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National Audit Office’s Annual Report to Parliament 2022

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The social security reform and supporting trade and industry call for holistic management

Long-term objectives are set for the amendments of benefit systems and for central government measures aimed at supporting economic activities and growth. However, preparations have not always succeeded in sufficiently foreseeing the costs the reform will cause to the central government or in focusing on the support, steering and monitoring required for the implementation. The cooperation between administrative sectors has improved in recent years, but it is still important to pay attention to long-term funding and the coordination of cross-sectoral steering.

Over time, the central government systems and policy measures have developed overlaps and features that should be removed because of the changes taken place and the foreseeable developments in the operating environment. The decentralised steering, short-term funding and insufficient follow-up of these systems and policy measures make it difficult to assess the cost-effectiveness and societal impacts of the activities. They also undermine the utilisation of this information in the planning of future activities.

Social security reforms require a good knowledge base and an ability to manage the overall system

Since the recession in the 1990s, efforts have been made to increase incentives to work by reforming taxation and removing incentive traps in the social security system. The removal of various incentive traps aims to increase tax revenue and reduce social security expenditure.  The student financial aid scheme was also reformed in the 2010s. The reforms have aimed to ensure adequate livelihood for full-time students and to promote full-time studying. The aim with this has been to speed up studies and students’ transition to working life.

When benefit system reforms are prepared, it should be ensured that it is possible to conduct reliable impact assessments of them.

Based on the audits conducted by the National Audit Office, benefit reforms should pay attention to the benefit schemes as a whole. The reforms should be based on a reliable knowledge base and enable impact assessments during the preparatory phase. When reforms are prepared, it would be important to utilise the expertise of the implementers and to assess and monitor the impacts of the reforms on the behaviour of the target groups.1, 2 At present, this is not taken sufficiently into consideration.

In the preparation of the social security reform, special attention should be paid to incentive traps as a whole

Different incentive traps form a whole. When reforms are prepared to remove them, it would be important to examine whether other traps remain in legislation or its implementation that hamper the achievement of the objectives set for the reform. The reforms should also be adequately communicated to the main target groups.1

The National Audit Office audited tax, enforcement and social security reforms aimed at removing unemployment, revenue, bureaucracy and information traps1. Unemployment and income traps refer to situations where it is not financially motivating to accept work or earn additional income from work. Bureaucracy traps can emerge from the uncertainty, paperwork or dealings related to access to benefits, for example when accepting short-term work. Information traps are situations where the person has inadequate or incorrect knowledge of, for example, the possibilities of reconciling social security and earned income.

Based on an audit conducted, it became easier to reconcile earned income and unemployment security when the adjustment of unemployment benefits was reformed in 2019. The reform shortened and reduced the delays in the payment of unemployment benefits receivable in addition to earned income, because it is no longer necessary to wait for earnings data when the amount of the benefit is calculated. However, unemployed jobseekers are not necessarily aware of the new practices, which may reduce the willingness of some people to accept short-term or part-time work.1

The reform made at the beginning of 2018 aimed at increasing incentives for unemployed jobseekers to start a business. For this purpose, the assessment of whether the business activities are of full- or part-time nature was postponed to a later stage. The assessment is currently made only four months after the start of a business. This means that the right to unemployment benefit remains in force for the first four months.  Nevertheless, the problem with the reconciliation of entrepreneurship and receiving unemployment benefit has remained unchanged, as there are still no clear criteria for assessing the full- or part-time nature of entrepreneurship. It may be difficult for unemployed jobseekers to anticipate how entrepreneurship will affect their right to receive the unemployment benefit. The uncertainty may reduce the willingness of unemployed persons to try out entrepreneurship.1

Unemployed persons may also be encouraged to start a business if they participate in the entrepreneur education provided as vocational labour-market training. The National Audit Office audited the cost-effectiveness and impacts of this training in 2018. In the follow-up of the audit, it was found that it has been somewhat better ensured in experiments and reforms that the good practices of labour-market training are maintained, that the activities continue uninterrupted, and that the services are consistent. On the other hand, the impact assessment of labour-market training and, in particular, the setting of monitoring indicators describing the activities have not yet reached a satisfactory level.3

The enforcement system reform, which entered into force in 2018, sought to increase incentives to work by providing the long-term unemployed with the right to a deferral of garnishment of wages or salary for a maximum period of six months from the start of employment. The right was limited to those who were employed within the scope of the income limit garnishment. On the basis of the audit, the implementation of the right of deferral has proven to be difficult, and a significant number of applications for deferral are rejected. The reform does not seem to increase incentives to work even temporarily. The incentive effect is reduced by the fact that debt bears interest during the deferral. Instead of deferral of garnishment, it would, therefore, be important to develop the enforcement system by creating solutions that speed up escape from debt.1   

Incentives to work have also been promoted by easing the taxation on earned income, but this is expensive.  According to the audit findings, the beneficiaries of unemployment security and those outside the labour force are not very familiar with the differences between the taxation of unemployment security and earned income. Nor do they feel that lighter taxation on earned income has any significant impact on the decisions they make regarding employment1. More detailed information is needed on the actual behavioural effects of the difference between the taxation on earned income and unemployment security.

Student financial aid reforms led to significant unforeseen expenditure

When student financial aid is reformed, it would be important to strive to overall management of the multifaceted effects of the reform. The impacts of an individual reform are reflected in central government expenditure, degree completion times as well as students’ livelihoods, employment and housing choices. In the 2010s, the central government’s annual student financial aid expenditure varied between EUR 473 million and EUR 806 million. In addition to impacting direct benefit expenditure, the student financial aid scheme can have an impact on employment. The student financial aid consists of the study grant, the housing supplement and the state guarantee for student loans. After the student housing allowance reform, student households have become the largest group of general housing allowance recipients.2 

In the student financial aid reform of 2017, the study grant level of higher education students was decreased while the state guarantee for student loans was raised. At the same time, students were transferred from the housing supplement of student financial aid to the general housing allowance. The reform aimed at a savings of around EUR 112 million in central government finances. Based on the audit, savings were only achieved in study grants. However, the transfer of students to the scope of the general housing allowance led to significant unforeseen expenditure. The housing allowance reform of 2018 had already increased the expenditure by at least EUR 130 million, while in the preparatory phase, the increase had been estimated to be EUR 54 million (see Figure 1). The knowledge base of the housing allowance reform was unreliable, as outdated information on accommodation costs was used in the assessment calculation. The unforeseen expenditure may also be partly explained by the fact that more students than expected had moved to more expensive accommodation after the reform. Students’ average accommodation costs continued to increase in 2019 and 2020, faster than those of other groups receiving general housing allowance.2

The student financial aid reform of 2014 introduced student loan compensation for new higher education students. This means that the Social Insurance Institution of Finland (Kela) pays 40 per cent of the student loan exceeding EUR 2,500 if the student completes the degree within the target time. On the basis of the audit, the expenditure estimated in the preparatory phase of the student loan compensation had been exceeded by EUR 48 million by 2021 (see Figure 1). However, the cost overrun cannot be interpreted as a failure, as the objective of the reforms was to increase the use of student loans. The degree completion times shortened in both universities and universities of applied sciences during the 2010s, which may have a positive impact on employment. The proportion of those who had completed a degree in a university or a university of applied sciences within the target time was approximately 4─5 percentage points higher among the students who had begun their studies in the autumn of 2014 than among those who had begun their studies the year before and were not entitled to the student loan compensation. However, the proportion of those who completed their degrees in universities of applied sciences within the target time had already increased before the student loan compensation was introduced.2

The use of student loans has increased and the completion times of higher education degrees have shortened as a result of student financial aid reforms.

When the adequacy of student financial aid is assessed, it is important to take into account both the amount of loan used by the recipients of the aid as well as their earned income. The adequacy should be monitored based on personal-level data. Based on the income data registered by Kela, the average real income of those receiving student financial aid increased at all levels of education during the 2010s. Earned income continues to be the most significant source of income for the recipients of student financial aid, but working may also slow down the completion of higher education studies. However, based on current information, it is unclear whether working during studies makes it easier to find employment after graduation.2

The introduction of the student loan compensation in 2014 was estimated to increase benefit expenditure by EUR 36 million by 2021. However, the expenditure increased by EUR 84 million. The study grant cut in 2017 was expected to bring savings of EUR 103 million in study grant expenditure by 2019. The actual savings amounted to EUR 96 million. The student housing allowance reform was estimated to bring savings of EUR 250 million in housing supplement expenditure. The actual savings amounted to EUR 255 million. The reform was estimated to increase general housing allowance expenditure by EUR 304 million, but the expenditure increased by EUR 379 million. Social assistance expenditure was estimated to decrease by EUR 55 million, but the actual decrease was EUR 44 million. The 2017 reform aimed at savings of EUR 112 million between 2016 and 2019. However, the reform increased the benefit expenditure by EUR 47 million.
Figure: The key impacts of the 2014 and 2017 student financial aid reforms on benefit expenditure.2

The objectives and impacts of activities of a permanent nature can be achieved through long-term financial planning, monitoring and cooperation

The objectives and implementation of strategies, roadmaps or other Government decisions are strongly tied to government terms, even though the activities described in them are of a permanent nature, and their impacts are expected to extend beyond government terms. Examples of such activities include state support and funding for regional development and for research, development and innovation (RDI). These activities were also audited4, 5. The state supported regional development by approximately EUR 369 million in 2018 and by approximately EUR 474 million in 2022. The state’s R&D funding amounted to EUR 1.95 billion in 2018 and EUR 2.49 billion in 2022.

The planning and use of funding for permanent or long-term purposes should be enhanced, and the activities should be monitored adequately.4, 5 Furthermore, data management should be developed, and attention should be paid to its ex-ante and ex-post assessment, so that the data produced can be used in the future development of activities.4

The central government activities should be seen by the responsible parties and service users as uniform and consistent. This can be achieved by focusing on coordination between different administrative sectors and on cooperation between different administrative levels.4, 5, 6, 7 Cooperation within the central government promotes operational efficiency, productivity and effectiveness but requires that intangible capital is managed as a whole. At present, intellectual capital is too fragmented across different administrative sectors and levels, and its elements are managed separately. Therefore, financial steering is also fragmented. Figure 2 illustrates the various elements of intellectual capital and their interdependence as a system of cogwheels.

The various elements of intellectual capital are interlinked, and these links can be illustrated by a system of cogwheels, consisting of individual cogwheels (competence, interaction, structures) and their functioning interrelationship. In order for the system to function, the cogwheels must be balanced and synchronised. The cogwheels are as follows. Human capital: Quantity and quality, right competence, professional skills, intellectual condition, wellbeing at work, enthusiasm, commitment, motivation, ability to create new. Relationship capital: Actors, customers, partners, subcontractors and suppliers, communities, networks, other stakeholders. Structural capital consists of four segments. 1. Systems and processes: Opportunities for acquisition, sharing and utilisation of knowledge and competence; competence development and learning opportunities; knowledge and competence management; taking care of people's wellbeing and health; taking care of data protection and information security; interaction and communication. 2. Organisational structure: Cooperation; operating methods and models. 3. Technology (ICT): ICT opportunities; access to information; tools; information networks; social media systems and other platforms enabling ecosystems and platform economy activities. 4. Mental structures Atmosphere; sense of community; values; culture; leadership.
Figure: Intellectual capital management as a whole. (Information: Rastas & Einola-Pekkinen 2001 and Otala 2008)4

Short-term financial steering has made it difficult to support the commercialisation of research data

The aim of the growth strategy for health-sector research and innovation activities is to make Finland an internationally renowned forerunner in health-sector RDI and business. Based on the audit conducted, the efficient implementation of the growth strategy and its roadmap 2016–2018 as well as the assessment of the effectiveness of the strategy have been hampered by the general nature of the objectives, the poor coordination between the steering instruments, the short-term nature of the funding and the unclarity of the responsibilities and duties of different actors. Cross-sectoral RDI activities in the health sector and the funding allocated to them have been steered primarily by the administrative sector. However, the strategy set objectives for the entire data value chain, and the new financial instruments have made it possible to allocate funding to different parts of the value chain. Financial support for research data utilisation should cover the entire value chain from data production to data commercialisation so that funding organisations can plan the overall funding in the long term. Short-term financial steering has made it difficult to support the commercialisation of research data.4

Based on the audit, the health sector lacked data policy and management principles in 2016–2018. Such principles would have defined the responsibilities, needs, opportunities and solutions related to data management in the sector. The health sector growth strategy did not include an assessment of the impacts of its implementation on the formation of intellectual capital for the state or RDI actors, nor did it include a requirement to foresee or assess the financial impacts of its implementation. Therefore, the cost-effectiveness of development measures has also been assessed only in a limited manner.4

The strategic, operational and financial steering of RDI activities and research data should be better coordinated.

In the implementation of the growth strategy, data management has consisted of the identification, compilation and transmission of data and data needs. However, only part of the data produced has been used for the development and monitoring of the implementation. The development work carried out by the ministries and funding organisations, on the basis of their own needs, has undermined the overall management of the growth strategy and its implementation. No clear objectives or resources have been allocated for assessing the produced data or utilising it in future activities.4

Fluctuating funding complicates long-term regional development

Regional development calls for longer-term resource planning in order to achieve the sustainable growth, competitiveness and other regional development objectives. The purpose of regional development is to promote the sustainable development, growth and competitiveness of the regions and enhance the well-being of the residents and the quality of the living environment. Regional development activities are steered by the regional development decision issued by the Government and the regional programmes. The regional development decision sets objectives for 2030 and underlines the importance of having an operating environment that encourages innovation and entrepreneurship across Finland. National objectives are supported with funding from both the central government and EU programmes. As a result of the Covid-19 pandemic, the appropriations for regional support doubled in 2020–2021 compared with the previous years.5

On the basis of the audit, the regional development decision 2020–2023 was prepared and implemented as planned. Variations in regional development funding and inadequate effectiveness indicators in the implementation plan of the decision undermine the achievement of the operational objectives and their monitoring. This causes the activities to fluctuate as well as hampers the implementation of contractual activities and the dialogue with the regions.5

Future regional development decisions should set comprehensive effectiveness indicators to make it possible to assess the achievement of the objectives.

Due to the Covid-19 crisis, the regions were granted recovery funding in autumn 2020. To receive the recovery funding, the regions had to draw up their own survival plans for the renewal of their economic structure. The survival plans were to focus on measures based on innovation, competence and international activities that accelerate digitalisation and the building of a sustainable and carbon-neutral society. According to the audit, the survival plans had been drawn up on a very general level, and their content had no significance in the regional distribution of the funding. However, regional stimulus measures have indirectly supported the objectives and implementation of the regional development decision.

The National Audit Office observed regional and sectoral variation in the business development aid granted by Business Finland and the Centres for Economic Development, Transport and the Environment (ELY Centres) to tourism sector companies affected by the Covid-19 crisis in spring 2020. In individual cases, the grounds for the aid decisions were not fully consistent, and applicants in different regions were not treated in a completely equal manner. Generally speaking, the grounds for rejection were in line with the criteria, i.e. the aid applications did not meet the conditions set. The business development aid granted to tourism companies totalled approximately EUR 120 million.5

The central government has promoted companies’ investments by improving their operating conditions but should make further efforts to digitise services

Based on the follow-ups of audits, the central government has taken a number of development measures in recent years to improve the operating environment of companies and promote investment.6, 7 In audits published in 2017, the National Audit Office found that the Government can influence companies’ investments, for example, by clarifying legislation, developing decision making, strengthening the infrastructure and streamlining the permit processes. The National Audit Office also recommended increasing the dialogue between government agencies and companies and strengthening the infrastructure as well as the marketing and public procurement competence in public administration.6 In 2019, the National Audit Office recommended that the digitisation of services should place even more emphasis on customer-orientation and a closer connection between the support, steering and funding models of digital development.7

In the administrative sector of the Ministry of Finance, development activities have focused on digital services in order to make transactions between companies and government agencies smoother. In the administrative sector of the Ministry of Economic Affairs and Employment, the key measures to promote the investment environment, exports, internationalisation and the familiarity of Finnish expertise were the establishment of Business Finland in 2018 and the revamp of the strategy for the Team Finland network in 2019. The administrative sector of the Ministry of Social Affairs and Health has promoted investments in pharmaceutical development and the pharmaceutical industry. It has also harmonised bio-banking, which can support RDI activities in the health sector as well as the development of products and services. However, the objectives of promoting the digitisation of public administration have not been fully achieved, and various operating models and services continue to require attention.7

The Covid-19 pandemic significantly altered the efforts to promote investment worldwide. Instead of new customer acquisition, investment promotion organisations in many countries have focused on the aftercare model, which seeks to encourage companies already operating on the market to grow their business. The resources to be allocated to aftercare work should be taken into account in Finland as well.

In spite of the Covid-19 pandemic, the number of new foreign investments (acquisitions and new investments) has been relatively stable during the past five years, on average around 283 per year. However, there have been major fluctuations in the net payment flow. In some years, investments withdrawn from Finland have exceeded those made in Finland.

Further information

Antti Halmetoja
Senior Auditor