and 1990, and use the financial statements by the government
from 1980 as well as the national budget proposals from 1985 and 1990 as
source material. The results from the previous research concerning expenditure inflexibility appear in table 1. The greater part of the expenditure in
the table consists of inflexible expenditures. These expenditures are conTABLE 1 Inflexibility of expenditures in Finland’s National
Budget (as % of total) according to the studies 1984 and 1992
Inflexible
Partially flexible
Wholly flexible
Total
1980
1985
1990
68
9
23
100
73
8
19
100
75
12
13
100
Source: Asumalahti 1984 and Nummikoski 1992.
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PENTTI MEKLIN, JUHA LIINAVUORI AND JUKKA NUMMIKOSKI
trolled by laws and agreements. As far as these expenditures are concerned,
the government has hardly any fiscal policy latitude. Regarding the partially flexible expenditures, the government possesses a little fiscal policy
latitude. As to the third group, the government is completely free to practice any financial policy that it wishes.
THE EVOLUTION OF THE INFLEXIBILITY CLASSES
At first, our intention was to use for 1996 the same classification for expenditure inflexibility as was used in the earlier studies, but this was not possible owing to the many changes that had taken place since 1990. For this
reason we devised a new, more relevant classification.
There have been many fundamental changes and reforms in the Finnish
public sector that have affected expenditure inflexibility. The most significant ones have been the reform of basic rights and the abrogation of a set
of provisions on leaving a bill in abeyance. Before the latter provisions were
abrogated, a minority group’s economic and social rights were primarily
secured by leaving a bill in abeyance and not by the Constitution’s basic
rights provision, as had happened in many other countries comparable to
Finland. The leaving of a bill in abeyance was problematic in the management of the state economy, because, according to the provisions, a parliamentary minority of one-third could vote to put a bill into abeyance until
after the next elections. The leaving of a bill in abeyance was often directed
at laws making expenditure cuts introduced in connection with the budget
proposal. When cut-backs were thus so difficult to make, almost the only
means available to balance the budget was to increase state borrowing or
enact new tax laws. In time, the set of provisions on leaving a bill in abeyance was amended several times, and it was finally abolished at the end
of 1995. Basic economic and social rights that were earlier secured by these
provisions were incorporated into the Constitution through the basic rights
reform (Liinavuori 1996).
The abrogation of the provisions on leaving a bill in abeyance has
improved the ability of the Council of the State to influence the magnitude
of expenditure in the budget through expenditure law amendments. Therefore, statutory expenditure can no longer be considered to be as inflexible
as during the period when the provisions were in force. However, one
exception to this is constituted by statutory expenditure that provides basic
income security as defined in the Constitution: bills concerning this form
of expenditure have to be processed according to the order of procedure
required for the enactment of constitutional legislation.
Other recent legislative changes that have influenced expenditure
inflexibility include changes in the civil service legislation and the reform
of the state grant legislation. The legislation on civil servants now includes
‘collective grounds for giving notice’ in accordance with the Contracts of
Employment Act. On these grounds, a civil servant may be given notice
for economic and production reasons, and so the inflexibility of personnel
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expenditure can no longer be considered as great as it was before the legislative reform. In the reformed state grant system, grants to municipalities
are mainly determined by calculations based on objective factors, such as
the number or age-classes of inhabitants instead of the earlier principle of
‘accepted expenditure level’. The aim of the reform has also been to remove
the cost automation that was inherent in the old state grant system. In fact,
state grants for municipalities have clearly decreased since the reform
(Liinavuori 1996).
In recent years there have also been changes in the budget structure
which have influenced expenditure inflexibility. One of these changes has
been the removal of certain functions from the budget. A particularly striking development in the early 1990s was the number of budget-linked state
offices which were changed into enterprises outside of the state budget.
The establishment of extra-budgetary funds (for example the State Pensions
Fund) has also been characteristic of the reforms that have occurred in the
control of expenditure. The removal of functions from the scope of the
budget has contributed to the decrease in inflexible expenditures in the
state budget.
On the other hand, European Union membership has brought more
expenditure inflexibility into the budget. Firstly, Finland pays her membership dues to the European Union; these are based on the gross domestic
product and a value added tax base. Secondly, many expenditure items in
the budget have become inflexible with respect to the Union’s operational
policy. This is especially visible in the administrative sector of the Ministry
of Agriculture and Forestry. Other administrative sectors also have inflexible expenditure items with respect to EU structural and regional policies.
Net budgeting and operational expenditure budgeting comprise other
structural reforms to the budget that have influenced expenditure inflexibility.
Because of these changes we constructed four inflexibility classes of
expenditure, which are shown in table 2. The mechanisms through which
inflexibility operates were actually used as differentiation criteria. The order
of the classes does not directly reflect the magnitude of inflexibility. It is
important to notice that expenditures controlled by statutes are often considered highly inflexible, but the government, however, can change laws
unilaterally when a sufficient political consensus exists. Instead, expenditures controlled by agreement are normally based on a bilateral agreement,
which can be changed only if both the contracting parties agree. In this
respect it is, in fact, more difficult to influence expenditures controlled by
agreement than expenditure which the government itself controls by statutes.
The inflexibility classification includes four main classes: expenditure
controlled by statute, expenditure controlled by agreement, expenditure
controlled by authorization, and expenditure without formal control.
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PENTTI MEKLIN, JUHA LIINAVUORI AND JUKKA NUMMIKOSKI
TABLE 2 Expenditure in the 1990 and 1996 state budgets according to inflexibility
classes, %
Inflexibility class
1. EXPENDITURE CONTROLLED BY STATUTE
Constitution
Ordinary law
Amount of expenditure controlled
entirely
partly
free
Administrative statute
Amount of expenditure controlled
entirely
partly
free
2. EXPENDITURE CONTROLLED BY AGREEMENT
International agreement
Membership payments
EU-linked expenditure
Foreign currency debt expenditure
Labour market agreements
Finnish mark debt expenditure
Other commitments
3. EXPENDITURE CONTROLLED BY AUTHORIZATION
4. EXPENDITURE WITHOUT FORMAL CONTROL
TOTAL
1990
1996
57
42
12
28
24
0
4
2
2
0
0
27
45
18
2
6
10
8
18
1
3
13
5
8
100
100
Expenditure controlled by statute
These refer to expenditure resulting from laws or lower-level statutes, such
as decrees or decisions by the Council of State. This class was divided into
subclasses according to the level of statutes and further into groups according to how precisely the level of appropriations is fixed by the statutes.
Expenditure controlled by agreement
These consist of appropriated funds resulting from existing agreements
binding the state. This class was also further divided into subclasses according to whether the expenditures were based on international agreements,
labour market agreements or whether they were caused by the national
debt.
Expenditure controlled by authorization
These include expenditure resulting from the use of authorization granted
before 1996. All expenditures resulting from the use of earlier authorization
have been placed in this class, whether the authorization is connected with
expenditure controlled by law or agreement, or with discretionary expenditure.
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Expenditure without formal control
These primarily consist of the expenditure of state offices other than consumption expenditures and investments concerning personnel.
The classes of this inflexibility classification and their proportion of the
expenditure in the 1996 budget are presented in the following table. To
facilitate temporal comparison, the table also includes figures from the earlier study carried out in 1990.
THE PROPORTION OF INFLEXIBLE EXPENDITURE IN 1996 AND
ITS CHANGE SINCE 1990
The largest inflexibility class in 1996 comprises expenditure controlled by
agreement (45 per cent). Within this class, the largest expenditure items are
expenditures resulting from government loans (28 per cent). The proportion
of expenditure controlled by statutes is 42 per cent: expenditures controlled
by the Constitution cover 12 per cent of budget expenditure, expenditures
controlled by ordinary laws account for 28 per cent, and expenditures controlled by administrative statutes for 2 per cent. The proportion of expenditure controlled by authorization and expenditure without formal control
accounts for 5 per cent and 8 per cent, respectively.
We completed the picture on the fiscal policy latitude of the Council of
State by examining how the expenditures of different administrative sectors
were being controlled. The percentual distribution of inflexible expenditure
in the overall total of the state budget proposal according to different
administrative sectors is presented in table 5. It shows that the constitutional laws governing citizens’ basic rights specifically control the expenditure of the administrative sectors of the Ministry of Social Affairs and
Health, the Ministry of Labour and the Ministry of Environment. The
expenditure of the administrative sectors of the Ministry of Justice, Ministry
of the Interior and the Ministry of Agriculture and Forestry are controlled
by special agreements. Expenditures controlled by authorization are particularly those of the administrative sectors of the Ministry of Defence and
the Ministry of Trade and Industry. Expenditures of the Ministry of Transport and Communications, especially the construction and maintenance of
the transport network, are without formal control.
In order to see how expenditure flexibility has developed, the 1996 figures can be compared with those of 1990 (see table 2). A comparison can
only be made on the basis of the main classes, because the subclassifications
differ in the years in question. The results of the comparison indicate that
the proportion of expenditure controlled by statute in the new classification
has decreased from 57 per cent to 42 per cent, while the proportion of
expenditure controlled by agreement has increased from 27 per cent to 45
per cent. The proportion of expenditure controlled by authorization has
slightly increased from 3 per cent to 5 per cent, whereas the proportion of
expenditure without formal control has decreased from 13 per cent to 8
per cent.
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PENTTI MEKLIN, JUHA LIINAVUORI AND JUKKA NUMMIKOSKI
EXPENDITURE INFLEXIBILITY IN THE INTERNATIONAL
CONTEXT
The expenditure inflexibility problem is a familiar one in many countries
and also in the EU. In the EU budget the terms compulsory and non-compulsory expenditures are used (article 203(4) and (9) EEC Treaty) (Commission of the European Communities 1995). The division is primarily a
political one. It is a matter of decision-making power on the one hand
between the EU’s organs and on the other hand between the member states.
The concrete affects of this classification on the EU’s member states can be
seen in the EU budget’s biggest expenditure class, agriculture, which is
taken to be compulsory expenditure.
This vague classification into compulsory and non-compulsory expenditures was clarified in 1982 (in a Joint Declaration). Then three organs
(Parliament, the Council of Ministers and the Commission) proposed that
compulsory expenditures are those which the organ using budgetary power
has to include in the budget so that the Community can fulfil the internal
and external obligations imposed by legislation and agreements. All other
expenditures are non-compulsory (Commission of the European Communities 1994).
The classification was applied in accordance with what is called the first
budget agreement in the 1975 budget, when Parliament achieved decisionmaking power over non-compulsory expenditure, and has been in use ever
since. Thus the EU Parliament does have some controlling power over
expenditure and in addition it is able to put forward its own priorities. The
Council of Ministers decides about compulsory expenditure. The proportion of compulsory expenditure has decreased. As can be seen in table
3. At present about 50 per cent of expenditure in the EU budget is compulsory and 50 per cent non-compulsory (Laffan 1997).
Although the problem is known in EU-countries, only a few studies of
it have been made, but in the USA there are some studies which use the
concept of budget controllability (for example Widavsky and Jones 1994).
These studies emphasizing controllability deal with inflexible expenditures,
but they underline the judicial point of view. Instead, our study emphasizes
the economic perspective and the judicial analysis of fiscal policy latitude
receives less attention. In the following we will examine some specimen
studies relating to state budget inflexibility in the United States and the
Netherlands.
TABLE 3 Expenditure inflexibility in the EU budget
Compulsory
Non-compulsory
Total
Source: Strasser 1991.
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1988
1989
1990
1991
1992
74
26
100
70
30
100
66
34
100
61
39
100
58
42
100
EXPENDITURE INFLEXIBILITY IN THE STATE BUDGET
201
In his study of the United States federal budget (which he bases on quantitative material), Weidenbaum (1965) estimates how much the Congress is
able to influence federal expenditure. The influence was measured in terms
of the possibility of controlling and significantly changing the President’s
budget proposals during the budgetary process. Weidenbaum classifies the
appropriations into four categories according to controllability. The appropriations represented by each of the categories are relatively uncontrollable.
The research does not, however, examine the differences in the degree of
controllability between the categories.
According to Weidenbaum, the first category consists of trust funds,
which include appropriations for social security for example. It is characteristic of the funds that they are financed by permanent appropriations,
which do not require measures in the course of the budget year. According
to Weidenbaum the appropriations of the funds are relatively uncontrollable.
The second category of uncontrollable expenditure in Weidenbaum’s
research is composed of appropriations whose common characteristic is
that they are permanent and indefinite. As a typical permanent appropriation
Weidenbaum mentions the payment of interest on the public debt. Indefinite
appropriations are, for instance, pension contributions for civil servants.
Indefinite appropriations allow a state office to consume a necessary sum
if specially defined conditions are fulfilled on the part of the beneficiary.
The third category consists of fixed charges caused by programmes the levels
of spending of which are defined in statutes and not in the budgetary process. The largest programme in this category consists of pension payments
and appropriations for veterans’ benefits.
The fourth and last category of uncontrollable expenditure in Weidenbaum’s research consists of appropriations for partially completed investments. A good example of this are the construction projects whose realization takes several years, and which it is economically unsound to leave
unfinished because of the costs which the project has already incurred. Weidenbaum claims that, in simple terms, the almost unassailable justification
for the appropriations for these amounts is the old question: ‘What is the
value of half a bridge?’
In his research Weidenbaum arrives at a result according to which some
73 per cent of the 1965 budget appropriations (appropriations allocated for
military purposes have been excluded from the study) were relatively
uncontrollable. According to Weidenbaum the greater part of the appropriations of the annual budget are determined automatically on the basis of
the decisions made during the previous years. Finally, Weidenbaum concludes that the possibilities for the Congress to control federal appropriations are considerably slighter than has been officially assumed.
More recent American research on the inflexibility of expenditure is represented here by Allen Schick’s work The Capacity to Budget (1990b), in
which he has devoted a few pages to the examination of sticky expenditures.
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PENTTI MEKLIN, JUHA LIINAVUORI AND JUKKA NUMMIKOSKI
Borrowing from the concepts of economics, Schick uses the term sticky,
which he explains by the fact that the closely related concepts rigid and
inflexible in his opinion give a misleading impression that this kind of
expenditure is totally inflexible. In fact, all expenditures are flexible if for
instance the period of examination is long enough.
According to Schick, sticky expenditures result from treaties and other
international commitments, bonds obligating the payment of principal and
interest, contractual obligations to producers of services, entitlements
recorded in the statutes, and other commitments. Characteristic of sticky
expenditures is their tendency to drift upward. Schick concludes that most
sticky expenditures are controllable. Controllability, however, requires that
changes be made in various control mechanisms, for example in treaties
and statutes.
Schick’s research covers federal expenditure between 1981 and 1988. The
objective was to study what proportion of the federal expenditure growth
results from sticky expenditures. The research material consisted of the
published federal budget data. The research results consist of the annual
increase in sticky expenditure expressed as a percentage. According to
Schick, despite the incompleteness and inaccuracy of the data, the study
gives a clear picture of the development which has taken place. During
the period of examination, each year the increase in state expenditure was
expressly due to the growth of sticky expenditure.
In a study differing from Weidenbaum’s (1965) and Schick’s (1990b)
methodological line on the controllability of the US federal defence expenditure, True (1995) comes to the conclusion according to which budget
expenditure is controllable. Weidenbaum’s and Schick’s results on inflexibility and controllability are presented as percentages. Their studies
emphasize the amount and increase of the inflexible or controlled expenditure. In True’s research results, on the other hand, the time factor is emphasized. True’s (1995) study is based on budget authority figures from the fiscal
years 1969–1993. In his research, the more general policy changes affecting
the federal budget in 1980–1993 were empirically tested using an interrupted time-series and two regression models. The starting point for True’s
analysis is the idea that policy decisions influence budgetary decisions, and
thereby affect the level of budget authority, which again affect budget controllability.
According to True’s study, instead of marginal changes in accordance
with the incrementalist tradition, the federal budget has gone through a lot
of large-scale changes associated with changes made in government policy.
For that reason the budget was controllable at least in the years 1980–1981
and 1985–1986. True explains controllability by the fact that during the
above-mentioned years at least, the federal budget fulfilled the function for
which it was assigned.
In his research on the Netherlands, Kraan (1984) divides the inflexibility
of expenditures into two classes: technical and political inflexibility. In the
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EXPENDITURE INFLEXIBILITY IN THE STATE BUDGET
203
short run the budget is inflexible in practice, but budget flexibility is still
necessary, especially in a recession or depression. According to Kraan,
inflexibility is mainly due to the growth of social security expenditure in
the industrial countries. Inflexibility is said to be the price which must be
paid for living in a welfare society.
Kraan (1984) defines flexibility as a possibility to phase, reduce or abrogate public expenditure in the budgetary decision-making process. Expenditures that are technically inflexible cannot be reduced in the short run
because of the formal procedures associated with the expenditure, or the
fact that the circumstances determining the expenditures are beyond the
reach of political decision-making. A typical example of technically inflexible expenditures are those based on laws. These expenditures cannot be
changed unless we change the laws regulating them. According to Kraan
the expenditures in the first category are entirely flexible. The second category of technically inflexible expenditures consists of salaries based on collective labour and bargaining contracts of people working for the government or institutions predominantly dependent on government subsidies.
The third category consists of expenditures that complement the whole, for
example appropriations for partially completed investments. The expenditures in the second and third categories are, when viewed in the short-term
examination, partly flexible.
According to Kraan, the political inflexibility of expenditures is induced
by reasons that can be divided into two main categories. The first one consists of the programmes based on law, and the second one of the programmes based on political agreements or politically accepted prognoses.
By politically inflexible expenditures based on law Kraan means expenditures that are difficult to change, because changing the law is a political
act. The degree of flexibility of the politically inflexible expenditures
depends each time on the legal status of the programme. A high legal status
provides more security to different interest groups: people entitled to benefits, bureaucrats, politicians and the public at large. As to the second category, the degree of flexibility depends on budget practices, and especially
on the timespan of the budget. In many countries budgeting is still today an
annual practice. However, an annual budget includes forecasts for several
coming years, and therefore forecasts discussed unofficially will suddenly
receive ‘official status’ when they are included in the annual budgetary
process. Especially when government expenditure should be reduced
because of the economic situation, the forecasts for future years will often
lead to the opposite and increase expenditures.
Kraan compares the results of his research with a study made in the
Netherlands in 1980, concerning expenditure inflexibility. The results are
presented below in table 4, where the expenditures are classified as inflexible, partly flexible and entirely flexible expenditures. In both the 1980 and
1982 studies, expenditure inflexibility is defined in the same way, but there
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PENTTI MEKLIN, JUHA LIINAVUORI AND JUKKA NUMMIKOSKI
TABLE 4 Expenditure inflexibility in the Netherlands national
budget (as % of total) according to a study of 1980
Inflexible
Partially flexible
Wholly flexible
Total
1980
1981
1982
1983
1984
39
58
3
100
25
69
6
100
13
80
7
100
11
81
8
100
10
81
9
100
Source: Kraan 1984.
appear to be slight differences as to how expenditures are classified into
different flexibility groups.
CONCLUSION
This study has analysed the inflexiblity of expenditure in the Finnish state
budget and the changes to this between 1990 and 1996. Inflexiblity has a
major bearing on the fiscal latitude available to the government when the
budget is being prepared. The study shows that (Research Objective (i))
expenditure inflexiblity mechanisms can be divided into four main classes;
these distinguish between expenditure controlled by statute, expenditure
controlled by agreement, expenditure controlled by authorization and
expenditure without formal control. The composition and their relative size
have changed between 1990 and 1996. For example, statutory expenditures,
which were once regarded as being highly inflexible, are no longer as
inflexible as they were at the beginning of the 1990s. The key factors behind
this change were the abrogation of the provisions for leaving a parliamentary bill in abeyance and the reforms made to the civil service legislation.
Thanks to the softening in the degree of expenditure flexibility, fiscal latitude has grown, and so the Council of State’s ability to decide whether or
not expenditure should be included in the budget or to alter the totals for
budget expenditures has improved.
The study has demonstrated (Research Objective (ii)) that when the state
budget is analysed in percentage terms, expenditure flexibility seems to
have changed during the 1990s in two ways. First of all, the proportion of
expenditures without formal control has decreased, or, put another way,
inflexiblity deriving from inflexibility mechanisms has increased. In 1990,
87 per cent of expenditures were determined by laws, lower-level statutes,
agreements or other obligations, while in 1996 the corresponding figure was
92 per cent. Secondly, the proportion of statute-controlled expenditures has
decreased and that of agreement-controlled and authorization-controlled
expenditures has increased.
Lastly (Research Objective (iii)), this study indicated that the question
dealt with here is a topical one in many countries, but as yet little research
appears to have been carried out. Expenditure inflexibility mechanisms
have been classified either generally or else on a basis specific to a certain
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The percentual distribution of expenditure into inflexibility classes according to administrative sectors in the 1996 budget
Class 1 Expenditure controlled by statute
Constitution
Administrative sector
Ministry of
Foreign Affairs
Justice
Interior
Defence
Finance
Education
Agriculture and Forestry
Transport and
Communications
Trade and Industry
Social Affairs and Health
Labour
Environment
National debt
Total %
% of
budget
1
1
3
4
12
12
6
3
2
21
5
2
28
100
ordinary law
administrative statute
amount of expenditure controlled
amount of expenditure controlled
entirely
partly
7
20
3
free
entirely
partly
free
7
3
45
25
44
1
48
66
4
1
1
51
3
1
9
1
3
5
2
2
1
2
44
3
2
19
EXPENDITURE INFLEXIBILITY IN THE STATE BUDGET
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TABLE 5
205
206
Continued
Class 2 Expenditure controlled by agreement
international agreement
Administrative sector
Ministry of
foreign
% of membership EU-linked currency
budget payments expenditures
debt
Foreign Affairs
1
Justice
1
Interior
3
Defence
4
Finance
12
Education
12
Agriculture and Forestry
6
Transport and
Communications
3
Trade and Industry
2
Social Affairs and Health 21
Labour
5
Environment
2
National debt
28
Total %
100
12
Finnish
mark
other
debt
commitments
13
58
51
35
5
18
6
11
23
1
81
2
labour
market
agreements
12
35
Total
%
49
5
2
26
11
1
5
9
6
Class 3
Class 4
Expenditure Expenditure
controlled
without
by
formal
authorization
control
14
65
41
1
3
2
17
43
1
3
16
19
32
17
24
15
9
4
100
100
100
100
100
100
100
47
14
100
100
100
100
100
100
5
8
PENTTI MEKLIN, JUHA LIINAVUORI AND JUKKA NUMMIKOSKI
 Blackwell Publishers Ltd. 2000
TABLE 5
EXPENDITURE INFLEXIBILITY IN THE STATE BUDGET
207
country, but we could not find any research that dealt with the problem
on a very concrete level. Some reports from the countries we looked at
revealed that problems similar to those in Finland can be found elsewhere.
The issue of expenditure inflexibility has also been considered within the
administration of the EU. Notwithstanding the limited amount of evidence
available, it seems clear that in actual practice expenditure inflexibility
mechanisms and fiscal latitude do differ between countries because of their
different administrative systems; the differences would seem to be
especially marked between countries with a common law-based system and
those with a statute law-based one.
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Date received 10 September 1997. Date accepted 2 December 1999.
 Blackwell Publishers Ltd. 2000