Despite unexpected strong GDP growth in the first half of 2012, growth over the year as a whole will be just 1.5 per cent in calendar-adjusted terms. Economic activity will remain subdued next year, with GDP growth of 1.9 per cent.
Due to the deterioration in the economy, public finances are expected to produce further deficits of SEK 20 billion, or 0.6 per cent of GDP, this year and SEK 12 billion, or 0.3 per cent of GDP, next year. The central government sector is expected to show a budget deficit of SEK 18 billion this year and SEK 11 billion next year.
Economic growth slowing
GDP grew unexpectedly strong in the second quarter, based on preliminary figures from Statistics Sweden. However, elsewhere in Europe, growth is weak and the economic climate is deteriorating. There are also signs of growth slowing in other parts of the world. Several indicators suggest that the Swedish economy will decelerate in the coming quarters, and we expect growth to be weaker in the second half of the year than in the first. Above all, exports are expected to grow slowly while imports will grow relatively quickly, which means that net exports will make a significantly smaller contribution to growth. Investment is also expected to rise more slowly, while household consumption will continue to increase at a relatively rapid rate.
Economic growth will be stronger next year, but there will be no rapid recovery, as demand from Europe is subdued and uncertainty about the debt crisis is expected to hold back domestic demand. Growth will pick up in subsequent years, with the economy reaching full capacity in 2016.
The slowdown in the economy in the second half of 2012 and limited growth next year are expected to put a damper on demand for labour. The number of employed will fall during the second half of 2012 and grow slowly next year. Over 2013 as a whole, employment is expected to be largely unchanged. Unemployment will peak at 7.8 per cent next year as labour force grows faster than employment, due partly to population growth.
Relatively slow growth in tax revenue this year and next
General government tax revenue will increase by merely 2.1 per cent this year. Cyclically sensitive tax revenues will be affected primarily by the state of the labour market, household consumption, and earnings and investment in the private sector. It is mainly weak growth in taxes on consumption and capital that will put a damper on revenue this year. Although households have become more optimistic in recent months, they are still cautious about increasing spending. Value-added tax revenue will be low this year due to the lower tax rate on restaurant and catering services. Taxes on capital, the most volatile type of tax, will fall due to the decline in companies’ earnings as exports of goods and services are hit by weak external demand and a strong krona. Capital taxes in the household sector will also fall as interest income and capital gains decrease. Moreover interest expenditure will rise due to an increase in debt, leading to higher tax credits and thus lower tax revenue. Tax revenue will grow more quickly next year, with stronger growth in household consumption and exports leading above all to increased revenue from value-added tax and corporate tax.
Moderate growth in central government expenditure
Total expenditure in the central government budget will grow this year by SEK 27 billion, or 3.3 per cent, to reach SEK 831 billion, due primarily to a temporary increase in the National Debt Office’s net lending. Total expenditure will therefore fall again next year, even though expenditure in several areas is set to rise, before climbing again from 2014 onwards. The increase in expenditure over the forecast period is 4.0 per cent. As a proportion of GDP, expenditure will fall from 23 per cent in 2011 to 20 per cent in 2016.
Several different areas of expenditure will contribute to the overall increase during the forecast period. The biggest rise will be in the area of social security for families and children, due to increases in both the volume of parental leave and the average payment. Foreign aid and EU contributions will rise in line with Swedish GNP. In the area of health care, medical care and social services, expenditure on the state attendance allowance will rise, due primarily to higher hourly wage rates and more hours of care per person. The biggest decrease in expenditure during the forecast period will be on interest on central government debt. Spending on the labour market and health insurance will also fall over the entire forecast period. Unemployment will rise in 2012 and 2013, bringing higher labour market expenditure, but the labour market will then recover and expenditure in this area will fall again.
Central government budget balance
Central government is predicted to produce a budget deficit of SEK 18 billion this year, a sharp fall of SEK 86 billion from last year’s surplus. This is primarily a consequence of central government revenue being SEK 60 billion lower, due partly to non-recurring sell-off proceeds boosting the balance in 2011 and partly to lower tax revenue than last year. The budget deficit is expected to narrow to SEK 11 billion in 2013, which is an improvement from the deficit in 2012, with tax revenue unchanged and expenditure slightly down on 2012.
Deficit in public finances and no scope for reforms
Due to the weaker economy, public finances are expected to show another deficit this year of SEK 20 billion, or 0.6 per cent of GDP. Net lending in both the central government sector and the old-age pension system will fall markedly from 2011. General government net lending will be negative once again in 2013, albeit somewhat less so than this year. Slightly stronger growth in the economy will boost cyclically sensitive central government finances. Net lending in the old-age pension system, on the other hand, will deteriorate appreciably and turn negative due to the average pension rising markedly by 4.1 per cent. The average pension will, however, fall again in 2014.
The indicators for assessing the budget surplus target of 1 per cent of GDP over a business cycle suggest that there is no scope for reforms in the near future. Consolidated general government gross debt, or Maastricht debt, fell from 72 per cent of GDP on Sweden’s accession to the EU in 1995 to just over 38 per cent at the end of 2011 and is expected to be below 37 per cent at the end of 2013.
Proposed reforms and their effects on the budget surplus target
On 24 August the government announced plans for the budget bill for 2013 to include reforms of SEK 23 billion next year. ESV has not taken account of these reforms as they have not been decided nor specified. Should reforms on this scale be introduced, our forecast for general government net lending in 2013 would fall from -0.3 to -1.0 per cent of GDP. The indicators for the budget surplus target, which are already suggesting an undershoot in the baseline forecast, would then be even more negative. The picture is brighter closer to the forecast horizon, but the surpluses predicted depend partly on the economy returning to its potential without any shocks or further active fiscal policy measures in the interim. Expected surpluses tend also to shrink as the distance between the current year and forecast years decreases.