Net lending close to the target level next year but the expenditure ceiling risks being exceeded

28 March 2022 | News

The growth in the economy remains high this year, even though it is slowing down compared with last year. GDP is now expected to be in line with potential level, and growth will therefore be significantly weaker in the coming years. Russia's invasion of Ukraine is affecting the global and Swedish economy, but the extent of uncertainty is very high. The general government net lending deficit this year remains at about the same level as last year. The extensive measures in the decided budget for 2022, as well as the extra amending budgets and additional announcements submitted thereafter, contribute to net lending continuing to show a deficit this year. Structural net lending is below the target level for the surplus target for the third year in a row. A deviation from the target level has been justified in the economic crisis caused by the pandemic. However, since the economy is broadly expected to be in balance by 2022, a deviation from the target cannot be said to be in line with the fiscal policy framework this year. At the same time, the Maastricht debt is lower than the target level for the debt anchor in 2022 and public finances are fundamentally strong. The ceiling-restricted expenditures are expected to exceed the level of the expenditure ceiling next year and the government may need to cut expenditures to avoid this.

GDP is expected to increase by 3.2 percent this year, and is now estimated to be in line with potential level. In the coming years, the growth rate will be significantly weaker, just over 1.5 percent. Russia's invasion of Ukraine is expected to dampen growth to some extent, but the uncertainty about how much impact the war will have on the Swedish and global economy is very high. The already high inflation will be even higher as a result of the war and amounts to almost 4 percent this year. It is above all high energy prices that contribute to high inflation, but underlying inflation is also rising. Next year, inflation will be significantly lower as energy prices fall. As a result of GDP growth remaining relatively high, employment will continue to increase rapidly this year and unemployment will fall.

Tax revenues will increase significantly more slowly this year than last year. The decided budget and the government's support package entail tax cuts this year of a total of SEK 22 billion. A relatively strong growth in the economy means that the tax bases will continue to increase this year, albeit at a slower pace than last year. Next year, revenues will increase more than this year, although most tax bases will increase more slowly then. This is due to tax raises of a total of SEK 28 billion, including temporary subsidies that cease. The tax ratio will decrease this year, mainly as a result of tax cuts and a sharp decline in households' capital gains, but will rise again in 2023. The tax ratio then remains at a clearly lower level than before the pandemic, which is due to the fact that a not insignificant proportion of the tax cuts decided since the pandemic began are permanent.

Both the ceiling-restricted expenditure areas and the total expenditure in the central government budget will increase this year and then decrease next year. The ceiling-restricted expenditure areas will increase this year, despite the fact that most of the pandemic-related measures will cease. This is due to relatively large expenditure increases in the decided budget, in several amending budgets and in additional announcements. This year, total expenditure increases more than expenditure for the ceiling-restricted expenditure areas, which is a consequence of increased net lending by National Debt Office and increased interest on central government debt. Next year, spending will decrease as there is not yet a budget for 2023 and all temporary crisis measures have ceased. Despite the fact that revenues are growing relatively much this year, as a result of a fairly favorable macroeconomic development, net lending in the general government sector are not strengthening. Instead, the deficit remains at about the same level as last year. The extensive measures in the decided budget for 2022 as well as the extra amending budgets and additional announcements submitted thereafter contribute to this. It is still the central government sector that shows a deficit this year, while the local government sector and the old-age pension system show a surplus. From next year, the local government sector is expected to show a deficit, while the general government sector as a whole is expected to have a surplus that grows for each year thereafter.

Structural net lending will weaken this year, partly due to large expenditure increases, and partly due to further tax cuts. It is thus below the target level for the surplus target, for the third year in a row. A deviation from the target level has been justified in the economic crisis caused by the pandemic. However, since the economy is broadly expected to be in balance by 2022, a deviation from the target cannot be said to be in line with the fiscal policy framework this year. According to the ESV's assessment, the structural net lending will not, with decided and announced fiscal policy, reach the target level next year either. At the same time as structural net lending deviates from the target level, the Maastricht debt falls below the level of the debt anchor and public finances are basically strong. However, the debt anchor is not an operational goal for the budget process, but rather a benchmark for debt in the medium term. The local government sector as a whole meets the balance requirement by a good margin this year.

The Maastricht debt will fall by 4 percentage points this year to 31.5 percent of GDP. The decrease is largely due to a positive non-recurring effect in the form of repayment of the Riksbank’s loans. Next year, debt will continue to fall as GDP grows at the same time as crisis measures have ceased and the Riksbank repays the last foreign currency loans. The debt will then be lower than the lower limit for the debt anchor. The consolidated central government debt shows the same pattern and falls to 21 percent of GDP this year. It then continues to decline throughout the forecast period.

The ceiling-restricted expenditures are still high next year and exceed the expenditure ceiling by SEK 3 billion. Table 1 below describes the development of the budgeting margin for 2023 between the ESV's forecast a year ago, in March 2021, and the current forecast. The budgeting margin for 2023 was judged to be sufficiently large in the forecast published in March 2021, but since then the ceiling-restricted expenditures has been sharply revised upwards. Announced reforms account for the majority of the increase in expenditures. The central government may need to take austerity measures so that expenditures do not exceed the ceiling next year.

Table 1 Change in budgeting margin 2023 since ESV's forecast in March 2021

SEK Billions unless otherwise stated

  2023
Budgeting margin March 2021 82
Reforms -65
Of which  
   Budget Bill for 2022 [1] -54
   Changes in the decided budget [2] -2
   Guarantee supplement in the housing supplement -9
Forecast revisions -19
Of which  
   Contribution to the European Union -6
   Financial security for those with illness and disability -6
Budgeting margin March 2022 -3

[1] ESV's assessment from November 2021 of measures in the Budget Bill for 2022.

[2] ESV's assessment in this forecast of the measures in the decided budget.

It is highly unclear how the war in Ukraine affects the global and Swedish economy. There is a risk that the impact will be significantly greater, but it is very difficult to presently estimate the effect. The pandemic is currently not expected to affect the economy to any great extent in the future, but new mutations may arise which mean that the restrictions need to be reintroduced. The current high inflation may be more lasting than we expect and have a greater effect on wage formation than we expect. Interest rates may also rise faster than expected. The stock market has fluctuated a lot in recent weeks and how the development will look during the rest of the year, and thus how large the capital gains will be, is difficult to assess. On the expenditure side, there is mainly a risk that the expenditure on migration will be higher than expected if more asylum seekers come from Ukraine.

The forecast is based on the budget decided by the Riksdag for 2022. It is in turn based on the Budget Bill for 2022 with adjustments on several points according to the Finance Committee's report 2021/22: FiU1. The Finance Committee's report is in turn based on a joint budget proposal from the Moderates, the Sweden Democrats and the Christian Democrats. In addition to the decided budget, both central government expenditure and revenues are affected by several amending budgets submitted during the year. In addition, at a press conference on March 14, the government presented a number of measures following the invasion of Ukraine that will also affect general government net lending this year and in the coming years. The proposal in the consultation guarantee supplement in the housing supplement is also included in the forecast. The difference in assessment between ESV and the central government is mainly that we do not expect that expenditure in the Industry and trade area will increase to the same extent as announced.

Table 2 Effects on general government net lending 2022–2024 as a result of changes in the budget [1] and the differences compared to the government

SEK Billions

  ESV Diff
  2022 2023 2024 2022 2023 2024
Tax on labor -6 2 2 -1 0 0
Tax on capital 0 0 0 0 0 0
Tax on consumption and input goods -10 -4 -4 0 -0 -0
Total Tax Revenues -15 -2 -2 -1 0 0
UO 4 The judiciary 1 2 4 0 0 0
UO 9 Health care, medical care and social care 6 1 2 0 -1 -1
UO 10 Financial security in the event of illness and disability 7 0 0 -2 0 0
UO 11 Financial security in old age 4 10 9 0 0 0
UO 12 Financial security for families and children -2 -3 -4 1 0 0
UO 18 Community planning, housing etc 0 0 -5 1 0 1
UO 21 Energy 7 -1 -1 0 0 0
UO 24 Industry and trade 1 0 0 -4 0 0
UO 25 General grants to local governments 4 5 5 0 0 0
Other expenditure areas 4 -1 -2 -1 -1 0
Total Expenditure 33 11 8 -6 -1 -1

[1] The approved budget, extra amending budget 1, extra amending budget 3, the Riksdag's amending budget and expenditure increases that were presented at a press conference with the government on 14 March 2022, including the proposal in the consultation guarantee supplement in the housing supplement.

Remark: The amounts are rounded and therefore do not always correspond to the sum.

Source: ESV

GDP growth was higher in 2021 than we expected in the November forecast. However, GDP growth and employment growth has been lowered slightly this year, but in terms of levels they are higher throughout the period. The wage sum has also been increased throughout the period. This is one of the reasons why tax revenues have been revised upwards every year. Expenditure on the central government budget has increased mainly as a result of the extra amending budgets and additional notifications received during the year. General government net lending have been revised upwards every year. This year, it is primarily in the local government sector that savings have been revised upwards.

Table 3 The forecast in numbers

  2021 2022 2023 2024 2025
GDP, fixed prices, calendar adjusted, % change -4,7 3,2 1,7 1,7 1,6
Net lending in the public sector, SEK billions -23 -23 9 30 63
Net lending in the public sector, % of GDP -0,4 -0,4 0,2 0,5 1,0
Structural savings in the public sector, % of GDP -0,2 -0,4 0,0 0,6 1,0
Maastricht debt, % of GDP 35,6 31,5 28,2 26,5 24,5

Source ESV

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