The political economy of debt sustainability analysis: A case study of the Finnish debt brake

This paper critically examines the debt sustainability analysis (DSA) calculations underpinning Finland's new national fiscal rule, the "debt brake." The rule requires the public debt-to-GDP ratio, currently around 90 percent, to decline by at least 0.75 percentage points annually until it reaches 40 percent. Its implementation will rely on DSA calculations by the Finnish Ministry of Finance (MoF), which estimates that the next government must undertake fiscal adjustment amounting to more than 10 percent of this year's central government appropriations. Drawing on the European Commission's DSA framework, the paper reconstructs a model analogous to the MoF's unpublished model and analyses how assumptions about fiscal multipliers, automatic stabilisers, and hysteresis effects shape projected debt dynamics. It then compares expenditure-based consolidation with revenueand investment-based alternatives under different multiplier assumptions. The results suggest that the MoF's calculations may underestimate the adverse effects of spending cuts on growth and debt dynamics. Alternative scenarios based on revenue measures and public investment can produce comparable or better debt outcomes while sustaining higher output. The paper shows how technical modelling choices, which often escape sufficient critical scrutiny, shape perceived fiscal policy space.