Public sector net lending clearly below target level
21 November 2019 | News
The activity in the economy has slowed down and the economic boom has now come to its end. Tax revenues are increasing at a much slower pace this year and next year as a result of both tax cuts and the slowing economy. At the same time, expenditure is increasing quite significantly. Overall public sector net lending is therefore weakening, resulting in a deficit of SEK 17 billion next year. Structural net lending deviates significantly from the target level both this year and next year. However, the debt is within the limits of the debt anchor.
Deficits arising in the local government sector
General government net lending is weakening, from SEK 1 billion this year to SEK -17 billion next year. This reduction is due to the weak growth of tax revenues, which in turn is due to tax cuts and slower growth of several large tax bases when economic activity decelerates. In addition, public sector expenditure is increasing in a relatively large extent.
Net lending will decrease in all sectors both this year and next year. Proposals in the budget bill for 2020 imply that Government revenues will grow more slowly than GDP, while spending will increase more rapidly than GDP. Central government net lending will therefore decrease more than in other sectors, although they remain at a relatively high level, 0.7 per cent of GDP.
In the local government sector, the deficit is growing this year due to the fact that revenues are increasing more slowly than last year and as a result of investments remaining at a high level, even though the rate of increase is declining. In the coming years, the deficit will remain at roughly the same level as this year, equivalent to around 1 per cent of GDP. This year, there is scope within the local government sector to meet the needs that are arising due to the increasing share of young and elderly people in the population. Several local governments and regions are reducing their net lending in order to maintain consumption. Provided a weak growth of revenues in the coming years, consumption cannot increase at the rate required to maintain the current standard of service.
The budget balance, which is another balance measure for the central government, is strengthening by SEK 19 billion this year. The strengthening of the balance and the difference compared to net lending are mainly due to the Riksbank’s decision not to refinance several of the loans from the Swedish National Debt Office that matured this year. The repayments amount to SEK 69 billion.
Public sector gross debt, known as Maastricht debt, is continuing to fall this year, to 34.6 per cent of GDP. It will drop further by about one percentage point next year, to 33.4 per cent of GDP. It is mostly the central government’s debt that is falling. The debt is within the limits of the debt anchor.
Lending is deviating from the target level
Structural net lending is expected to amount to -0.6 per cent of potential GDP this year, and to -0.3 per cent next year. This means that structural lending deviates significantly from the target level. The surplus target infers that general government net lending should amount to a third of a per cent of GDP over a business cycle. Structural net ledning, actual net lending adjusted for cyclical fluctuations, shall be used as a forward-looking indicator.
The economic boom is now at its end
Activity in the economy has clearly slowed down this year, and the economic boom has now reached its end. Growth remains weak over the next year, and will be weaker than normal also in 2021. It is assumed that economic activity will then return to normal and that growth will become somewhat stronger.
Demand for labour has also slowed down, with a clear reduction in employment growth this year alongside a rise in unemployment. Employment is expected to decrease slightly next year, while unemployment is expected to continue to rise to about 7 per cent. After that it will remain at roughly the same level. The employment rate will fall slightly next year, but will thereafter remain more or less constant.
Wages have increased slowly in recent years, despite the rising inflation and the strong labour market trend. The wage increase rate is rising slightly this year and next, but remains low throughout the forecasting period.
CPIF inflation is not expected to reach 2 per cent in the next few years, and is thus below the Riksbank’s inflation target. However, the Riksbank has reinforced its message of an interest rate hike in December this year, and we therefore expect the repo rate to be raised to zero per cent. We expect the repo rate to re¬main unchanged in the subsequent years.
Tax revenues increasing much more slowly
When the growth rate in the economy slows down, tax revenues increase more slowly. Major tax cuts are holding back the rate of increase, both this year and next year. In the coming years, tax revenues will increase slightly faster than this year, but they are still increasing significantly slower than in recent years.
Revenues from tax on labour have risen rapidly since 2015, but they are increasing much more slowly this year. The rate of increase will decline further next year. This is mainly due to the fact that taxes are being reduced by SEK 20 billion this year, and by SEK 17 billion next year. In addition, the rate of increase in wages paid is gradually diminishing, which is also contributing to the slowdown.
Tax on consumption is increasing much more slowly this year than last year, mainly due to the sharp decrease in housing investment. Revenue will increase more rapidly again next year. Tax on capital is decreasing both this year and next year due to the fact that all capital taxes, with the exception of tax on corporate profits, are declining or stagnating. On the other hand, tax on corporate profits is increasing relatively strongly, even though the rate of increase is slowing down.
The tax ratio is declining this year and next year, mostly as a consequence of the tax cuts.
The budget bill for 2020 increases spending
Expenditure subject to the expenditure ceiling is increasing this year and next year by 2 and 3 per cent respectively. Spending is increasing, mainly due to proposals for increased expenditure in the budget bill for 2020 as well as in previous budget bills.
Spending on general grants to local governments is increasing strongly this year and next year, as is spending on defence and the judiciary system. Spending is also increasing in areas regarding children and family as well as in health and medical care. Several other expenditure areas in the state budget are also increasing as a result of rising wages and prices.
Spending on migration and integration is falling, although not as much as in 2018. Spending decreases as a result of fewer people seeking asylum now compared to the period 2014–2015, which results in reduced expenditure with a certain lag. Spending in sickness pay and disability insurance is also continuing to decrease.
Spending is falling in the expenditure areas subject to the expenditure ceiling this year as a share of GDP, and is unchanged next year.
Total spending is decreasing considerably this year as a result of a temporarily low level of National Debt Office net lending. It will increase again next year.
The expenditure ceilings are met in every year, and the margin to the ceiling is exceeding the safety margins recommended by the Swedish National Financial Management Authority.
Lower savings than in the previous forecast
Economic activity has deteriorated more rapidly than anticipated since the previous forecast. The forecast for both GDP and employment growth has been revised down both this year and next. The weaker business cycle and tax cuts have contributed to a reduction in general government revenues, while proposals in the budget bill for 2020 have increased spending. This means that general government net lending is lower in the current forecast than in the previous one.
Risk of further deterioration in growth
The risks to the Swedish economy primarily depend on developments in the outside world. Uncertainty surrounding Brexit remains large and there is still a risk that the UK will leave the EU without an agreement. In such an event there would be significant adverse effects on Swedish exports. Increased trade barriers could also contribute to a weaker world trade than expected and negatively affect Swedish exports. In addition, conflicts and structural problems around the world are giving rise to uncertainty in respect of global growth.
In-depth section on indirect effects of lower taxes for pensioners
Over the past ten years, taxes for pensioners have been lowered almost every year. These cuts have been carried out by raising the basic deduction for people over the age of 65 years. The budget bill for 2020 contains proposals for a further reduction. The tax cuts have primarily covered municipal income tax, although other taxes and charges have also been affected. In addition, the manner in which local authorities have been compensated for reduced tax revenues has had an impact on both local government revenue and on the levelling out between local authorities and between regions.