Uncertainty about the debt crisis in Europe has eased, and Swedish households and businesses are more optimistic. The Swedish economy is therefore expected to expand again in the second quarter, but only marginally over 2012 as a whole. As a result of further subdued demand from Europe and rising unemployment putting a damper on household consumption, GDP growth will remain moderate in 2013, only really taking off in the second half of the year. The weak GDP growth will reduce the demand for labour, causing employment to fall and unemployment to rise in both 2012 and 2013.
Preliminary figures indicate a small surplus of 0.2 per cent of GDP in 2011 in general government net lending, after deficits of 1.0 per cent in 2009 and 0.1 per cent in 2010. The surplus was due primarily to substantial net lending in the old-age pension system. This year the weaker economy is expected to result in a deficit of SEK 25 billion or 0.7 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 less so than this year. The economic recovery will boost cyclical central government finances, but net lending in the old-age pension system will deteriorate appreciably and turn negative.
The central government budget is predicted to show a deficit of SEK 13 billion this year, a substantial decline of around SEK 80 billion from the surplus in 2011. A deficit is also forecast for 2013, albeit a somewhat smaller one than this year. The deterioration in 2012 is due mainly to a drop of SEK 55 billion in central government revenue, a result partly of non-recurring sell-off proceeds enhancing the result for 2011 and partly of lower tax revenues than last year. This year the slowdown in the Swedish economy entails a slow increase in general government tax revenues compared to last year. Growth in taxes on labour income is low somewhat due to the number of hours worked falling both this year and next. Taxes on capital income will also decrease somewhat this year, due mainly to corporate earnings falling as exports of goods and services are hit by the international turmoil, but also because of a rise in households’ interest deductions. Central government expenditures will increase very moderately in nominal terms and decrease relative to GDP as the economy picks up later in the forecast period, falling from 23 per cent of GDP in 2011 to 19 per cent in 2016. Virtually all classes of expenditure will contribute to the decline in the ratio of expenditure to GDP, the exceptions being migration and international aid, where spending will rise in line with GDP.
Consolidated general government gross debt, or the Maastricht debt, is expected to be 36 per cent of GDP at the end of 2011 and hold at roughly the same level in 2012 before falling even faster to 25 per cent in 2016. The Maastricht debt comprises mainly central government debt and only to a lesser extent local government debt. Central government debt is expected to be SEK 1 104 billion at the end of this year, slightly higher than a year earlier, due primarily to a change in the definition of central government debt with effect from 2012. The change makes no difference to the actual level of debt, only to the way in which it is reported. Since the Maastricht debt is unaffected by the revised definition, the gap between central government debt and the Maastricht debt will narrow.
The slowdown in the economy, with a slow growth of tax revenues, presents a challenge for local government. Revenues sets the limit for how much activity in the sector can be permitted to rise due to the statutory balanced-budget requirement that must be met every single year. This means that consumption growth will be moderate in the coming years, averaging less than 0.5 per cent per year.
Net lending in the old-age pension system is forecast to be SEK 6 billion or 0.2 per cent of GDP this year, down from SEK 19 billion or 0.5 per cent of GDP in 2011. Net lending will deteriorate during the forecast period, due partly to a larger number of pensioners.
Although a number of political decisions have reduced uncertainty about the European debt crisis, it still presents a risk of weaker growth. For as long as many countries remain heavily indebted and there are no clear political decisions on how this debt is to be repaid, uncertainty may flare up again. If politicians act responsibly and growth begins to pick up, however, the recovery may be more rapid than expected.