Following the sharp deterioration in the economy at the end of last year, Swedish GDP grew unexpectedly strong in the first quarter of 2012. In the light of this strong outcome, our forecast for GDP growth this year has been revised up to 1.1 per cent. Although the first quarter was strong, the outlook is still uncertain. The European debt crisis has flared up again, the main causes for concern now being Spain's debt and banking problems and whether Greece will leave the currency union. Growth will be stronger next year, but there will be no rapid recovery as demand from Europe is expected to remain moderate. Employment has so far proved relatively robust to the downturn in the economic climate. The slowdown in the economy this year and limited growth next year will, however, put a damper on demand for labour, and so the number of employed will fall during the second half of this year and increase slowly next year. Over 2013 as a whole, employment is expected to be largely unchanged. Unemployment will rise next year as the labour force outpaces employment, due partly to population growth.
Healthy public finances but no scope for reforms
Due to the weaker economy, public finances are expected to produce a deficit of SEK 22 billion this year, or 0.6 per cent of GDP. General government net lending will be negative once again in 2013, albeit less so than this year. Central government’s cyclically sensitive finances will be boosted by the economic recovery, while net lending in the old-age pension system will weaken substantially and turn negative, mainly for demographic reasons. Local government net lending will be increasingly negative during the forecast period.
Public finances are healthy but will not meet the budget surplus target of 1 per cent of GDP. In other words, there is no scope for unfunded reforms, at least not in the near future. Any such reforms would result in a larger deviation from the surplus target.
Central government is predicted to produce a budget deficit of SEK 8 billion this year, a sharp fall of SEK 75 billion from last year’s surplus, due primarily to sell-off proceeds boosting the balance in 2011. The deficit is then expected to widen to SEK 17 billion in 2013.
The slowdown in the Swedish economy means that general government tax revenue will grow only by a moderate 2.4 per cent this year, pulled down mainly by taxes on consumption and capital. Taxes on capital, the most volatile type of tax, will fall because corporate earnings decline when exports of goods and services are hit by a weak external demand. Taxes on capital from the household sector will also fall as interest income and capital gains decrease.
Total expenditure in the central government budget will grow by 3.1 per cent this year, due primarily to a temporary increase in the National Debt Office's net lending. Expenditure will then drop back in 2013 and 2014 before climbing again in 2015, due mainly to a temporary rise in interest expenditure. The overall increase in expenditure during the forecast period is a moderate 3.3 per cent in nominal terms. As a proportion of GDP, however, expenditure will fall from 23 per cent in 2011 to 19 per cent in 2016.
Consolidated general government gross debt, or Maastricht debt, was just over 38 per cent of GDP at the end of 2011 and is forecast to drop slightly this year and next year to reach 37 per cent at the end of 2013.
Central government debt is expected to be just over SEK 1,100 billion at the end of this year, SEK 28 billion higher than in 2011, due primarily to a change in the definition of this debt, but also to the budget deficit. Central government debt is then expected to rise somewhat further in 2013 due to the budget deficit.
The local government sector is expected to report a relatively large surplus this year on account of a one-off refund of premiums by pension company AFA. Part of the refund will be used to fund increased expenditure, but much of it is likely to be used to repay debt. Social security payments are expected to grow in the years ahead. Based on the latest population forecast, employment is expected to increase, but so will the proportion of people outside the labour force.
Net lending in the old-age pension system is forecast to be SEK 6 billion this year, down from a surplus of SEK 19 billion or 0.5 per cent of GDP in 2011. Besides variations resulting from the indexation of pensions, expenditure on earnings-related pensions will increase chiefly as a result of a higher number of pensioners.