Large deficit in general government net lending
17 June 2020 | News
The coronavirus pandemic is having a huge impact on the world’s economies. GDP is falling sharply in Sweden this year and employment is falling rapidly. Reduced tax revenues and increased expenditure to mitigate impact of the pandemic on the economy are creating a large deficit in general government net lending. The largest deficit is expected mainly all at the central government level. Structural savings are below the target level this year and the Maastricht debt will be higher than the upper limit for the debt anchor. However, comprehensive fiscal policy measures are necessary in a deep economic crisis.
Largest government deficit for more than 25 years
General government net lending is weakening sharply as a result of the crisis caused by the coronavirus. The deficit is mainly growing at the central government level, and it is now the largest for more than 25 years. By contrast, the deficit in the local government sector will be smaller this year than last year, despite reduced tax revenues. This is partly due to the fact that the local government sector is compensated for reduced tax revenues through increased government grants, and partly because investments are decreasing compared to their very high level last year.
The deficit remains large next year, although considerably smaller than this year. However, it will be significantly smaller at the central government level. This is mainly due to the fact that most of the measures that have been taken to mitigate the effects of the coronavirus pandemic are temporary for this year. The recovery in the economy will also contribute to improve savings.
In the local government sector, however, the deficit will be larger next year. The reason is that the situation becomes much more strained in the municipal sector when government grants decrease while tax revenues still are at a relatively low level.
The budget balance, which is another balance measure for the state, is expected to reach a deficit of almost SEK 400 billion this year. This is considerably greater than the deficit in central government net lending. This difference can mainly be explained by temporary deferrals of tax payments and reduced capital investments in tax accounts. These have an impact on the budget balance, but not on net lending. The budget balance equals the borrowing requirement, only with the opposite sign.
The consolidated gross debt (Maastricht debt) is rising sharply this year to 46 per cent of GDP, as a result of the large deficit. This is above the limit for the debt anchor, although from an international perspective, Sweden’s central government gross debt is still low.
Savings well below the target level
Structural savings are expected to amount to -3.0 per cent of potential GDP this year. This is significantly lower than the target level of a third of a per cent of GDP. It is however reasonable to deviate from the surplus target if the economy suffers a severe and unpredictable shock. The measures being taken to reduce the spread of infection, to support companies and anyone who becomes ill or unemployed, as well as to compensate the local government sector for lost tax revenues, are important in this crisis. They soften the effects of the crisis and facilitate the recovery as economies now gradually open up and demand increases.
Extensive measures due to the coronavirus
In order to mitigate the impact the pandemic has on the economy, extensive support have been introduced. These measures will totally amount to more than SEK 200 billion this year. The net amount will be smaller, however, as part of the support is taxable. The Swedish National Financial Management Authority’s (ESV) assessment of costs is lower than that of the government. The main difference lies in the assessment of expenditure relating to short-term layoffs. This is because ESV is expecting the support to be paid out for a shorter period of time than the government expects.
Measures resulting from the coronavirus pandemic
|Career readjustment support||39||39|
|Reduced employers’ social security contributions||33||42|
|Unemployment insurance fund, unemployment insurance policy, etc.||13||12|
|Infection control measures||4||4|
|Capital injections, state enterprises||4||4|
|Public transport and roads||4||4|
|Sport and culture||2||2|
Source: Government and ESV
* The amount includes measures that have not only been introduced due to corona. It therefore deviates from the amount presented by the government.
** Net effect in brackets. Since several of the grants are taxable, public finances are not affected by the full amount.
GDP will fall by 6.5 per cent this year and employment will fall by 120,000 persons. As a result of the sharp decline in economic activity, both GDP and the employment level are projected to end up well below their potential levels this year. The Swedish economy has thus entered a deep recession. There are however signs that a recovery has begun now that many countries are gradually opening up their economies. The recovery continues next year. The Swedish economy will not be back to the level it was at before the start of the pandemic and the recovery continues over the next two years. Nevertheless, we estimate that it will take several years before the Swedish economy returns to the level it was at before the start of the pandemic and the recovery continues over the next two years.
The pandemic is having a major impact on the labour market. Employment plans among private enterprises have been drastically cut back, redundancy notices have increased to historically high levels and the number of people newly registered as unemployed at the Swedish Public Employment Service has increased sharply. The employment rate will decrease by almost 2 percentage points. The sharp fall in employment means that unemployment is soaring, even though participation in the labour force is also falling slightly.
The significant deterioration in the labour market is resulting in a reduction in the rate of wage growth. The wage agreements for a vast majority of the labour market expired by the end of March this year. The agreements has been extended and the collective bargaining has been postponed until the autumn. The negotiations at that time are expected to result in lower wage increases than in recent years, since unemployment has risen sharply in a short space of time.
CPIF inflation will be as low as 0.2 per cent this year. The considerable weakening in demand is slowing down price increases, particularly in the services sector. Energy prices are also falling.
Large fall in tax revenues
The downturn in the economy is having a significant impact on tax revenues. These will fall by SEK 130 billion this year, which is a very large reduction in historical terms. The loss of revenue is having a broad impact across the various tax types, as most tax bases are shrinking. Temporary rules aimed at countering the harmful effects of the crisis are also contributing to a reduction in revenues. The greatest loss is for tax on capital. Tax revenues will increase again next year, as a relatively strong economic recovery is anticipated.
Revenues from tax on labour are declining as a result of a weak labour market and the temporary reduction in social security contributions. However, government support for shortterm layoffs weakens the fall, as total earnings would otherwise have decreased by considerably more. Revenues will increase again next year, as total earnings are expected to increase at the same time as the regular rules for social security contributions then will be applied again.
Revenues from tax on capital are falling sharply this year. Household capital taxes are decreasing as a result of falls in both capital gains and share dividends. Tax on corporate profits is decreasing, as companies are experiencing reduced demand and, in certain cases, facing production difficulties as a result of the coronavirus pandemic. Revenues will increase again next year, mainly as a result of the fact that tax on corporate profits is expected to increase rapidly.
Although there are signs of a turnaround for some subsets of household consumption, the revenues from consumption tax will fall sharply this year. This is because overall household consumption is decreasing, which has a significant impact on VAT revenues. In historical terms, it is very rare for VAT revenues to decrease year on year. As household consumption will increase rapidly next year, revenues will rise again.
The tax ratio is declining this year. This is a consequence of the temporary reduction in social security contributions and the sharp reduction in capital taxes. The tax ratio will rise marginally next year, due to the fact that tax on capital will grow slightly faster than GDP.
Spending rising sharply this year due to emergency measures
Total spending in the state budget is increasing sharply this year, but will fall next year. The large increase is mainly a result of all extensive government measures being taken with intention to soften the effects the ongoing pandemic has on the economy. Total expenditure will fall again next year, as most of the emergency measures are temporary.
Spending on business is increasing, mainly as a result of state aid for short-term layoffs and turnover support for companies. General grants to local authorities have been increased to strengthen welfare and to support the local government sector during the pandemic. Spending on health and social care is increasing, in part a result of costs for testing and extraordinary measures to control infection. Spending in the labour market sector is increasing, mainly because unemployment is rising. Spending on illness and disability is increasing, as the state has temporarily taken over all costs for sick leave and the compensation for qualifying deductions. However, spending on migration and integration is continuing to fall.
The expenditure ratio, i.e. total expenditure as a share of GDP, is growing sharply this year. This is because expenditure is increasing greatly as a result of measures aimed at countering the crisis, at the same time as GDP is falling.
Due to the pandemic, the expenditure ceiling was raised in this year’s spring supplementary budget. As a result, the expenditure ceiling will be cleared by a healthy margin this year, despite the large increases in spending resulting from the pandemic. The remaining margin will be small next year, however, bearing in mind the required safety margins.
Continued great uncertainty about the effects of coronavirus
There is still considerable uncertainty about the extent of the effects of the coronavirus pandemic on the Swedish economy. We now estimate that the fall in GDP, and thus the deficit, will not be as strong as we estimated in our update of the economic situation in May. If the pandemic continues for a prolonged period of time, however, growth may be weaker and the deficit will be larger. The recovery may also be faster. Some indicators have reported an upturn in the latest surveys and there are signs of recovery in parts of the economy. Although it is still too early to say if activity in the Swedish economy has started to increase again.
It is also uncertain how much some of the support that has been introduced as a result of the coronavirus pandemic will cost. In particular, this relates to the support for short-term layoffs and the fact that the state is temporarily taking over the cost of sick leave. At present, it is difficult to know how many companies will apply for short-term layoffs, as well as how long and what proportion of the working hours they will be applying for.